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Non-Tech : BBY -Best Buy
BBY 94.98+0.1%10:17 AM EST

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From: Glenn Petersen8/6/2012 1:08:08 PM
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How a Best Buy Takeover Might Work

By MICHAEL J. DE LA MERCED
DealBook
New York Times
August 6, 2012, 12:28 pm


Best Buy‘s founder, Richard Schulze, finally confirmed on Monday that he is pursuing a takeover of the electronics retailer, one that might be worth as much as $8.8 billion.

That’s a tall order for any leveraged buyout these days, let alone one for a troubled retailer besieged by Wal-Mart Stores on one hand and Amazon.com on another.

But Mr. Schulze and his advisers at Credit Suisse and the law firm Shearman & Sterling appear willing to give it a shot. Here’s how it might work.

In his letter to Best Buy’s directors, he said that he has had discussions with several “premier private equity firms” with experience in retail deal-making about joining him in his bid.

In total, Mr. Schulze will likely need to raise $2 billion in additional equity financing, to go along with the $1 billion worth of Best Buy shares that he is willing to contribute to a deal. He currently owns about 20 percent of the company.

That means that Mr. Schulze and any group he forms must raise about $7 billion in debt to cover the rest of a leveraged buyout. Given that Best Buy is currently rated Baa2 by Moody’s Investors Service, two levels above junk status, such financing may be relatively expensive to maintain. And as of May 5, the company already had about $1.7 billion worth of debt on its books. It also had close to $1.4 billion in cash and equivalents during that time.

Mr. Schulze wrote that Credit Suisse is “highly confident” that it can arrange the debt.

In some ways, the situation is a little reminiscent of Coty’s failed attempt to buy Avon Products Inc.: A much smaller entity tried unsuccessfully to entice its target into merger talks, and then goes public with its offer. Then and now, the unsolicited suitor proposes a deal backed only by a highly confident letter, rather than fully committed financing.

It’s unclear how many partners Mr. Schulze would eventually work with. So-called “club deals,” in which several buyout shops team up, have proved unpopular since the end of the private equity boom in 2007. Limited partners, most of whom are invested in multiple funds, have increasingly balked at the practice, arguing that it increases their exposure to investments and reduces any claims to uniqueness on the firms’ parts.

Mr. Schulze may ultimately end up working with one firm, though that shop would then likely bring on a number of its limited partners as co-investors in the deal, according to a person briefed on the matter.

Monday’s disclosure followed weeks of efforts by Mr. Schulze to engage with the Best Buy board and begin performing due diligence, this person said. Minnesota law dictates that any shareholder who acquires a big stake in a company must wait four years before seeking any sort of business transaction. Since any members of a Schulze-led consortium would be new investors, they would be subject to the law — unless Best Buy gives them permission to begin talks.

That’s why Mr. Schulze has been fairly careful about not formally aligning himself with a buyout firm and saying only that he has been “discussing” bringing back two former Best Buy executives if his deal should succeed.

Over the weekend, however, Best Buy’s directors said that they needed about three more weeks to respond to his request, this person said.

The company said in a statement that it will “review and consider the letter in due course.” It has retained Goldman Sachs, JPMorgan Chase and the law firm Simpson Thacher & Bartlett as advisers.

It’s not quite clear that Best Buy shareholders believe a deal could happen. While shares in the company are up 9 percent as of midmorning on Monday, at $19.24 they remain well below the range that Mr. Schulze is proposing.

dealbook.nytimes.com
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