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

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.

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 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.

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?