How Best Buy’s Schulze missed Christmas

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Richard Schulze faced unique challenges as he worked to meet a 16 December deadline to launch a bid for the electronics retailer he founded, Best Buy (NYSE:BBY), sources involved in the effort said.

By the time Schulze and Best Buy’s board of directors mutually agreed to extend the bid date on 14 December, Schulze had not asked for a specific amount of debt or provided an up-to-date capital structure to the banks poised to finance his bid, three of the sources said. The sources added that the parties had yet to start negotiating a so-called commitment letter that would have detailed the exact terms of the agreement between Schulze and the lenders.

Media reports have claimed Schulze was ready to make a bid by the December deadline, though no specifics have emerged about the terms or how it would have been structured. The executive now has until the end of February to submit an offer to Richfield, Minnesota-based Best Buy, which faces increasing pressure from internet retailers like Amazon.com (NASDAQ:AMZN).

Schulze’s external public relations firm did not return requests for comment. A Best Buy spokesperson also did not respond to a request for comment.

While the original agreement between Schulze and Best Buy’s board of directors arranged a rigid bid schedule, the board had a fiduciary duty to give the executive an opportunity to present a viable offer, said one of the sources.

Best Buy had few options other than to offer Schulze an extension, this source said, since it cannot force its founder to sell his 20% stake or compel him to rejoin the board -- two compromises short of a leveraged buyout.

In late spring, Schulze resigned from Best Buy’s board and announced he was exploring options for his stake in the company. The development came after Best Buy’s CEO, Brian Dunn, resigned over allegations about his personal conduct.

On 6 August, Schulze sent a letter stating he was prepared to act “quickly” to present a fully financed bid of USD 24 to USD 26 per share to the board if he was given access to due diligence materials. The executive engaged Credit Suisse and Shearman & Sterling as advisors on his bid.

Ten days later Schulze said his “carefully considered” proposal had been “dismissed” but if given access to company documents, “due diligence can be completed quickly and a fully financed offer can be presented for the board’s consideration.” Schulze claimed “value is eroding every day” at Best Buy.

By 27 August, Schulze and the board announced they had reached an agreement that allowed him to form a group to conduct 90 days of due diligence and make a formal bid.

The first source said he was perplexed that Schulze’s sense of urgency in the August letters did not translate into a fully financed offer by the December deadline. Another source said Schulze made a “tactical” mistake to start the due diligence clock before Christmas, since it complicated his ability to secure financing.

Still, the first source said Schulze alone is not to blame. He noted Schulze is working with two former Best Buy executives, Brad Anderson and Al Lenzmeier, who likely needed time to get up to speed with Best Buy’s current activity.

Anderson and Lenzmeier both retired in 2009. The two executives did not respond to requests for comment left with Schulze’s public relations firm.

The apparent hurdles to a rapid deal did not keep the media and market from speculating that a transaction was near at hand. The Minneapolis Star-Tribune reported on 28 August that once a data room opened, Schulze could make an offer “within days to a week”. Reuters later claimed a bid could emerge in November.

The data room opened on 16 September and Schulze worked to round up equity and debt partners to join his group. As the clock ticked, Best Buy started to reduce its earnings estimates and its stock slumped well below Schulze’s August offer.

The company lowered its 3Q guidance in late October and then missed the estimate when it announced final numbers on 20 November. Free cash flow projections for 2013 plunged to USD 950m from a previous estimate of between USD 1.25bn to USD 1.5bn.

Several days after the November earnings, Schulze held a financing meeting with lenders to present his plan for a buyout. Sources said the meeting felt “incomplete”. Schulze never gave a structure for the debt that his bid would need or asked for a final number, they said.

At the banks, some desks charged with monitoring risk grew concerned about their institutions agreeing to carry large, unfunded debt commitments on their books ahead of the New Year, sources said.

Still, lenders could have figured out how to handle debt backing a Best Buy buyout, one ratings agency analyst said. With the correct guidance, Best Buy’s holiday retail sales figures could be estimated accurately enough to quote financing, this analyst maintained.

The February bid extension now allows the Schulze group to see Best Buy’s holiday numbers and more time to provide lenders with a complete capital structure plan. The company is scheduled to report results for the holiday quarter on 11 January.

It remains to be seen if Best Buy can adopt its business model to successfully compete with online electronics retailers like Amazon. Its chief rival, Circuit City, filed for bankruptcy in 2009. Regional electronics seller hhgregg (NYSE:HGG) has seen its comparable store sales decline.

Best Buy has hired a new leadership team led by CEO Hubert Jolly and CFO Sharon McCollam, the retired CFO of Williams-Sonoma, which is working on a new plan for the company. In his summer letters, Schulze indicated he has his own ideas for turning around the retailer.

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