BEST BUY BUYOUT TRADE DISPOSITION ALTERNATIVES ( see below )
The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
Founder and former Chairman Schulze offers a buyout. In a letter dated August 6, 2012 and addressed to the Best Buy (NYSE:BBY) Board of Directors, Best Buy founder and former Chairman Richard Schulze offered to acquire all of the common stock of the company for $24 â€“ 26 per share in cash, a 36 â€“ 47% premium to Fridayâ€™s closing price. In a regulatory filing on Monday, Best Buy disclosed that Mr. Schulze owns just over 20% of the â‰ˆ 340 million total shares outstanding as of June 6, 2012. The transaction will be financed through Mr. Schulzeâ€™s equity investment of â‰ˆ $1 billion, investments from unidentified private equity firms, and debt financing. In the letter, Mr. Schulze discloses that he has had discussions with several premier private equity firms interested in a potential acquisition, along with former Best Buy senior executives who may have an interest in rejoining the firm in a take-private scenario. The offer letter comes roughly two months after Mr. Schulze resigned from the Best Buy Board to explore different options for his ownership stake.
In his letter, Mr. Schulze discloses that his financial advisor Credit Suisse is highly confident that it can arrange the debt financing needed to complete the transaction. Factoring in Best Buyâ€™s capital position at the end of last quarter, with cash of $1.4 billion and debt of $2.0 billion, we calculate an enterprise value of $8.8 â€“ 9.4 billion, meaning Mr. Schulze will have to raise $7.8 â€“ 8.4 billion after his own investment. However, Best Buy has some working capital needs, suggesting that the gross amount of debt will have to approach $8.7 billion unless Mr. Schulze is able to obtain additional equity funding from his prospective partners. Trailing EBITDA levels may be adequate to support a large amount of debt, but we think that core EBITDA is on the decline, and believe that the equity investment required would be substantial in order for lenders to be comfortable financing more than $5 billion.
Any bid that may ultimately surface will likely be hostile, in our view. Interactions between Mr. Schulze and the Board appear to be quite contentious, as would be expected following Mr. Schulzeâ€™s June resignation. A month earlier, the company disclosed that Mr. Schulze had acted inappropriately when he failed to tell the Audit Committee of the Board about an extremely close personal relationship between former CEO Brian Dunn and a female employee that negatively impacted the work environment. Further, in Mondayâ€™s letter, Mr. Schulze discloses repeated requests to the Board over several weeks for due diligence information and consent to form a group, as required by Minnesota law. However, the Board had previously asked for an additional three weeks before considering Mr. Schulzeâ€™s request. Mr. Schulze does not appear to be willing to wait for an extended period of time, and he likely made his letter public today in order to increase shareholder pressure on the Board to act decisively.
We question whether a deal can be completed. We believe that Mr. Schulze will have to raise at least $3 billion in equity in order to complete a deal of this size, as we think lenders would be reluctant to advance more than 2x trailing EBITDA given recent declines. Private equity investors would have to believe that they have a reasonable chance of generating a return on their investment; in our view, $3 billion of equity invested would likely require a return of at least 100% in the foreseeable future, meaning that private equity firms would have to believe that Best Buy could be taken private for $8 billion and then sold for $11 billion or more in the next 3 â€“ 4 years; we do not believe that is a plausible scenario, and think that private equity investment will be hard to come by.
Michael Pachter is an analyst at Wedbush Securities.
However, as you can see this buyout proposition isn't going to be that easy.
The offer was $24 - $26 and the stock closed at $19.99 today.! Interesting!.
So we have several ways for you to play this position to close depending on your individual risk tolerances, here are the alternatives.
#1 - You can close the spread completely out tomorrow and hopefully get something close to the BID/ASK of $0.65 - $0.72 NET DEBIT and be done with the position.
#2 - You can buy back the short August 20 call for $1.05 - $1.09 DEBIT and hold the long August 22 Call and hope the stock trades above $22 between now and August expiration on Friday, August 17, 2012.
#3 - You could put a stop order above the stock or the option price that you would be prepared to close out the position and hope the stock continues to trade around the closing price today or lower. CAVEAT: This stock can get pretty volatile during the day and swing $1 - $3 a day with this buyout hanging over the stocks Head. so your could easily get stopped out, but you would be stopped out if stock begins to move higher, but you would be out of the position.
#4 Hold the position for another 24 hours to see how the market is pricing this potential buyout. Of course, if you select this option there is no guarantee that the stock will remain around the price of $20 until expiration. It could go higher and into the money based on the perception other investors have regarding the FIRMNESS and PROBABILITY of this buyout. Remember Mr. Schulze has to probably $3 billion in equity in order to complete a deal of this magnitude. They could be some reluctant for private equity managers to give him that much money. A tough call!
The biggest decision will be whether to hold the Long August 22 if you decide to close out the August 20 short call alone on the belief this deal and price will be over 22 by expiration Friday the 17th.
Personally if you just want to exit the position with the least aggravation or guess work, you would probably want to close BOTH parts of the spread for a NET DEBIT or use a STOP on the August 20 short call and then buy to close the long Aug 22 call.
So if you decide to exit you can exit for a NET DEBIT and close out BOTH sides of the spread of leg off the short side and either close the Long August 22 separately or hold it if you think the BBY deal lead to the stock trading above $22 by Friday the 17th.
Personally, if your risk tolerance is "I want to close", this is an excellent opportunity to get out for a NET $65 - $0.72 tomorrow, provided the stock doesn't jump up tomorrow after people have a chance to figure out and analyze this buyout offer/indication.
The MCM cash Machine will be holding for at least 24 hours before making a decision. However if the stock gaps down lower ( and it did trade as low as $19.10 today, after the announcement.) We might decide to close out at that time or place a stop and hold. You will be informed by email of course
and that might be during the day. So if you are going to be away from your
computer tomorrow you might want to choose one of the other alternatives.
Of course, if you hold you run the chance of the stock trading up to $22 or higher and increasing the NET DEBIT price you will need to close out the position.
These are your alternatives. Remember, there are not multiple suitors for Best Buy at this time, so if the deal doesn't fly, we cold see $17 again, that is why I am not suggesting a iron condor on the put side.
One should either close out for the NET DEBIT ( hopefully close to the close today if the stock opens flat ) or We utilize a stop above the market either at a stock price slightly above $20 or at an acceptable price to close the position for a NET DEBT basis.
We will be holding and seeing how the stock behaves tomorrow, than we will decide where and how to exit this position.
Of Course, if you decide to hold, you could face higher exit prices later.
We think the public has to figure this one out, just like the BBY board of directors regarding the offer.