Real Deal on Wall Street: Why Best Buy Founder Really Wants to Buy the Company
A wise old man once told me that everything in life happens due to underlying motives.
In investing, a larger company may opt to purchase a smaller rival because that company's product pipeline is superior, undercutting the future dominance of the larger company. Or, even in this age of quick information transparency, a CEO decides to unload stock to lock in profits weeks before a mega earnings warning that other shareholders had no inkling was coming.
Finding motivations for recent events, or hypothetical future scenarios, is a trick I apply in selecting stocks for clients in our Decoding Wall St. portfolio. I wanted to share an example of this approach at work with Best Buy (NYSE: BBY), which is certainly not lacking for its time in the spotlight in 2012.
With Best Buy shareholders staring down the barrel of a known event - an August meeting to outline new strategies, and a hypothetical event - a founder/partner buyout, understanding the motives behind the latter is helpful.
Four Reasons Why Best Buy's Founder May Want the Company
Best Buy, as of the latest 10-k, leased two store locations from Richard Schulze, paying him $965,000. Since the filing, one of the locations was put into the mix for closure as part of the company's restructuring. There goes a portion of Schulze's spending money.
Given the age of the two stores leased, it's quite probable that demographic shifts will cause the other store that escaped the original chopping block to close as well. There goes more income up in smoke.
Best Buy rents planes for corporate usage from the Richard Schulze Revocable Trust. Total price target in FY12: $1.3 million. The new CEO and re-energized management team are definitely scrutinizing every expense item and with Schulze no longer chairman, it places yet another income stream in jeopardy (Best Buy could outsource the service or require executives to act like other people... and fly commercial. Remember, Best Buy is closing stores, so is this cushy type of relationship warranted?).
Best Buy purchases certain store fixtures from Phoenix Partners, which is owned by Richard Schulze's brother Robert Schulze. Total spending in FY12: $8.8 million. Store closures and downsizes equals fewer fixtures. No Schulze involvement as chairman - maybe the contract gets outsourced to many suppliers instead of the one that happens to be the founder's brother.
In FY12, Schulze's daughter was awarded Best Buy stock options at prices of $29.75, $31.54, $24.12, and $24.18. Any Schulze and partner tag team could make an initial offer for Best Buy around $30.00, immediately establishing a position for his daughter to earn a nice chunk of change. That chunk of change obviously increases if the initial offer is rebuffed only to lead to something closer to $35.00 or higher.
See where I am going here? Not only could Schulze be trying to preserve the company he founded and annual income streams, but could also be attempting to keep family members profitably involved.
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