Aug. 7 (Bloomberg) — Best Buy Co. founder Richard Schulze may beoffering the best option for shareholders, even as traders questionhis ability to finance the fourth-largest U.S. retail takeover inhistory.

Schulze, who remains the electronics chain's largest investorafter stepping down as chairman in June, sent a letter to the boardyesterday with an acquisition proposal of $24 to $26 a share,valuing Best Buy at as much as $9.5 billion including net debt.Even at an earnings multiple that's the cheapest on record in theU.S. industry, the bid is as much as 40 percent higher than thestock's 20-day price, topping the group average, according to datacompiled by Bloomberg.

While Best Buy is trading 17 percent below the low end of theoffer because Schulze didn't name private-equity partners anddoesn't yet have committed financing, the 71-year-old saysMinnesota law requires he get the board's permission to form abidding group with buyout firms and executives. If Credit SuisseGroup AG's confidence in raising debt leads to full financing, thedeal could provide a 14 percent bigger gain for shareholders thananalysts project Best Buy will generate on its own in the next yearas it struggles to compete with online retailers.

“It's obviously a pretty good premium,” Joe Feldman, a NewYork-based analyst at Telsey Advisory Group, said in a telephoneinterview. “A lot of investors may say this isn't such a bad dealgiven where things are at right now and the stock otherwise mightnot get there on its own, so we'll take it. The issue is justwhether they can get a deal done.”

'Due Course'

Best Buy confirmed in a statement that it had received theletter from Schulze and said the board would consider it “in duecourse.” A spokesman for Richfield, Minnesota-based Best Buywouldn't comment further.

A spokesman for Schulze declined to comment beyond the letterand statement.

Best Buy, founded by Schulze in 1966, sells everything fromcomputers and televisions to DVDs and mobile phones. Schulze saidhe would explore all available options for his 20.1 percent stakewhen he resigned as chairman in June after failing to inform theboard of allegations that Brian Dunn, the company's former chiefexecutive officer, had an inappropriate relationship with anemployee.

Schulze sent a letter yesterday to Best Buy's directors offeringto acquire the rest of the company's equity and net debt, valuingthe purchase at as much as $7.6 billion, data compiled by Bloombergshow. That would be the biggest takeover of a U.S. retailer since2005 when Federated Department Stores Inc., now Macy's Inc., boughtMay Department Stores Co., and it would also be the industry'slargest leveraged buyout on record, the data show.

Board Negotiations

Schulze has negotiated unsuccessfully with the board for thepast several weeks, seeking permission to conduct due diligence andform a bidding group, said a person familiar with the matter. BestBuy's board told Schulze it wasn't a good time to go privatebecause it was looking for a new CEO, and asked for three moreweeks to consider the matter, said this person.

Best Buy shares yesterday traded only as high as $21.60, lessthan the low end of Schulze's proposed offer, before closing at$19.99. While the stock was 13 percent higher than its closingprice Aug. 3, the shares were still 17 percent below Schulze'sminimum offer because investors are skeptical he will be able tosecure enough money to fund the transaction, said Michael Pachter,an analyst for Wedbush Inc. in Los Angeles.

“I think it's worth less than where it's trading at now, so ifinvestors can get more than that, then it's a great deal,” Pachtersaid in a phone interview. “The question is, how much willfinancial institutions be comfortable lending? Can he pull itoff?”

'Highly Confident'

Today, shares of Best Buy fell 2.6 percent to $19.47 at 9:46a.m. in New York.

Schulze's letter to the board said he will pay with $1 billionof his own equity, investments from private-equity firms and debt.The letter also said he retained Zurich-based Credit Suisse as hisfinancial adviser and that Switzerland's second- biggest bank is“highly confident that it can arrange the necessary debtfinancing.” Standard & Poor's and Fitch Ratings both cut BestBuy's credit ratings to junk yesterday.

Schulze is still seeking the board's permission to conduct duediligence on the electronics retailer and form a group includingprivate-equity funds and other executives to formalize the offer.Under Minnesota corporate law, Schulze needs permission fromdirectors to form the group.

“While I have not yet reached any such agreements, I amconfident, based on my discussions to date, that I could in shortorder if the board allows me to do so,” Schulze said in theletter.

Financing Obstacles

No private-equity firms are named in the letter. Still, Schulzehas sought and received interest from funds that want to be part ofhis effort, and he likely would have two buyout firms backing hisoffer, said a person familiar with the matter.

“There are a number of obstacles,” said R.J. Hottovy, aChicago-based analyst for Morningstar Inc. “I'm not convinced he'sgoing to get approval from all of the board members. The board andshareholders need more information before they will sign off onthis deal.”

Once a $29 billion company, Best Buy has wiped out more thanthree-quarters of its market value as it lost sales toInternet-based retailers such as Amazon.com Inc. and discountstores like Wal-Mart Stores Inc. Best Buy's same-store sales fellin seven of the last eight quarters, data compiled by Bloombergshow.

'Runaway Train'

After Best Buy shares declined 32 percent in 2011, thefourth-worst performance among retail stocks in the S&P 500Index, the stock extended its drop this year by another 25 percentthrough Aug. 3. The company reported its first annual net loss intwo decades in March, and the CEO resigned the next month as theboard investigated an inappropriate relationship with a 29-year-oldfemale employee.

Even the bottom of Schulze's range is more than the $22.89 thatanalysts expected Best Buy's stock to reach within 12 months as astandalone company, according to estimates compiled by Bloomberg asof July 29.

“If consumer sentiment is weak and unless there's some hot newproduct that nobody knows about, the stock isn't getting there inthe next year,” Louis Meyer, a New York-based special situationsanalyst at Oscar Gruss & Son Inc., said in a phone interview.“Schulze is saying, 'Before this thing becomes a runaway train, weneed to interject ourselves.' He sees the urgency.”

'Penalty Box'

The takeover proposal values the entire company, including netdebt, at about 2.9 times its $3.26 billion in earnings beforeinterest, taxes, depreciation and amortization in the last 12months, data compiled by Bloomberg show. That means Schulze wouldbe getting Best Buy for the cheapest Ebitda multiple on record fora U.S. retail takeover of more than $500 million, the datashow.

“When you are in a penalty-box situation, it's very hard to saywhat's a reasonable price,” David Schick, a Baltimore- basedanalyst for Stifel Financial Corp., said in a phone interview.“It's obviously a bargain if management thinks it can grow thatEbitda number. It's not if the pressures are too great.”

Schulze's bid ranges between a 29 percent and 40 percent premiumversus Best Buy's 20-day stock average before the announcement.Takeovers of American retailers have historically been valued at anaverage premium of 31 percent, data compiled by Bloomberg show.

“He's pretty much right on target” in terms of price, said Meyerof Oscar Gruss. The board knows that “nobody's going to come upwith $30, especially if the company is not run any better. There isno $30 bid coming. Another year of pretending nothing bad ishappening isn't going to work.”

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