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Turmoil at Best Buy could make it a takeover target

By Thomas Lee, Star Tribune (Minneapolis) –

MINNEAPOLIS — Best Buy Co., in the midst of an investigation of former CEO Brian Dunn, may have other trouble to fend off.

The Minnesota-based retail giant has become an alluring target for a private takeover, according to industry sources. The nation’s largest consumer electronics chain generates more than $1 billion in cash a year and has relatively little debt.

Such an effort may well be a long shot, but in the past two years, Best Buy’s stock price has lost more than half of its value, making an acquisition less expensive to a potential buyer.

A takeover of Best Buy “is on a lot of people’s radar screens,” said Jeremy Brunelli, a retail analyst with Consumer Edge Research in Stamford, Conn. “Best Buy is an obvious candidate. There’s a definite buzz going on.”

Investors are contacting people with connections to Best Buy to seek their help in exploring a buyout bid, a source with close ties to the company confirmed.

“There are people swarming all over this,” said the source, who declined to name those parties.

One name attracting attention is Greenlight Capital Inc., an investor with a record of challenging boards at other troubled companies. Since 2011, the New York-based firm has purchased 7.7 million shares of Best Buy stock, making it the retailer’s ninth-largest investor.

The inquiries come during a tumultuous time for the company. Best Buy’s board is investigating whether Dunn, who suddenly resigned last week, used company funds to further an inappropriate relationship with a female subordinate.

It’s unclear whether the potential investors have contacted the company or how serious they are about making a bid. But at least two parties are considering whether to pursue the company, sources say, though they declined to name them.

Greg Hitt of H&K Strategies, who is acting as a company spokesman, declined to comment.

A buyout would face enormous obstacles, as Best Buy would command an estimated market value of nearly $8 billion. Potential acquirers would need to borrow billions of dollars more to entice current shareholders to sell.

Further, analysts say, there’s little or no chance founder and chairman Richard Schulze, who owns nearly 20 percent of the company, would ever agree to such a deal.

“If (Schulze) doesn’t want to sell it, it won’t be sold,” said Michael Pachter, an analyst with Wedbush Securities.

But Pachter didn’t rule out an acquisition. “They still make money,” he said of Best Buy.

With about 1,100 stores in the United States, 180,000 workers across the world and highly profitable businesses such as Geek Squad, a buyer could find plenty of things at Best Buy to cut or sell, industry observers say.

Last month, Best Buy announced a restructuring plan that aims to shave $800 million in the next three years by closing 50 big-box stores across the country and laying off thousands of workers. But analysts say Best Buy can cut costs even deeper by slashing its advertising budget and shutting down more stores. David Strasser, an analyst at Janney Capital Management, said he thinks Best Buy will ultimately close more than 200 of its big boxes in the next few years.

This isn’t the first time Best Buy has attracted buyout interest. Five years ago, a private equity firm unsuccessfully tried to acquire the company, according to an analyst with a major Best Buy investor who requested anonymity because he was not authorized to speak to the media.

But Best Buy is much more vulnerable today. Since April 2010, the stock has dropped nearly 55 percent. With interest rates at historic lows, a potential buyer could cheaply borrow the money to finance the purchase.

Wall Street currently values Best Buy at $7.7 billion, or about $22 a share. Some analysts estimate a potential buyer would need to offer at least $12 billion, or $35 a share.

But any buyer must confront the same problems that have flummoxed Best Buy’s leadership. The company is losing market share to Wal-Mart and online competitors such as Amazon. Best Buy’s core consumer electronics business has been eroding as shoppers gravitate toward the Internet.

And any potential owner would have to overcome the likely opposition of Schulze, Best Buy’s largest shareholder.

The board’s investigation of Dunn, though, may help an outside bidder, experts say.

If investigators determine the board knew of misbehavior and didn’t act to stop it, that could weaken support for the board and for Schulze’s leadership among Best Buy’s large shareholders, said David Gebler, president of the Skout Group, a consulting firm in Massachusetts that advises Fortune 500 companies on corporate ethics and organizational culture.

That, in turn, may make shareholders more receptive to a buyout offer, Gebler said.

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