Schulze's $8.8 Billion Best Buy Deal Has Icahn-Like Strings (Update 1)

Best Buy buyout story, updated to reflect Standard & Poor's downgrade

NEW YORK (TheStreet) -- Best Buy's(BBY) founder and former chairman Richard Schulze has proposed a $24 to $26 per share buyout of the struggling big box electronics retailer, but the offer comes with strings attached. While the deal appears to offer shareholders a premium, they would be wise to treat the prospective buyout in the same way they would a bid by Carl Icahn.

With the deal, which could be worth $8.8 billion excluding Best Buy's debt, Schulze is pinning his hopes on heavy private equity and debt financing, in a proposal that closely resembles Carl Icahn's failed bid for Clorox(CLX) in 2011.

That's because while Schulze is willing to include his 20.1% stake in Best Buy shares worth roughly $1 billion in the deal, extensive buyout financing from advisor Credit Suisse(CS) and still unspecified private equity investment will be the deal's linchpin. Icahn's $76.50 a share bid for cleaning products giant Clorox in July 2011 -- the activist had a near-10% share stake -- hinged on a multi-billion dollar debt financing commitment from Jefferies(JEF) and unspecified strategic interest from competitors outlined by Icahn.

Icahn's bid failed after a hostile battle between the activist and Clorox, which called the financing commitment and indication of strategic M&A interest flimsy. The board projected Icahn's offer as a bluff to shareholders, who came to a similar conclusion and rejected a slate of Icahn-appointed directors for the company's board. In September, Icahn withdrew his offer and began liquidating Clorox shares.

Monday's prospective Best Buy offer would come at a premium of 36% to 47% to the company's Friday close, in a buyout that would be the biggest since the financial crisis. Best Buy shares rose over 13% in late-afternoon trading on Monday to $19.98. That rise cut into year-to-date losses nearing 25%, but shares were still well below Schulze's offer price, and came down from an early morning high that sent shares up by as much as 21%.

Best Buy's board said it received and will review the proposal, which it characterized as a "highly conditional indication of interest." The company's board of directors "will review and consider the letter in due course, consistent with its fiduciary duties, in consultation with its financial advisors," said Best Buy in a statement.