Best Buy's slump might help Schulze

Judging by Best Buy's slumping stock price, founder Richard Schulze's quest to buy the company has just become a whole lot cheaper.

Since August, when Schulze first indicated he would pay $24 to $26 a share, Best Buy Co. Inc. shares have dropped more than 25 percent to below $15 a share, closing Tuesday at $14.95. As a result, Schulze's eventual offer range "won't be as high," said Michael Pachter, an analyst with Wedbush Securities in Los Angeles.

In fact, some investors think Schulze could eventually offer as low as $21 a share and still get the job done.

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.

Despite Schulze's interest in Best Buy, the retailer's shares have recently sunk to 10-year lows because Wall Street continues to doubt Schulze can finance a buyout.

"Most investors are still skeptical Dick Schulze can raise enough equity to make the deal make sense," Pachter said.

Pachter estimates Schulze would need to borrow about $5 billion and raise about $3 billion in equity.

Some investors believe shareholders would gladly take $21 a share.

Such an offer "is a big enough splash that would make a lot of people happy," said a representative of a major institutional investor in Best Buy, adding that $21 a share "would put the board in the tough position." The source requested anonymity because he was not authorized to speak to the news media.

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.

But Best Buy's deteriorating balance sheet could complicate Schulze's efforts, especially if the company sees a big drop in traffic over the key holiday shopping season. Investors and banks could decide to pass on the deal if they suspect Best Buy's free cash flow, currently at $2 billion a year, will significantly decline over the next year or so, Pachter said.

Last month, Best Buy warned investors that its third-quarter profit would be "substantially lower" than the same period a year ago. So far, the company hasn't given much detail on how it expects to perform over the holiday shopping season, which is why the stock is so weak, Pachter said.

"If there is a downturn in traffic, we have a massive problem," he said. Pachter hopes Joly will offer more information during next week's investors meeting.