Best Buy Shares Soar as Private Equity Giants Negotiate $11B Buy-Out

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Best Buy Co., Inc.  shares are soaring in early morning trading, on news that founder, Richard Schulze has put together a consortium of private equity firms, to buy the struggling retailer to accept an $11 billion. Shares of Best Buy, are currently up 5% in pre-market trading.  According to an exclusive report from Reuters , Cerberus Capital Management LP, TPG Capital LP, Apollo Global Management LLC (NYSE:APO)  and Leonard Green & Partners LP are among firms that are conducting due diligence on Best Buy Co., Inc.  (NYSE:BBY). Richard Schulze and his financial advisers at Credit Suisse Group AG (NYSE:CG) are also looking for a buy-out.

Best Buy Shares Soar as Private Equity Giants Negotiate $11B Buy-Out

Schulz finally convinced the company to allow the founder to do due diligence in late August. The deal must be fully financed, and the company will review the proposal, according to the earlier report. Details at that time remained murky about how the deal would be financed. Best Buy Co., Inc. (NYSE:BBY) has a market capitalization of $5.7 billion, and it seemed investors would only sell at a premium. Schulz needed a plan to get billions of dollars in funding for a leveraged buy out. Additionally, only earlier this year, the company was trading at a market cap 30% higher. Schulz needed to convince investors to sell at a possible loss.

With the announcement, that several large private equity firms are on board, the financing appears to be available. With the company struggling, the private equity firms are likely to take a strong hand in negotiations. However, Best Buy Co., Inc. (NYSE:BBY) appears to be running out of options.

This morning Barclays research is out with a report noting the problems facing best buy from Barclays Research. They note that on an absolute basis, electronics and appliance store retail sales are down nearly 10% from their highs in 2007 – 2008 and are showing no signs of a recovery as they have been largely down through the first eight months of 2012.

Worse, for Best Buy Co., Inc. , is that this appears to be a secular trend and not a cyclical one. E-commerce seems to be gaining traction with consumers, and no shows no sign of reserving.  ComScore data indicates that E-commerce now accounts for 37% of computer sales, 28% of printer sales and 23% of portable digital player sales. These contrast with non-Consumer Electronic categories such as toys and apparel, which despite being significantly less shipping intensive than many Consumer Electronic categories, are sold through E-commerce channels only 9% of the time. Meanwhile, the response of the Consumer Electronic retailers – Best Buy, hhgregg, Inc. (NYSE:HHG) and RadioShack Corporation (NYSE:RSH) – to these changes has significantly lagged many of their non-Consumer Electronic peers.

Best Buy Co., Inc.  could be forced to accept whatever terms are offered to the company, as the competition grows from on-line retailers.

(Disclosure: No positions)


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