Best Buy’s (BBY: Charts, News) founder, Richard Schulze, made headlines this week when he announced that he was considering a bid to take the troubled big box electronics retailer private. 71-year old Schulze has been working with bankers from Credit Suisse to review his options, which may include pooling resources with a private equity firm. Schulze, who still owns 20.1% of the company’s shares, resigned from Best Buy’s board after failing to share prior knowledge of former CEO Brian Dunn’s “inappropriate relationship” with a female employee with the rest of the board. The scandal resulted in Dunn’s resignation in April, and the company has yet to fill his spot with a permanent CEO.
The company’s public shareholders, who could be wiped out if the company were taken private, called a special meeting last week, in which the ownership threshold for the company was raised from 10% to 25%, which would block Schulze’s power to make ownership decisions. If Schulze regains control of his company, he could install a new board of loyal directors who would vote to take the company private. Schulze could also sell his stake to interested parties who could persuade the current board into taking the company private.
Many analysts are skeptical that Schulze and his partners could privatize Best Buy, which has a market cap of $6.6 billion. BB&T Capital Markets analyst Anthony Chukumba commented, “I think the probability of this happening is very, very slim.” Chukumba noted that the fragile state of the global markets would make it hard for Schulze to acquire further financial backing.
The company’s board also voted to pay the its top four executives $2 million in cash bonuses, as well as $500,000 in retention bonuses each to CFO James Muehlbauer, international chief Shari Ballard, chief HR officer Carol Surface and the company’s U.S. president, Michael Vitelli. Each executive was also granted $1.98 million in restricted stock. The cash and stock awards were not approved by shareholders, who rejected the plan. However, the shareholder vote was non-binding” and subject to being overruled by the board of directors. Spokesman Greg Hitt defended the board’s decision, stating, “To ensure a strong and stable future for the company, Best Buy’s board of directors has taken action to retain key senior leaders during the current period of transition.”
After the internal problems with Dunn and Schulze occurred, numerous key executives have left the company: CTO Robert Stephens – who founded the company’s Geek Squad service, international CFO Dave Deno and domestic CFO Ryan Robinson. These high level departures raised red flags with analysts and investors.
Best Buy has struggled over the past two years, losing significant market share to e-commerce giant Amazon (AMZN: Charts, News). Best Buy has been suffering from high inventories caused by “showroom syndrome” – in which customers merely try out products at its stores before ordering the products online. Smartphones equipped with barcode scanners have also made it easier for customers to find better prices, either at other brick and mortar stores or online. Shares of Best Buy have plunged 37% over the past twelve months, while shares of Amazon have rallied 12.5%.
Despite current problems, Best Buy remains the largest consumer electronics retailer in the United States. Shares trade at 5.3 times forward earnings, with a 5-year PEG ratio of 0.94, suggesting that the stock is fundamentally undervalued. Analysts believe that a stronger product cycle and increased discretionary spending could boost the stock, giving the company more capital to expand. The stock pays a quarterly dividend of 17 cents per share, a 3.5% yield at today’s prices.
Other News About BBY
Best Buy Bucks Stronger Wall Street
Best Buy’s future remains in limbo as its top executives fight its founder.
Best Buy Founder Mulls Bid to Take Retailer Private
Does Schulze have the resources to take Best Buy private?
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