Read This Before Shorting Best Buy
Betting against Best Buy (NYS: BBY) just got a bit more dangerous.
The consumer electronics retailer has reached an agreement with Richard Schulze for access to Best Buy's internal financials and permission for Schulze to team up with private equity sponsors to explore the purchase of the struggling retailer.
Don't get me wrong. The Best Buy model is toast. If Schulze isn't successful in bailing out the chain that he founded before being unceremoniously discarded earlier this year, it's over. Best Buy will likely follow Circuit City into liquidation within five to seven years.
What Schulze doesn't want to hear is that if he is successful that the retailer will implode even sooner. He only owns a 20% stake in Best Buy, and rounding up private equity firms will probably result in a leveraged buyout.
If you think Best Buy's a sinking ship now, just imagine it with more debt.
However, what happens after the company is taken private isn't the concern of today's public shareholders. It will no longer be on their dime. Schulze has suggested taking investors out between $24 and $26, and that's a premium to where the stock is presently perched.
Yes, the actual bid may come in lower. Best Buy's board didn't do itself any favors by posting dreadful quarterly results. Signing up a new CEO to an extravagant pay package should also result in a discount.
It also doesn't help that the models that Best Buy wants to emulate are also deteriorating. The push to smaller smartphone-centric Best Buy Mobile stores is a strategy that has only taken RadioShack (NYS: RSH) to new lows. Trying to woo in-store traffic by offering trade-in opportunities is a model that doesn't seem to be working these days at GameStop (NYS: GME) .
Yes, all roads lead to gloom at Best Buy, but this doesn't mean that this ends at zero. Never underestimate the pride of a founder with a Rolodex of well-financed friends.
If Schulze walks away, all bets are off. This isn't a bidding war. It's one proud guy with an auction card in an empty room. However, with Best Buy's board coming to grips with its own incompetence and the model's shortcomings, the chain that he founded is now Schulze's to lose.
Betting against Best Buy will be dangerous until the dust settles here.
Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS last year. The call is beating the market so far -- because Best Buy is not. It's a gutsy call now, but I'll stick with it on paper. I wouldn't short Best Buy with real money.
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The article Read This Before Shorting Best Buy originally appeared on Fool.com.The Motley Fool owns shares of RadioShack. Motley Fool newsletter services have recommended creating a modified stock repair position in GameStop. 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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