Best Buy’s (NYSE:BBY) founder and former chairman Richard Schulze, who stepped down earlier this year as a result of a scandal, has offered to take the struggling consumer electronics giant private for $24 to $26 a share.
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The proposal represents a premium of 36% to 47% to Best Buy’s closing stock price of $17.64 on Friday, or a total value of between $8.16 billion to $8.84 billion. Shares of Best Buy soared more than 13% Monday afternoon to $19.93 on the news.
However, Standard & Poor's downgraded Best Buy's corporate credit rating to BB+ from BBB- on Monday, citing the proposed transaction that the ratings company said would add "a significant amount of debt."
S&P said it estimates the total purchase price could be as high as $9 billion, which would, if completed, "materially weaken" the company's "credit protection metrics."
The ratings company said that depending on the amount of debt used and the expense of Schulze's proposed turnaround plan, S&P "could lower the rating by multiple notches."
While Schulze hasn’t inked any formal deals, he has already entered into talks with interested private equity companies, which he says would fund the deal along with debt financing and about $1 billion of his own equity.
With a controlling stake of 20.1%, Schulze is the Richfield, Minn.-based company’s largest shareholder. In May, he stepped down from his position as chairman 46 years after founding the company following an internal probe that showed he knew about but failed to disclose to the board of ex-CEO Brian Dunn’s alleged affair with a female subordinate.
Upon quitting in June, Schulze had said that he was exploring strategic options for his ownership stake and reports emerged that he was considering bidding to regain control of the company.
Best Buy’s current board, however, has opposed such a takeover. In June, the board proposed not allowing shareholders to vote on any buyout proposal without first receiving the board’s consent. It had also set the minimum threshold of ownership required for a shareholder to call a shareholder meeting to 25% from 10%, pushing Schulze below the required level.
Best Buy confirmed that it received the bid and said it will "review and consider the letter in due course." The company is being financially advised by both Goldman Sachs (NYSE:GS) and J.P. Morgan (NYSE:JPM).
Best Buy "will evaluate this proposal carefully and will, as always, pursue the best course for its shareholders," the company said in a statement.
Along with his bid, Schulze provided a business plan that he says addresses “many challenges Best Buy faces.” It is an effort to turnaround the company after several quarters of stagnant growth as Best Buy continues to lose market share to rival Amazon.com (NASDAQ:AMZN). In May, the company reported a 26% drop in profit and another quarter of reduced same-store sales.
Schulze says he has also held discussions with several of Best Buy’s former executives, including former CEO Brad Anderson and former Chief Operating Officer Allen Lenzmeier who are reportedly interested in rejoining the company as a private entity. The former chairman called his offer a “unique win-win opportunity,” which he says would eliminate market risk and provide Best Buy with the flexibility needed to reinvigorate the retailer’s brand.
“There is no question that now is the moment of truth for Best Buy and that immediate and substantial changes are needed for the company to return to its market-leading ways,” Schulze said in a statement. “It is my strong belief that Best Buy's best chance for renewed success is to implement with urgency the necessary changes as a private company.”
Schulze, who had also served as chief executive until 2002, said he is prepared to enter into a customary confidentiality agreement and reach a definitive agreement with Best Buy’s board.
Credit Suisse (NYSE:CS) is Schulze’s financial adviser and has said it is “highly confident” the bank can arrange the necessary debt financing.