Justin Sullivan/Getty ImagesSome analysts say acquiring shares of Best Buy may be expensive for any leveraged buyout firm.With the founder of Best Buy announcing on Thursday that he was resigning immediately and potentially selling off his 20.1 percent stake in the company, many have been wondering whether the beleaguered electronics retailer may be sold.
It might be a tempting proposition for a potential buyer, like a private equity firm. But at least one analyst doesn’t think such a sale is likely, as potentially attractive as it may be.
Richard Schulze, Best Buy’s founder, originally planned to step down as chairman later this month and as a director next summer. (The decision follows the controversy over his failure to alert the board about claims that the company’s now-former chief executive, Brian Dunn, had had an inappropriate relationship with an employee.)
But he is instead stepping down now, in order to “explore all available options for my ownership stake.” A regulatory filing made after the market close on Thursday made clear the universe of potential paths that Mr. Schulze may take.
But most analysts consider a sale of the 68.9 million shares the most likely outcome. It’s possible that a leveraged buyout firm interested in eventually taking over all of Best Buy could begin by buying the stake.
The company, which has been struggling against the likes of Amazon.com and Walmart for years, hasn’t made much progress in increasing its stock price. Its shares have plummeted 32 percent over the last 12 months and nearly 60 percent over the last five years. It fell about 1 percent on Thursday, to $19.70.
At that price, the entire company is valued at about $6.7 billion, making it an expensive deal for any buyout firm. Indeed, only a handful of deals over $5 billion have been made since the financial crisis, including the takeovers of Del Monte Foods, the Samson Investment Company and the El Paso Corporation’s pipeline business.
In a research note published last month and reprinted on Thursday, analysts at Janney Capital Markets argue that a potential buyer might need to pay about $30 a share, representing 3.5 times the company’s trailing 12-month earnings before interest, taxes, depreciation and amortization. That’s roughly $10.2 billion, though the company had about $1.2 billion in cash as of March 3. So let’s call it a $9 billion deal.
Yet the Janney analysts don’t think a leveraged buyout is likely. Assuming the current rules of the private equity market hold, at least a third of the purchase price, or $3 billion, would need to be in equity. Such a big check would require a club deal of several buyout firms, at a time when private equity deals of late have rarely exceeded three partners.
That doesn’t mean that a deal couldn’t be profitable. Best Buy still generates a healthy amount of cash from its operations, with $3.3 billion in the year that ended March 3. That cash flow could be used to support the debt taken on in a leveraged buyout.
And while Janney analysts didn’t factor it into their buyout models, Best Buy’s China and European cellphone businesses could be divested, they said. The former could fetch a valuation of about $800 million in an initial public offering, while the latter might fetch about $880 million.
None of this means that a deal will be forthcoming, though it might be alluring to some potential suitors. Any acquisition, however, would entail a lot of hard work. As Mr. Schulze said in a statement on Thursday, “There is an urgent need for Best Buy to reinvigorate growth by reconnecting with today’s customers and building pathways to the next generation of consumers.”