Best Buy as takeover target: What's Schulze's ROI, plan?

Best Buy as takeover target: What's Schulze's ROI, plan?

Summary: Richard Schulze wants to buy the part of Best Buy he doesn't already own. He'll need an Amazon-killing plan to line up funding.

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Richard Schulze, founder of Best Buy, wants to buy the 79.9 percent of the retailer he doesn't own for $24 to $26 a share because the company is facing a "moment of truth" and requires substantial changes.

The problem? It's unclear what Schulze and his band of former Best Buy executives can do to right the ship.

Best Buy's biggest problem is that it is quickly becoming a showroom for Amazon.com. You test electronics at Best Buy and then buy the goods online. Best Buy's issue will soon be critical for all retailers. That's why the retail industry is pursuing multichannel offerings.

Let's face it: Best Buy is struggling a bit, but it's hardly a train wreck. Best Buy is facing a bevy of issues---e-commerce, mobile commerce, efficient rival supply chains and distribution, vendors that act like retailers and price conscious buyers---but Schulze didn't outline a plan.

In fact, Schulze didn't seem to have financing either. Schulze said he was told by Credit Suisse he could line up the debt needed to buy Best Buy. Being told you can line up debt and actually landing private equity partners are two different things entirely.

bby080612
Best Buy year to date.

The biggest challenge for Schulze is whether he can get the return on investment with a Best Buy purchase. Roughly speaking, Schulze would need a 5-year time horizon and then an IPO so everyone could cash out. However, few in tech can predict 5-year product cycles and certainly not a retailer that is increasingly a partner and competition for vendors like Apple. Best Buy needs more of a plan than emulating Apple's retail stores

This time horizon-return equation left analysts skeptical. What is Schulze going to do? Shutter Best Buy's physical stores and go online? Utilize mobile to make Best Buy cool? Ride the latest tech? Feature exclusive products and services? Install new technology to make Best Buy even more efficient?

Piper Jaffray analyst Peter Keith said he was skeptical that Schulze could be successful. Keith, who noted that private equity would have to offer $3.5 billion to $4 billion in equity to buy Best Buy, said the hands-on Schulze would clash with his funding partners. He said:

While financing for an offer appears to be lined up, and Schulze brings a 20% ownership stake, we continue to believe a final deal is unlikely. Projecting out Best Buy's business for the next 5-10 years is a difficult exercise given the uncertainty of product cycles and the ongoing disintermediation within the industry (i.e. Apple's direct-to-consumer model). As a result, we continue to believe Mr. Schulze will have difficulty finding private equity partners to support his takeout offer.

 

In other words, Schulze will need more than memories of Best Buy's glory days. "We remain under the opinion that Best Buy needs fresh management in order to drive better returns in a new operating environment, and is unlikely to find success led by former management that operated the company under a different competitive backdrop," said Keith.

Stifel Nicolaus analyst David Schick said that whatever entity owns Best Buy the retailer will have to shrink to become more profitable.

Barclays analyst Alan Rifkin said that investors would need an internal rate of return of 21.5 percent to help Schulze. Do you want to bet Best Buy can deliver those returns?

Topics: E-Commerce, Tech Industry

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  • The Online Myth

    The current myth is that brick and mortar stores like Best Buy are collapsing because people are using them to investigate products, but are then buying them for less money at an online store. I’m not denying that this happens, but it is only a part of the story. The rest of the story has to do with the history of online commerce, and the fact that B&Ms (Brick & Mortars) have been around for a long time, while online is relatively new.

    When online stores were starting up, they had to deal with their disadvantages. Most of the disadvantages revolved around customer service. There is no face-to-face person to talk to. How do you return something? What if I receive something and it isn’t what I expected? I feel insecure giving my money to someone I can’t see. So most of them (the good ones) bent over backwards to make up for their disadvantage. You don’t like it? We’ll help you return it. No questions asked. Our customer service representatives will do everything they can to help you.

    Meanwhile, the B&Ms saw all of these customer service issues as an advantage, and didn’t realize until it was too late (Best Buy still doesn’t get this) that the online stores had surpassed them in customer service.

    The last time I bought a TV from Best Buy, it stopped working after a week. Even though I had purchased their super-duper protection plan, I went to customer service hell. It took weeks of people not showing up for appointments, phone calls going up the customer service ladder, and hours at a Best Buy store, to get the issue resolved.

    Part of the problem is that customer service is broken up into various vague responsibilities. The Geek Squad operates like a separate organization, and communication is terrible. And of course, they are not allowed to make any customer service decisions on their own. They have to follow their very small script. Then there’s Best Buy corporate. It seems like they have no ability to make anything happen at the lower levels. Then there are the local store managers. They are responsible what happens in the local store, but they depend on the Geek Squad to handle customer service issues after you leave the store. So customer service for returns is a mess.

    But there is another level of customer service that is missing. In the local Best Buy store, customer service is abysmal. I’ve had generally good experiences working with the Best Buy employees, but they’re always way understaffed. When helping a customer, they are constantly interrupted by other customers because there is no one else available for assistance. Maybe some of the people who are “window shopping” are really just customers who gave up while waiting for someone to help them.

    I don’t know how Richard Schulze is going to fix all of this. I don’t even think he recognizes it as a problem.
    mlewis@...
    • You nailed a lot of issues.

      But I think the major reason for the window shopping is price gouging. You can't tell me that Best buy has to charge $60 for a 5 foot HDMI cable that I can buy on amazon for $4 just because they have to pay a service staff. I often go to Best buy hoping to find what I need so that I don't have to wait for it to be sent in the mail. But %90 of the time, they are so overpriced that I just can't bring myself to pay the mark up for instant gratification.

      Another problem is the fact that I find the customer reviews etc. on websites far more informative than what they have available in store. Half the stuff has no specs listed. 20 employees will come offer unwanted help when you are browsing CDs, but then when you need to ask a question like "It says HD on the box. Is that 720p? or 1080p?" the guy not only looks annoyed, but doesn't actually know the answer, so he says something like "well, their both either one would be HD. Why do you need to know?".

      Half the computers there say things like "High speed intel processor" and list no specifics, as if every computer on that isle doesn't have an intel processor. It's a total cluster F.
      mrefuman
  • You want to save retail?

    Start taxing online at the same rates and much of the online business goes away. Not all of it, but a lot will.
    slickjim
    • Applying sales tax to online retailers won't fix Best Buy's problems

      The foremost problem facing Best Buy is they have simply over-priced their products. I needed a card reader for an XD style of card for a friend leaving the following day for Europe. The only one of Best Buy's five different (store brand?) card readers included that format and it was the most expensive at $52.95. I left Best Buy and walked 50 feet (15 meters) to Target and found a Belkin reader for $19.99. Best Buy lost a traditional retail B&M sale for being non-competitive with another B&M store.
      RayStar
    • best buy will fail sell your stock

      if customer service is important they will fail. After getting a phonne call blameing me for one of their employees lies i kind of doubt that best buy understands what customer service is about.
      the constant complaints dont seem to get any one fired they dont follow up and apologize. Given this kind of treatment of its customers guess what like my self i have moved my buying recently i purchased 30k of computers i was going to purchase at best buy just because i was assuming that their geek squad could take care of my client. but after taking a computer into the store for repair all i got was lies and complete ignorance as to new laws realted to HIPAA they better figure it out that HIPAA is hear to stay an to alienate customers is very important i could be a multi million dollar client HIPAA applies to hospitals if i were a manager of one i would never go to best buy they will not sign a HIPAA release so be aware of this its against the law to have best buy work on any computer that contaions any medical info this law is new but it is the law if they refuse to sign a HIPAA release then DONT USE BEST BUY OR GREEK SQUAD both REFUSED TO SIGN any HIPAA forms. THE FBI i hope investigates them and fines them the millions dollars in fines for every computer they repair
      Mikealie
  • i know this is a dream

    but revenge will come when they are out of business. and this wil happen soon enough from what i can tell from all the issues they are having . if i were a banker they would not get a dime from my bank. not untill the management can fix the issues related to customer service. and others as well .
    Mikealie
  • Richard buy the stock at 10 its not worth more

    just my thoughts your offer of 24 is way to much its not worth it
    Mikealie