Will Best Buy Play Hard-to-Buy, Again?
Dec 14th 2012 4:28PM
Updated Dec 14th 2012 4:36PM
Investors are reeling on news that Best Buy founder Richard Schulze is back with a vengeance. By this I mean he's back to buy the company for an amount ranging from $5 billion to $6 billion. The Minneapolis Star Tribune broke the story on Thursday, reporting that a formal proposal from Schulze is imminent. So what does this mean for Best Buy shareholders?
Say 'bye to the best buyout
Schulze's decision to take the world's largest consumer electronics chain private is hardly a surprise. In fact, he put a much richer offer on the table as far back as June, but the board's outrageous curveballs derailed the effort. Today, instead of a new bid we have the board's decision to extend the deadline. Schulze now has until the month of February 2013 for due diligence before making an official bid for the company.
From a shareholder perspective, this will probably do more harm than good. You see, had the board not put takeover talks on hold the first time around, shareholders would have enjoyed a deal worth $24 to $26 a share. That's a rich premium to where the stock trades today, at around $11 per share.
Unfortunately, after kicking the can down the road, Best Buy has watched its situation worsen. Margins continued to shrink and same-store sales continued to fall. Challenged by so-called showrooming and a burdensome cost structure, the company's condition will only get worse in the months ahead.
Too little, too late
E-commerce sites like Amazon.com are slowly killing big-box stores like Best Buy as more customers use such stores to comparison-shop -- often making purchases for less money elsewhere online. In a bid to help counter this, the electronics giant says it will price-match online offerings from Amazon during the holidays.
However, by implementing this price-match plan, Best Buy is setting itself up for another loss. For starters, the company needs to mark up products more than Amazon, because unlike Amazon, Best Buy must compensate for its massive overhead costs. Additionally, the company's new pricing strategy doesn't extend to other online opponents, such as eBay . Clearly, Best Buy is fighting a losing battle against more nimble e-tailers.
Best Buy may still claim the title of the world's largest electronics retailer, but broader product variety and competitive pricing from Amazon, eBay, and others are quickly pushing Best Buy into irrelevance. Current shareholders better hope that a deal between Schulze and the board happens sooner rather than later. Given the headwinds Best Buy faces in this all-important holiday season, I suspect the buyout offers will only decline in value as the February deadline draws closer.
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The article Will Best Buy Play Hard-to-Buy, Again? originally appeared on Fool.com.Fool contributor Tamara Rutter owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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