Best Buy Founder Makes Bid for a Takeover

Best Buy has been troubled by declining sales and growing competition from the likes of Wal-Mart Stores and Amazon.com.

Now, with a preliminary takeover proposal from the company's founder, many are considering whether it has more of a future with executives who led it in the past.

Richard M. Schulze, who founded the company with a single audio equipment store in 1966, announced on Monday a proposal that would give the company a market value of $8.8 billion. Mr. Schulze, 71, who is Best Buy's biggest shareholder with a 20 percent stake, is betting that he and a handful of longtime lieutenants can breathe new life into the company.

Yet investors and analysts were immediately skeptical about his ability to cobble together the huge sums of money that would be needed to take the chain private.

And they questioned how anyone could turn around a company that has steadily declined over the last several years amid a newer generation of retailers competing b oth online and in brick-and-mortar outlets. Best Buy reported a loss of $1.2 billion for its last fiscal year.

Mr. Schulze wrote in a letter to the company's board that he has been in discussions with private equity firms and former executives over the outlines of a potential deal. He is seeking access to the company's books. Under the laws of Minnesota, where the retailer is based, Mr. Schulze must also win its permission to form the takeover consortium.

Under the terms of his proposal, he would pay $24 to $26 a share - up to 47 percent higher than the company's closing price on Friday. He would roll as much as $1 billion worth of his shares into a takeover.

“After assessing all of my options, it is my strong belief that Best Buy's best chance for renewed success is to implement with urgency the necessary changes as a private company,” he wrote in Monday's letter. “This proposal represents a unique win-win opportunity for everyone involved.”

Such a transaction would be difficult enough in terms of amassing the required equity and debt financing. But beyond the financial challenges, Mr. Schulze would face a daunting competitive landscape.

While he and two former Best Buy executives that he plans to involve in the deal, Brad Anderson and Allen Lenzmeier, helped turn the company into a seemingly omnipresent big-box retailer, analysts say that the current predicament may be beyond their solving.

“They both did a strong job while at the company, but we would be a bit skeptical that they would be able to come in and drive this turnaround,” David Strasser, an analyst with Janney Capital Markets, wrote in a note to clients. “So much has changed in the few years since they left the business, that the learning curve could prove to be steep.”

Mr. Schulze has outlined few specifics, though people briefed on his plans said that he disagrees with the current management's efforts to shrink the compan y sharply. And he and his proposed management team have expressed frustration at what they see as an erosion of the company's culture.

What he may pursue is some extra focus on online sales and retail formats that would appeal to specific segments of consumers as part of an effort to compete with Apple's highly successful physical stores.

Best Buy said in a statement that it will review Mr. Schulze's proposal - which it called “highly conditional” - and respond in due course. But the retailer's interim chief executive, George Mikan, who is known as Mike, has said that he will announce the company's own turnaround strategy in a matter of weeks. The company is searching for a permanent chief.

Known as a hands-on manager, Mr. Schulze stepped down as chief executive in 2002 and remained on the company's board until June. He stepped down after Best Buy disclosed in May that Brian J. Dunn, who had resigned as chief executive just a month before, had “violat ed company policy by engaging in an extremely close personal relationship with a female employee that negatively impacted the work environment.”

Mr. Schulze had found out about the relationship last December and confronted Mr. Dunn, though did not inform the board, which learned about it only in mid-March. At the time of the board's report, Mr. Schulze said that he planned to resign as chairman, but remain a director until next year.

In June, he changed his mind, announcing his imminent departure and plans to explore options for his 20 percent stake. The move prompted many investors to wonder if the company founder would make a move to eventually take the company private.

Since then, he has been working with Credit Suisse and the law firm Shearman & Sterling on a proposal.

Mr. Schulze began meeting with former Best Buy executives shortly before announcing his departure from the board, according to people briefed on the matter. He had breakfast with Mr. Lenzmeier, a former president of the company, several weeks ago to complain about the current management team. Later that afternoon, he called Mr. Anderson, who replaced him as chief executive in 2002. Mr. Schulze also began reaching out to what he described in Monday's letter as several “premier private equity firms” with retailing experience.

He has expressed frustration about what he said was a lack of urgency on Best Buy's part, according to people briefed on the matter. The tipping point came this past weekend, when the company's board asked for about three weeks to respond to his takeover proposal. But he did not disclose his proposed price range until Monday.

Such a deal would likely require garnering some $2 billion in equity financing, which would likely come from one or two leveraged buyout firms, according to one of the people briefed on the matter. It would also require raising some $7 billion in debt to cover the rest of the purchase price.

Best Buy is rated at Baa2 by Moody's Investors Service, two levels above junk status. And it already has about $1.7 billion worth of debt on its books.

Colin McGranahan, an analyst at Sanford C. Bernstein, wrote in a note to investors that the heavier debt load would expose the company to much more risk. Vendors, for instance, often decline “to extend terms to struggling retailers when cash flow comes under pressure,” he wrote.

But in his letter to the board, Mr. Schulze wrote that his advisers at Credit Suisse were “highly confident” that they can secure the financing.

Investors seem less sure. While shares of Best Buy jumped 13.3 percent on Monday, they remain well below the $24 to $26 proposed price range, suggesting significant doubt that a deal will be done.

“It will be very hard for him to take it private,” said David J. Simon, the chief executive of Twin Capital Management, a hedge fund that holds a short position in Best Buy a nd increased the size of that bet against the company's stock on Monday. Noting that Mr. Schulze left in June, he asked, “what could he do now that's different that he didn't realize” then?