Tuesday, December 18, 2012

Psst! Wanna Bum Steer?!


 The original title of this piece was “No ‘Star’ For the Star-Tribune,” but that seemed a little obscure, because what this virtual column is really about is not so much the Minneapolis Star-Tribune—a newspaper that, like all newspapers, has seen its glory days come and go.
 Rather, it is about the ability of somebody with an agenda (the agenda, in this case, seeming to be the promotion of Best Buy founder Richard Schultz’s dream of recapturing his baby) by getting stuff planted in the mainstream media pretty much any time he or she wants to, regardless of its merit.
 At least that’s how it appears to us based on the repeated speculation—Speculation With A Capital “S,” since none of it has proven accurate, in the sense of actually happening so far—that has appeared in the paper about Schultz’s purported plans ever since he got kicked off the Best Buy board last spring.
 Exhibit A is the Star-Tribune report that appeared last Thursday morning as follows:
 Best Buy Co. founder Richard Schulze will make a fully financed offer to purchase the consumer electronics giant by the end of the week, possibly on Friday, the Star Tribune has learned.
 Schulze will submit a formal proposal to the board of directors before a "hard" deadline of Sunday, said one source. The offer is expected to be at least $5 billion to $6 billion.
—Thomas Lee, Minneapolis Star-Tribune 12/13/12
 That breathless bit of “news” was picked up immediately on CNBC, Bloomberg and elsewhere, sending Best Buy’s share price soaring two points, or 15%, on unusually heavy volume of 44 million shares, by day’s end.
 Unfortunately, the very next morning reality smacked the stock in the head with a 2-by-4 when Best Buy announced it was giving Schultz somewhat more time to make a bid than the above-reported “end of the week” (they postponed it to after the holiday season), causing the stock to drop right back down to where it had started the day before the 15% spike.
 Here’s how the Star-Tribune managed to both backpedal on its Thursday morning scoop and suggest better things to come:
 Best Buy Co. and its founder, Richard Schulze, have agreed to push back the deadline for Schulze to make an offer to buy the company, leading some analysts to speculate that Best Buy is more willing to make a deal.
—Thomas Lee, Minneapolis Star-Tribune 12/14/12
 So the shmucks who on had bought millions of shares of Best Buy as high as $14.48 after reading the Star-Tribune (or the news outlets that picked up the story) Thursday morning lost $2 a share before they had time to spit out their coffee after reading the Star-Tribune Friday morning, when the stock opened for trading at $12.46.
 Now, that was not the first time the Star-Tribune had passed along what turned out to be a bum steer relating to Best Buy. 
 Since at least last April the paper has been quoting “sources,” “a source,” “one source,” “two sources” or “an analyst” in stories surrounding the potential for a Best Buy takeover, or a Dick Schultz-led leveraged buyout, or both.
 And, as of this writing, not only has neither a takeover or leveraged buyout occurred, one has not even been announced.
 What follows is a timeline, with the pertinent quotes along with the closing price of Best Buy shares the day the article appeared. 
 We highlight in bold particularly juicy or over-the-top statements, such as “There are people swarming all over this,” “It’s not going to take long,” and "Richard Schultz will make a fully financed offer," statements for which the average Star-Tribune reader should be forgiven for assuming they meant something good was going to happen to Best Buy’s share price, and soon.
 We also highlight a pertinent quote from an analyst who knows a thing or two about retailing that those same Star-Tribune readers ought to have paid more attention to (“I've talked to several private equity firms, and no one will touch it”).
 As in the above quotes, all articles contain the byline of one Thomas Lee:

April 18, 2012/$22
 Best Buy Co., in the midst of an investigation of former CEO Brian Dunn, may have other trouble to fend off.
 The Minnesota-based retail giant has become an alluring target for a private takeover, according to industry sources. The nation's largest consumer electronics chain generates more than $1 billion in cash a year and has relatively little debt.
Such an effort may well be a long shot, but over the past year, Best Buy's stock price has lost more than half of its value, making an acquisition less expensive to a potential buyer.
A takeover of Best Buy "is on a lot of people's radar screens," said Jeremy Brunelli, a retail analyst with Consumer Edge Research in Stamford, Conn. "Best Buy is an obvious candidate. There's a definite buzz going on"….
 Investors are contacting people with connections to Best Buy to seek their help in exploring a buyout bid, a source with close ties to the company confirmed.
 "There are people swarming all over this," said the source, who declined to name those parties.
June 8, 2012/$20
 Richard Schulze's resignation from Best Buy's board Thursday sets the stage for a potentially divisive battle for the company's future, one that pits the founder against the very people he recruited to lead the struggling Minnesota giant….
 Schulze, Best Buy's largest shareholder, said he is giving up his board seat and chairmanship early to "explore all available options" for his 20.1 percent stake in the company. Those options include a venture to reclaim control of the company by acquiring it through private investment, according to two sources close to the situation. Schulze has already hired a top lawyer in New York to assist in such an endeavor, the sources said.
June 8, 2012/$20
"I've talked to several private equity firms, and no one will touch it," said Colin McGranahan, a retail analyst with Sanford Bernstein & Co….
 And while $9 billion is certainly a lot of money, it wouldn't be anywhere near the largest private buyout of a retailer in the United States. That distinction belongs to the $17 billion acquisition of supermarket chain Albertsons by Cerberus Capital Management, CVS and Eden Prairie-based Supervalu Inc. And while food retailing is a low-margin, low-growth business, Best Buy still generates plenty of profits and cash from consumer electronics and services.
 Schulze also has the advantage of not starting from scratch. Thanks to his 20 percent stake, Schulze would just need private investors to contribute around $500 million to $1 billion and the rest he could borrow from the debt markets, according to an analyst with a major institutional investor in Best Buy. The individual requested anonymity because he was not authorized to speak to the news media.
June 27 ($20):
 Schulze was said to be talking with Credit Suisse among other firms, but it was unclear if, or when, he might make a move.
 According to sources close to the situation, Schulze would install his own management team if he regained control of the company, in which he still holds a 21 percent stake.
August 8 ($20)
 Best Buy Co. Inc. founder Richard Schulze has recruited four big-name private equity firms -- KKR & Co., Leonard Green & Partners, TPG Capital and Apollo Global Management -- to help bankroll his $8.8 billion plan to buy the company, the Star Tribune has learned.
 Collectively, the group would provide $3 billion to $4 billion to back Schulze's bid, with the rest coming from debt financing and Schulze's own 21 percent stake in the Richfield-based company. Sources close to Schulze said he may also tap a strategic investor who, for example, might want Best Buy to sell certain products or services.
August 27 ($18)
 Now that Best Buy Co. will let founder Richard Schulze peek at its books, Schulze will likely present a formal buyout offer to the board of directors in early September.
 "It's not going to take long," said a source close to Schulze, who requested anonymity because of the sensitive nature of the negotiations.
 On Monday, Best Buy and Schulze said they struck a deal that allows Schulze to review the company's financial records and formally form a buyout group, which has 60 days to present a proposal to the board.
 The company is currently setting up a "data room," where Schulze and his investors can examine Best Buy's financial records. After that, he will make an offer "within days to a week," the source said.

November 6 ($15)
 An initial offer will likely come next week after CEO Hubert Joly presents his strategy to investors in New York, according to a source close to Schulze. Of the eight potential investors that expressed interest in financing Schulze's bid, the final buyout group will probably include one to three investors, the source said, who added Schulze's team has already completed a preliminary business plan….
 The source close to Schulze said he was originally prepared to offer $25 a share. But given Best Buy's declining market value of late, Schulze might initially offer $18 to $19 a share, which the board will reject, he said.
"I guarantee they will say no," the source said.
 Schulze could then make a second offer in January for $21 or $22 a share, the source said.
 "If you want the killer blow, you have to be close" to Schulze's original range, he said.
December 13 ($12.18 to 14.12)
 Best Buy Co. founder Richard Schulze will make a fully financed offer to purchase the consumer electronics giant by the end of the week, possibly on Friday, the Star Tribune has learned.
 Schulze will submit a formal proposal to the board of directors before a "hard" deadline of Sunday, said one source. The offer is expected to be at least $5 billion to $6 billion.
"This is going down to the wire," the source said.
 Over the past weekend, Schulze and his team secured agreements to finance the deal from bankers and private equity investors, which includes Cerberus, Leonard Greene & Partner and the Texas Pacific Group, the source said. Schulze will meet with his top advisers, including former CEO Brad Anderson and former president Al Lenzmeier, in Minnesota on Thursday and Friday as they prepare to move forward.
 Best Buy declined to comment on Wednesday.
 Founded by Schulze as a single store in St. Paul in 1966, Best Buy has grown into a global retail powerhouse with more than $50 billion in annual sales and more than 100,000 employees.
 While it remains unclear how much Schulze will offer for the company, investors expect the bid to be much lower than the range of $24 to $26 per share that Schulze first outlined over the summer. Since late June, Best Buy stock has fallen 45 percent, closing Wednesday at $12.20 per share.
 The recent stock plunge surprised Schulze so much that he requested a 30-day extension from the original deadline of mid-November to see how Best Buy's holiday numbers would hold up, sources said.
 At this point, institutional investors and analysts speculate that shareholders would be open to selling their stake to Schulze, although they would prefer at least $17 per share, a 40 percent premium over the company's current stock price.
December 13 ($12.18 to $14.12)
 Over the past weekend, Schulze and his team secured agreements to finance a buyout deal from bankers and private equity investors, which include Cerberus, Leonard Greene & Partners and the Texas Pacific Group, according to a source close to Schulze. On Thursday, Schulze met with his top advisers, including former Best Buy CEO Brad Anderson and former president Al Lenzmeier, in Minnesota as they prepare to move forward, the source said.
 Talk on Thursday quickly turned to two questions: How much will Schulze offer investors and will Best Buy's board of directors accept or reject? Under the original negotiating terms between Schulze and Best Buy, Schulze can make a second offer in January if the board rejects his initial bid.
 Some institutional investors have said they would sell their stakes for as little as $16 to $19 a share. But other analysts suspect Schulze will need at least $20 a share.
December 14 ($14.12 to $12.05)
Best Buy Co. and its founder, Richard Schulze, have agreed to push back the deadline for Schulze to make an offer to buy the company, leading some analysts to speculate that Best Buy is more willing to make a deal.

Warren Buffett has been buying up a lot of newspapers lately.  We’re not sure if this kind of track record would make his cut.

Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2012)    Available now at Amazon.com

© 2012 NotMakingThisUp, LLC              
The content contained in this blog represents only the opinions of Mr. Matthews.   Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.  This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever.  Also, this blog is not a solicitation of business by Mr. Matthews: all inquiries will be ignored.  And if you think Mr. Matthews is kidding about that, he is not.  The content herein is intended solely for the entertainment of the reader, and the author.

2 comments:

Jack Straw said...

Jeff - have you seen Ackman's 342 slide presentation on Herbalife yet? If not, please check it out. It is a work of art, and right up your alley. Thanks.

Robert said...

It is now selling at 22.00. So hopefully some of those people who bought and held on they would be sitting on a nice capital gain. BB isn't JCP(at least not yet) they have quite a bit going for them still.


BTW a nice blog, It has some very interesting comments I have enjoyed reading some of the articles.