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Best Buy takeover play ends; turnaround in focus

A Best Buy logo is seen during Thanksgiving Day in San Francisco, California, November 22, 2012. REUTERS/Stephen Lam
A Best Buy logo is seen during Thanksgiving Day in San Francisco, California, November 22, 2012. REUTERS/Stephen Lam

By Dhanya Skariachan

NEW YORK (Reuters) - Prospects of Best Buy Co going private ended on Friday when the retailer's founder failed to strike a buyout deal with management, leaving the fate of the world's largest consumer electronics chain in the hands of CEO Hubert Joly and his turnaround plan.

Richard Schulze, a former chairman who last August made an informal bid to buy the company for 50 percent more than its current market value, had until midnight Thursday to submit a formal buyout proposal to the retailer's board. But he failed to line up necessary debt and equity financing, said a person familiar with the talks.

The person declined to be named as the talks were private.

Schulze's three private equity partners - Cerberus Capital Management LP , TPG Capital and Leonard Green & Partners - instead came forward with an offer to take a minority stake in the company and three seats on the board, said two sources familiar with the situation who asked to be anonymous because the talks were private. The proposed price of that investment at one point hit $1 billion.

Best Buy rejected the offer, saying the cost was excessive and dilutive to shareholders.

"We are moving on," CEO Joly told Reuters, adding his team was focused on an overhaul that includes a host of efforts to boost sales and cut costs.

The resolution, along with better-than-expected quarterly results on Friday, brought some stability to a company that has been under a cloud of uncertainty for months while its 71-year-old founder stuck with his quest to take it private.

Schulze made the informal bid just months after he was forced out as chairman. An internal probe had found he had failed to tell the board about allegations of personal misconduct by then-CEO Brian Dunn.

The company founder has not yet decided whether to exercise his right to appoint two nominees to Best Buy's board, he said in a regulatory filing on Friday.

"We viewed the Schulze buyout talks as a distraction," said JV Bruni & Co portfolio manager Jerry Bruni. "The primary issue for us was what was actually going on at the company."

INVESTORS CHEER JOLY HOLIDAY

In its first holiday season under Joly, Best Buy matched competitors' online prices to tackle "showrooming," the retail term for people visiting stores to look at products only to buy them online for less later. It also gave additional training to store workers and made a bigger push to sell online.

"I've been increasingly encouraged by what we're seeing," Bruni said.

"The new CEO is off to a good start," said Bruni, whose Colorado Springs, Colorado, firm owned about 337,000 Best Buy shares as of December 31. "They're doing the right things and focusing on the right areas."

Some investors liked Joly's efforts to cut costs.

"If you can lower the cost structure, then you can lower your prices and become competitive in a very competitive industry while remaining profitable. I think that's his goal," said Frank Lombardi, a portfolio manager at Boston-based Cubic Asset Management which owns 150,000 Best Buy shares.

Shares of Best Buy fell 0.3 percent to $16.36 in afternoon trading. The stock had risen as high as $17.45 on Friday, still 1 cent below where it traded just before Schulze made his offer public on August 6.

MODEST SALES INCREASE

Best Buy's loss narrowed to $409 million, or $1.21 per share, in the fourth quarter ended February 2, from $1.82 billion, or $5.17 per share, a year earlier.

Excluding special items such as restructuring charges, earnings from continuing operations fell to $1.64 per share from $2.18, but exceeded the $1.54 analysts had expected, according to Thomson Reuters I/B/E/S.

Revenue rose just 0.2 percent to $16.71 billion, beating analysts' forecasts. Sales at U.S. stores open at least 14 months rose 0.9 percent, helped by demand for TVs before the annual Super Bowl U.S. football championship game.

"The early results are spectacular," BB&T Capital Markets analyst Anthony Chukumba said, adding that Best Buy appeared to have gained market share over the holidays while smaller rivals like RadioShack Corp and hhgregg Inc struggled.

Renewed U.S. momentum more than offset softness in international markets, Joly said.

Best Buy recently decided to extend its holiday price-matching program throughout the year, starting March 3, to fend off online rivals such as Amazon.com Inc .

The company, which had suspended profit forecasts and share buybacks last August to give Joly time to develop his own turnaround plan, said it would not provide revenue or profit outlooks during this transitional year either.

However, the company noted that the Super Bowl took place on February 3, when the first quarter began, so that pre-game sales of big-screen televisions happened in the fourth quarter. This reduced the latest period's earnings by about 14 cents per share in its first quarter.

The company, which permanently closed 49 large stores in the last financial year, said it expected to shutter an additional five to 10 large stores this year as well. At the end of the fourth quarter, Best Buy had 1,056 big box or large format stores in the United States.

(Reporting by Dhanya Skariachan, additional reporting by Jessica Toonkel and Olivia Oran; Writing by Jessica Wohl and Dhanya Skariachan; Editing by Jeffrey Benkoe, Lisa Von Ahn and Richard Chang)

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