Best Buy Co., Inc. (BBY): Is the Company Going Private?

In recent years, Best Buy has struggled to respond to changing technologies and consumer tastes. In 2011, it lost nearly $1 billion despite taking in about $51 billion in revenues. Although its acute financial problems began as consumer spending collapsed at the onset of the financial crisis, the root causes of Best Buy’s malaise can be traced back even further. Its formerly-dominant position in the electronics-retailing industry has been eroded on two fronts.

The Competition

First, low-overhead online retailers like Amazon.com, Inc. (NASDAQ:AMZN) are cheaper and more convenient than bricks-and-mortar retailers like Best Buy. Just as it once out-competed and eventually bankrupted smaller and less agile rivals like Circuit City, Best Buy now finds itself locked in a losing battle with stronger competitors. With lower labor, merchandise and overhead costs, Amazon is able to offer a wider range of products at lower retail prices. The problem is simple: Whereas Best Buy must staff and maintain hundreds of physical locations, Amazon cuts out the middleman by shipping products directly from its warehouses to consumers across the world.

Discount retailers like Wal-Mart Stores, Inc. (NYSE:WMT) have also eaten into Best Buy’s once-generous margins. As the largest North American retailer, Wal-Mart enjoys unrivaled pricing power. It maintains exclusive purchasing deals with many manufacturers and can rely on huge sales volumes to offset its minuscule margins. In addition, Wal-Mart and other general retailers enjoy greater product diversification than electronics-specific retailers like Best Buy. As its sales of high-margin but increasingly outmoded DVDs, video players and desktop computers have tailed off, Wal-Mart has compensated by finding new streams of revenue in unrelated departments. By contrast, Best Buy is exposed to the vagaries of a historically volatile retail sector.

At this point, it is too early to say with certainty whether founder Richard Schulze will succeed in taking Best Buy private. Given the company’s grim outlook for 2013 and beyond, a deal that offers its shareholders a 100 percent return on their investment seems almost too good to be true. Current shareholders can only hope that a deal is reached by the February 28 deadline. Meanwhile, prospective investors should carefully consider the pros and cons of acting on this yet-to-be-finalized deal.

The article Is the Company Going Private? originally appeared on Fool.com.

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