Breakout

Best Buy-Out: The Numbers Don’t Add Up

Breakout

According to a Reuters report, Best Buy (BBY) founder Richard Schulze is moving ahead with his plan to make a bid for the troubled electronics retailer. The numbers being tossed around are $24 to $26 per share. That translates into $8.2 to $8.8 billion for the equity and another couple billion for the debt. The potential $11 billion deal would be the biggest of the year.

Shareholders should be giddy at the prospect, but if the deal is going to get done it's going to have to make operational and financial sense. That's where we run into some problems...

Debt

Schulze has about $1.6 billion of equity. He'll use some, but certainly not all, of that to help fund the deal. As it stands, Best Buy has around $2 billion in debt. Against that, the company has $1.4 billion in cash. Ratcheting up the debt, which is also a given, would likely take total debt up to around $5 to $6 billion against whatever cash is left after the PE firms take out their nine-figure (at least) fees.

Last year Best Buy paid $129 million in interest — around 6%-ish. $5 billion of debt at 6% (which won't happen, as agencies are already taking down the company's rating) takes interest up to $360 million, or $100 million more than earnings from continuing operations last year. The last year BBY made money was 2011, when they reported a net margin of 2.6%. Since then sales and margins have meaningfully declined.

Failing retailers and huge debt loads don't mix.

(These are back-of-the-envelope figures. Bulls can quibble all they want, but I could have been much less generous, namely by including store leases.)

Business Model

Best Buy has huge stores staffed by young workers they can't afford to train. They've got a business in a secular decline and are pinched between better brick-and-mortar merchants on one side and Amazon.com (AMZN) on the other.

If Schulze has a way to overcome these obstacles, he hasn't shared it so far.

Exit Plan

Private equity firms aren't in the charity business. If a deal is done the PE guys will rip the cash off BBY's balance sheet, but the real goal is to make money selling out later. To stanch the bleeding is one thing, but to take BBY public again in couple years at a value of $14 to $15 billion would require a miracle.

Why a Best Buy Buyout Might Happen Anyway

According a report in The New York Times yesterday the private equity industry is collectively sitting on $1 trillion of dry powder and is looking to go "whale hunting" for deals bigger than $10 billion lest they be forced to return the money to investors.

If — and it's a huge if — the partners Schulze is lining up are really so desperate to do a deal that they're willing to sacrifice some upside just to get something done, then BBY is a candidate simply because it's big.

Hoping the nice guys at the private equity shops are willing to lose money to buy out my dead-money stock is a horrendous investment thesis.

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