Shares of electronics retailer Best Buy (click ticker for report: ) are surging on an offer received from founder Richard Schulze to acquire the company via a leveraged buyout for $24-$26 per share. The buyout figure is within our fair value range and would allow the company to operate with weaker margins and more creative strategies than possible were it to remain public, in our view. Best Buy will likely have to take large restructuring charges that would negatively impact net income, but would probably not harm cash flow generation nearly as much (some charges will be non-cash in nature). As a result, private equity buyers and Schulze could weather the storm better than public market equity investors, which can be near-term oriented at times.
However, we would not necessarily dive into shares at this price. Since Schulze did not announce any definitive partners, there is a reasonable chance that he will not be able to finance the transaction. Although he assured that Credit Suisse (CS) could secure the necessary financing, we are never ones to count our chickens before they hatch. We assume several cash-rich private equity firms and hedge funds have already begun evaluating a possible transaction, so perhaps a leveraged buyout isn’t very attractive.
Even though we wouldn’t be shocked to see a buyout occur, we remain cautious since there is always the chance of any deal falling apart. However, if shares fall below the low-end of our fair value range ($19), the risk/reward would become very compelling given the margin of safety and potential buy-out catalyst. Still, with a score of just 3 on the Valuentum Buying Index (our stock-selection methodology), we aren’t interested in taking a position at current levels. Shares of hhgregg (HGG) and Radio Shack (click ticker for report: ) are also surging on these rumors, but we believe neither is a particularly attractive investment.