Why Best Buy Shares Are Skyrocketing Today

Let's call this an open letter to Best Buy's (NYSE: BBY  ) board.

Dissed founder Richard Schulze is back. Don't let him get away this time.

The Minneapolis Star Tribune -- Best Buy's home turf newspaper -- is reporting that Schulze will make a fully financed offer to take the struggling consumer electronics retailer private.

The offer is a far cry from his original proposal. The paper is reporting that this will be a deal for at least $5 billion to $6 billion. Over the summer, Schulze was proposing a deal that would be worth as much as nearly $11 billion including debt to put the company out of its publicly traded misery at $24 to $26 a share.

Don't feel insulted, board members. The new offer won't be an unfair one.

Pride oozes money
Sure, it will be easy to blame yourselves for cheating shareholders on the difference. You've been -- let's not mince words here -- incompetent. Here's what you've done since Schulze approached you with his original takeout proposal in June:

  • You told him to wait at a time when Best Buy is a deteriorating asset. Same-store sales have fallen in nine of the past 10 quarters, and this is during an economic recovery.
  • An independent compensation consultant bolted, reportedly because the company insisted on offering 100 top managers retention bonuses that weren't tied at all to the company's performance.
  • You closed down stores, championing the smaller Best Buy Mobile stores. Didn't RadioShack's (NYSE: RSH  ) recent struggles tip you off to the boneheaded nature of opening wireless-centric stores in suburban strip malls? Will you just wait until RadioShack goes out of business in a year or two to foolishly take over their leases?
  • In August you hired Hubert Joly, overpaying a foreign CEO. "Spoiler alert: Hiring a new CEO makes it harder to complete a buyout," I wrote at the time, rightfully predicting that Schulze's offer would only "go lower if the chain's fundamentals continue to deteriorate or Best Buy makes itself harder to acquire."
  • In October you stunned the market by announcing that you would price-match Amazon.com (NASDAQ: AMZN  ) this holiday season. Well, no physical retailer has the cost structure to match the leading e-tailer without sacrificing margins. Oh, and what's the point in selling a tablet or a smart television at a potential loss? Amazon has an ecosystem where it sells the digital movies, music, books, and games that feed these gadgets. Best Buy's a dinosaur. Best Buy doesn't have an ecosystem. It has an echo system.
  • The final straw may have been Best Buy's stock falling after it hosted its analyst day last month. Wall Street pros had little confidence in the retailer's five-point turnaround plan.

This layer cake of incompetence is why it's so easy to predict what will happen next. You're going to tell Schulze to beat it. You will argue that Best Buy is worth more than $6 billion.

It was. It isn't.

Get it right in the end
I wasn't the only one begging for Best Buy to take Schulze up on his original proposal.

"The board owes it to its investors to pursue this exit strategy," I wrote this summer. "We saw what pride got Circuit City as it rebuffed buyout offers all the way down to its eventual liquidation."

Yes, Circuit City.

Remember them?

Circuit City rebuffed offers to take the company out at $8 a share in 2003 and $17 a share in 2005. It settled for $0 a few years later, as creditors salvaged some of the money that they were owed in the liquidation.

Best Buy isn't going to have to liquidate itself in the next year or so, but the downward spiral is irreversible at this point. It's toiling in a world where it can't compete with bare-boned online retailers on price. It's moving to a place where digital media replaces physical media.

Apple (NASDAQ: AAPL  ) is the country's largest music retailer, and it has never sold a single CD. Best Buy couldn't get digital music right. It bought a CD chain a year after Apple introduced the iPod. It dumped Napster last year. Apple and Amazon have thriving ecosystems of digital distribution. Best Buy is so out of touch that it's pimping obsolescence insurance without taking a policy on itself.

If it's any consolation, board members, it's not as if Schulze was ever going to really buy the company in the mid-$20s. He only has a 20% stake in the company, and he was going to have a hard time convincing private equity firms and former Best Buy executives to join him in his selfish dream of redemption.

However, the new offer that will likely be in the mid-teens is different. The newspaper reports that it's a "fully financed" offer to put Best Buy out of its misery.

Don't blow it again. The offers will only get lower and lower until the liquidators show up with their clipboards.

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS last year. The call is beating the market so far -- because Best Buy is not. It's a gutsy call now, but I'll stick with it on paper. I wouldn't short Best Buy with real money.

If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on Amazon. We'll tell you what's driving the company's growth, and how to know when to buy and sell Amazon in our new premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.


Read/Post Comments (1) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 13, 2012, at 3:10 PM, dcgatlanta wrote:

    Great article Rick. I wrote $15 2014 puts a month ago hoping for a quick buyout. So far, so good...hopefully the offer comes through and the board accepts.

Add your comment.

DocumentId: 2152447, ~/Articles/ArticleHandler.aspx, 7/30/2014 3:32:13 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement