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Why Best Buy May Be an Unlikely Takeover Target

Wednesday, 18 Apr 2012 | 12:24 PM ET
AP

Is Best Buy a potential leveraged buyout target?

The possibility has long been discussed, even before Best Buy CEO Brian Dunn unexpectedly resigned in the wake of an investigation of his conduct. But the turmoil is prompting the issue to be re-examined, according to sources who talked with Minneapolis Star-Tribune. The newspaper said at least two parties are considering whether to pursue an offer for the electronics giant.

Citing “a source with close ties to the company,” the newspaper reports, “investors are contacting people with connections to Best Buy to seek their help in exploring a buyout bid.”

Best Buy shares hardly budged on the report.

Still, it is worth considering. Private equity likes to shop the retail sector. Retailers like Best Buy generate a lot of cash, which makes them attractive to private-equity investors, who can then reinvest that money in other deals.

According to the Tribune, Best Buy generates more than $1 billion in cash a year and it has relatively little debt, though the company’s stock has lost half its value over the past year.

The report doesn’t mention any specific private-equity investors that are interested. Instead, it points out that activist investment firm Greenlight Capital is the company’s ninth-largest shareholder, with 7.7 million shares.

Perhaps, Greenlight’s stake is a sign that there is untapped value in Best Buy, but any private-equity buyer faces some serious obstacles.

First, there is Best Buy’s current struggle to compete against Amazon.comand other online retailers such as Newegg.com, who are able to sell electronics on the cheap due to their less expensive overhead. Best Buy remains handcuffed by its fleet of large stores, which are expensive and, analysts argue, not well-suited to today’s electronics marketplace.

Last month, Best Buy announced a restructuring plan that hopes to cut $800 million in costs over the next three years. As part of the plan, 50 big-box stores will be closed, but analysts say more stores should be shuttered.

There is also the issue of founder and Chairman Richard Schulze, who owns nearly 20 percent of the company. He would have to be convinced that a deal is the best move to make.

“Let’s rationally think through this for a second,” said Brian Sozzi, an independent analyst at Nothing But Gold Productions. “Why would a sponsor want to fork over say, $12 billion (most by tapping debt markets) for a business that has a vacuum in leadership, will need assets to be shuttered to make the store base lean and mean for the future of online, and a weak template to attack digital?”

As for the argument that the company churns out significant cash, Sozzi said he would argue that, under the current conditions, Best Buy’s free cash flow outlook is weakening quickly. Its operating earnings are coming under siege as it continues to lose market share and struggles under the overhang of bad store leases.

Ron Hutcheson, of H&K Strategies, who’s acting as the board's spokesman, declined to comment on the report.

Questions? Comments? Email us at consumernation@cnbc.com. Follow Christina Cheddar Berk on Twitter @ccheddarberk.

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