FORTUNE — Best Buy (BBY) founder Dick Schulze today indicated an interest in buying the troubled electronics retailer for upwards of $8.8 billion, or between $24 and $26 per share.
At the low end, that would represent around a 36% premium to Friday’s closing price for Best Buy stock. So why are shares up only around 14% as of this writing? Is there some sort of new trading strategy where 22% is the margin maximum?
All I can figure is that traders don’t really believe this deal is going to happen. Or at least not at $24-$26 per share.
One big reason may be that Schulze hasn’t specifically explained how he’s going to come up with the $8.8 billion. In a letter to the company’s board of directors, he writes that “the transaction would be financed through a combination of investments from private equity firms, my equity investment of approximately $1 billion, and debt financing.”
Schulze adds that he has “had conversations with several premier private equity firms with deep experience in retail,” and that his bankers at Credit Suisse (CS) are “highly confident that it can arrange the necessary debt financing.”
That’s all well and good, but it’s hardly the type of specificity that usually accompanies unsolicited buyout offers. For example, did those “premier private equity firms” indicate an interest in doing the deal? Just having conversations with them doesn’t mean too much.” In fact, I had “conversations with several premier private equity firms with deep experience in retail” earlier today, as prep for writing this story. Pretty sure they wouldn’t back my takeover attempt for the mobile phone kiosk at my local mall, let alone Best Buy.
To be clear, I’m not suggesting that Schulze is making up buy-side interest. I’m just trying to explain the lack of market excitement.
Chances are that few traders understand the Minnesota law Schulze believes prevents him from putting together an investor consortium without prior board consent — a rule dating back to when Len Riggio tried to take over what is now Target Corp. (TGT). Moreover, my private equity sources don’t think that any sponsorship commitments are imminent. In other words, even if Schulze got board approval today, it’s highly unlikely that he’d be announcing private equity names tomorrow. Or even next week.
Adding to the hesitance is the aforementioned lack of committed debt financing. It’s all well and good that Credit Suisse is confident, but why not get it in writing from someone? There’s no Minnesota law against securing lenders, and a bulge-bracket bank could make the deal conditional on an approved equity sponsor being signed. Moreover, will big private equity firms be willing to do the deal if they can’t get covenant-lite financing (which they can’t)? Possible, but again goes to explain why Best Buy shares aren’t currently trading in the mid-$20s.
Finally, there is virtually no chance for this to become a competitive process (thus bumping the sale price higher). There is a very limited universe of potential private equity firms for this deal, based on size and sector focus. Maybe 10 total, including Bain Capital Partners, Leonard Green & Partners, Kohlberg Kravis Roberts & Co. and TPG Capital. Chances are that Schulze will need to partner with two or three of them, in order to fund the $3 billion or so of equity (including his own $1 billion). Those he doesn’t choose were likely lower on price, so why would they band together to offer more?
None of this necessarily matters in terms of Best Buy ultimately being taken private. But it does help explain why so few people today seem to be betting on such an outcome.
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