Best Buy Co Inc (BBY.N) agreed to open its books to founder and former chairman Richard Schulze to allow him to firm up a potential $8.8 billion buyout bid for the struggling U.S. consumer electronics retailer.
The news pushed Best Buy shares up as much as 7.7 percent to $18.65 on Monday, though they remain far below the $24- to $26-per-share range that Schulze has offered, in a sign of continued investor skepticism over the viability of his proposal.
According to the agreement, Schulze, who owns a fifth of Best Buy's shares, now has 60 days after starting due diligence to propose a fully financed bid for the company. He also gets two board seats to represent his stake.
If the board rejects his proposal, Schulze has agreed to abide by a four-month standstill period that will prevent him from pursing another offer until January 2013. If his second formal offer is rejected, Schulze has agreed not to pursue an acquisition for a year, Best Buy said.
The deal was the culmination of weeks of negotiations between the board and Schulze, and comes days after Best Buy reported weaker-than-expected quarterly results and scrapped profit forecasts and share buybacks for the rest of the year.
BB&T Capital Markets analyst Anthony Chukumba said the dismal results from Best Buy last week shifted investor momentum in Schulze's favor, likely putting pressure on the board to allow Schulze to pursue his buyout bid.
"To not allow him to pursue due diligence, form an investor group, to me (that) would be a violation of their fiduciary responsibility," Chukumba said. "As a board, you have to give him a shot."
However, the analyst said he still had doubts about Schulze's ability to obtain the $2 billion to $3 billion in private equity financing that he would need to pull the deal off. Best Buy's market value is about $6 billion.
Under Minnesota anti-takeover law, Schulze needed permission from the board to form a buyout group with private equity firms. He said on August 6 that his financial adviser, Credit Suisse, was highly confident it can arrange the necessary debt financing, and that he had lined up private equity partners for the bid. He has declined to name the PE firms, and said in a regulatory filing on Monday that he had "six equity financing sources."
A source familiar with Best Buy's thinking said the board's decision to give Schulze access to nonpublic information was partly fueled by its desire to avoid more distractions heading into the all-important end-year holiday season.
"The company gets some breathing room for the next few months. This is the busiest time of the year for the company, and gives them a chance to concentrate on the business at hand as opposed to fighting a public battle over control over the company," that source said.
SCHULZE GETS TWO BOARD SEATS
Schulze was forced out as chairman after an internal probe found he did not inform the board of allegations that former CEO Brian Dunn was having an inappropriate relationship with a female employee.
Dunn's exit exacerbated Best Buy's problems, which include cut-throat competition from the likes of online retailer Amazon.com Inc (AMZN.O), discount retailer Wal-Mart Stores Inc (WMT.N) and Apple Inc's (AAPL.O) own retail stores.
Last week, Best Buy named restructuring specialist Hubert Joly as chief executive, but the move failed to reassure investors who pushed the stock down 10 percent the day of the announcement.
Schulze had reached out to some of Best Buy's top investors and analysts in recent weeks, hoping to drum up support for his buyout proposal and in turn pressure the board to let him move forward with it, according to sources.
Under the agreement announced on Monday, Schulze will lose his two board seats if he takes his bid directly to shareholders or if he violates the standstill provisions, Best Buy said.
Talks between Schulze and Best Buy ground to a halt earlier this month after he rejected the company's prior due diligence offer, which included a standstill period of 18 months.
Shares of Best Buy were up 4.7 percent to $18.12 in Monday afternoon trading on the New York Stock Exchange.
(Reporting by Dhanya Skariachan; Additional reporting by Martinne Geller and Greg Roumeliotis; Editing by Jeffrey Benkoe, Lisa Von Ahn and Tim Dobbyn)