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Best Buy: Nothing Left But Sentimental Value Says Munson


Tuesday morning embattled electronics retailer Best Buy (BBY) reported second quarter earnings well short of expectations. Income from continuing operations was $124 million or 20 cents a share — 11 cents light of estimates and nearly 50% lower than the same period last year. The news sent BBY shares below $17, which is well below the $24 - $26 per share buyout price offered by Best Buy founder Richard Schulze earlier this month.

According to Lee Munson, author of "Rigged Money" and founder of Portfolio LLC, Best Buy's value is more sentimental than financial. Munson says Best Buy is another tale of physical stores giving way to the new world, and he asks, "Is there anything there for investors? I would say no."

Of course, investing and trading are different animals. Schulze's bid for Best Buy would require billions in debt financing, or junk bonds. The only thing that makes a deal remotely possible is that the offer comes at a time when it has never been cheaper to issue billions in dicey paper. As Munson puts it, "There's so much demand for yield, and there's absolutely no regard for the quality of it." Schulze advisers at Credit Suisse (CS) reportedly say they wouldn't have any problem raising enough to fund the bid. There's no reason to doubt them.

Munson advises against shorting Best Buy, but it could, possibly, be worth a speculative trade. Schulze is pushing BBY's board of directors for access to the company's internal financials to allow his team to perform its due diligence. The board is stalling, hoping to delay the process until early 2013, ostensibly in order to get through the holidays without distraction. With the fundamentals eroding but a potential bid looming, traders have to be long at the precise moment.

The only question for traders is if Best Buy's board of directors lets Schulze pursue his LBO out or opts to, as Munson says, "be stubborn and let this stock slide into the high single digits." If Schulze wasn't out there as a potential buyer, the numbers suggest Best Buy's stock would be somewhere near $10 already.

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