Who Would Be Crazy Enough to Buy Best Buy?

Tire-kickers always seem to gather around troubled companies with falling share prices.

Minneapolis' Star Tribune -- Best Buy's (NYS: BBY) hometown newspaper -- is positioning the beleaguered consumer electronics retailer as a buyout candidate.

"The Minnesota-based retail giant has become an alluring target for a private takeover, according to industry sources," this morning's article reads. "Best Buy's stock price has lost more than half of its value, making an acquisition less expensive to a potential buyer."

Don't bet on it.

Private retreat
The article is definitely right about any potential buyer coming from the private-equity ranks. What public company could get away with paying a premium for Best Buy without seeing its own stock shellacked?

The only name that I can think of is Sears Holdings (NAS: SHLD) . Eddie Lampert hasn't had a problem embracing decaying big-box retailers. Sears. Kmart. Why not add Best Buy to its rescue collection? Lampert may even be able to convince investors that incorporating Best Buy Mobile into stale Sears and Kmart stores -- and rebranding its consumer electronics sections under Best Buy's banner -- would breathe new life into the two dying department store chains that have suffered years of freefalling comps.

However, at the end of the day, even Lampert isn't ready for this $8 billion gamble. Analysts tell Star Tribune that it would take an offer closer to $35 a share -- essentially tagging Best Buy with an enterprise value north of $13 billion -- to get a deal done.

Again, don't bet on it.

Savvy private-equity firms have no problem paying a modest premium for a company that they can flip in a few years at a higher price. However, there's a big difference between a company that is temporarily out of favor and one that is a few stops along the Circuit City Freedom Trail.

Follow the shrinking cash flows
"The nation's largest consumer electronics chain generates more than $1 billion in cash a year and has relatively little debt," the Star Tribune article argues.

Well, the problem is more about what the company will be able to generate in the future than what it's cranking out now. There is little reason to expect things to get better. Ever.

  • Best Buy is already bracing investors for a 4% to 11% decline in operating profits this fiscal year on negative store comps. There's little reason to expect a reversal in the future.
  • Nearly 50 stores will close in the next few weeks. Expanding into smaller Best Buy Mobile locations -- essentially aping RadioShack (NYS: RSH) -- is an exercise in small-box futility. If you've seen RadioShack's crumbling share price and margins, you already know why this is a bad idea.
  • Best Buy has no response to Amazon.com (NAS: AMZN) . None. It can't compete on price. If it does lower prices, it means making the in-store experience even more unbearable for customers through harder sells on services and protection plans that they don't want. It's a lose-lose situation.
  • The digital delivery of media that we used to consume through books, CDs, DVDs, and video game discs will grow with every passing year, shrinking Best Buy's business in the categories that deliver repeat business.

We've seen this before
Best Buy isn't going away anytime soon, but any potential buyer knows that waiting is the best bet. If you wanted to own a record store in the 1990s you simply waited for the last juggernaut to file for bankruptcy. If you wanted to own the last major DVD rental chain you just waited for Blockbuster to fall into Chapter 11.

Best Buy is definitely not in danger of buckling under in the next year or two, but there isn't a single catalyst that will prevent its business from continuing to decline in perpetuity.

Who would realistically buy in at today's prices -- and much less pay a premium?

This isn't a turnaround situation. It's a turn-around-and-don't-look-back kind of story.

The 10th chapter will be a long one, but we all know what happens next.

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS four months ago. The call is beating the market so far -- because Best Buy is not. If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.

At the time this article was published The Motley Fool owns shares of Amazon.com, Best Buy, and RadioShack. Motley Fool newsletter services have recommended buying shares of Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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