Best Buy: Go Private or Die?

 
on January 23 2013 2:12 PM
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People line up early in the morning to purchase the RIM PlayBook at a Best Buy store in Toronto, April 19, 2011. On Friday it was reported that founder and largest individual shareholder Richard Schulze has been given a 30-day extension to a deadline to put up an offer or back off to allow CEO Hubert Joly time to implement his turnaround strategy. Reuters/Mark Blinch

Are Best Buy’s (NYSE:BBY) only two options to go private or go bankrupt?

Jim Cramer, the host of CNBC’s “Mad Money,” does not agree with that simplified assessment. In an article published on financial news website TheStreet, Cramer outlined a different avenue, which he termed the muddle-through strategy.

“There was vast confusion involving this stock, because it became binary: It was either going to get a bid to go private or it was going to go to zero,” he wrote on Wednesday. “This last set of numbers, however, has shown that there’s a third path: a muddle-through strategy of a smaller, more lean and less profligate company that isn’t all things to all people all over the country but just a solid operator that can make money.”

He argued that Best Buy can be a profitable company given the right management, but that does not necessarily mean a buyout is the right choice.

Best Buy has been hurt by Amazon (NASDAQ:AMZN). The Internet retailer’s increasingly tight hold over the retail market has come at the detriment of many brick-and-mortar retailers, such as Best Buy. The company’s struggle with showrooming has become almost notorious. Best Buy’s shares lost 50 percent of their value last year as the practice of showrooming dragged down same-store sales. Electronics shoppers are increasingly using the retailer’s stores to examine and test products before purchasing them from cheaper Internet companies like Amazon, and this tactic contributed to a drop in same-store sales of 4 percent in the last nine months of 2012.

Founder and former chairman Richard Schulze has proposed to take the company private in an effort to save Best Buy. In August, his first bid to buy out the company private was rejected by the board, but he was given until February 28 to deliver a second offer.

However, if Best Buy’s board does not accept Schulze’s proposal and follows the “muddle-through strategy,” it must cut costs. Currently, the electronics retailer has three times the number of employees of Google (NASDAQ:GOOG) and only 2 percent of its market capitalization.

Cramer supports his argument by analyzing Research in Motion’s (NASDAQ:RIMM) tentative return to profitability. Mid-way through last year, shares of the BlackBerry manufacturer were trading around $6 per share and downgrades were piling up. “But late last year, this company got religion and starting firing people and closing plants while at the same time revealing that it simply hadn’t lost nearly as many subscribers as people thought,” he wrote. Subsequently, shares rose to $14, and the stock continued to make gains after RIM announced that it may leave the hardware business.

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