Stock Market Predictions

Best Buy founder resigns, puts large stake in play

Stock Market Predictions

The news came just two months after CEO Brian Dunn abruptly left the electronics chain, and adds to management distractions as Best Buy struggles to compete with online and discount retailers.

"To some extent, people are saying to themselves maybe what he is doing is he is getting off the board so he can team up with some private equity guys and make a run at the company," said BB&T Capital Markets analyst Anthony Chukumba.

But that is only one option.

In a filing with the U.S. Securities and Exchange Commission, Schulze laid out a wide array of potential moves, including selling shares, buying more shares, helping to engineer a reorganization or even an outright takeover. He said he may engage in talks with one or more shareholders, officers and board members of Best Buy.

There are no SEC rules to prevent a person serving on the board of a public company from considering plans to sell their stake. However, leaving the board could make such a process easier as Schulze would no longer be bound by the need to wait for approved trading windows.

The 71-year-old Schulze is by far Best Buy's largest shareholder, with 69.78 million shares as of April 11, according to Thomson Global Markets data. He served as the retailer's chief executive for 36 years, until 2002.

Last month, Best Buy said Schulze would step down as chairman after the June 21 annual meeting, following an internal probe that found he failed to tell the board about allegations that former CEO Dunn had engaged in an improper relationship with a female employee. Schulze had planned to remain a director through the 2013 annual meeting.

Some analysts, investors and corporate governance experts have also criticized Schulze in the past for what they said were potential conflicts of interest, including favoritism granted to Schulze's relatives, and transactions connected to his immediate family and some board members.

A HAIRY DEAL?

While Schulze's move could lead to his shares being sold, the public announcement on Thursday could mean there was little interest so far in his stake from private equity firms, said Bernstein Research analyst Colin McGranahan. Still, the "fire sale" element of this process could attract new bidders, he added.

"It is not obvious who or if there are buyers for such a substantial (though non-controlling) stake" at this point, said McGranahan.

A leveraged buyout of Best Buy would be tough to pull off, considering current market conditions and the challenges faced by the company, ranging from weak sales to a lackluster product cycle to large lease obligations, said BB&T's Chukumba.

"Even as depressed as their share price is right now, to (make an offer for) Best Buy, you're talking about probably a $10 billion deal," he said. As of Wednesday, Best Buy's market capitalization was $6.56 billion.

"It has to be somebody big, preferably somebody with a lot of experience with retail, with a deep Rolodex," Chukumba said, citing private equity firms like KKR, Thomas H. Lee Partners, Bain Capital or a smaller firm like Leonard Green in tandem with another firm. The private equity firms could not be immediately reached for comment.

Chukumba sees little chances of an activist investor like Bill Ackman, Carl Icahn or Nelson Peltz coming forward to take Best Buy private.

"This is a hairy deal," he said, referring to the company's declining same-store sales, tough competition and strategic challenges.

CHALLENGES

Best Buy is struggling with the trend of customers visiting stores to test pricey electronics, only to end up buying the items online from Amazon.com Inc and others. At the same time, Wal-Mart Stores Inc and Target Corp are flexing their competitive muscle by devoting space to popular Apple Inc devices in some of their stores.

Best Buy's sales at stores open at least 14 months, or same-store sales, have fallen in seven of the last eight quarters.

Under Dunn and Schulze, the company had taken steps to try to fix the problem, though analysts deemed plans to shut 50 of the company's roughly 1,100 U.S. stores to be far short of what was needed.

"We surmise that Schulze had some disagreement with the board and current management team around the strategies being considered," said McGranahan, who has a "market-perform" rating on Best Buy shares.

In May, interim CEO Mike Mikan said that Best Buy needs to "change substantially" to fend off rivals and that it would shed more light on a turnaround plan later this summer.

OTHER BIG SHAREHOLDERS

Best Buy began in 1966 when Schulze opened the first Sound of Music store in Minnesota, and went public in 1985. It has had just three permanent CEOs, and all were insiders with long tenures at Best Buy.

Back in 1988, Best Buy hired Goldman Sachs to evaluate business options after dismal quarterly results. A few weeks later Schulze changed course, saying that Best Buy would press on with its own five-year growth plan.

After Schulze, Best Buy's largest shareholder is Fidelity Management & Research Co, which owned 24.2 million shares, or 7.06 percent, as of March 31, according to Thomson Global Markets data. Tradewinds Global Investors LLC owned 14.9 million shares, or 4.3 percent, and Vanguard Group Inc owned 11.8 million shares, or 3.5 percent.

Best Buy named Hatim Tyabji as chairman, two weeks earlier than planned. Tyabji has been a Best Buy director since 1998. He is also chairman and CEO of Bytemobile Inc and chairman of Jasper Wireless Inc.

Best Buy shares fell as much as 8.5 percent on Thursday, but pared losses to close down 1 percent at $19.70 on the New York Stock Exchange.

(This version of the story has been refiled to add attribution in 12th paragraph)

(Reporting by Jessica Wohl in Chicago and Dhanya Skariachan and Phil Wahba in New York; Editing by John Wallace, Maureen Bavdek and Matthew Lewis)