BUSINESS
06/07/2012 09:17 am ET Updated Aug 07, 2012

Richard Schulze, Best Buy Founder, Resigns, Mull Options For 20 Percent Stake

* Schulze leaves chairman's role two weeks early

* Exploring options for his 20.1 pct stake in Best Buy

* Hatim Tyabji now chairman

* Shares pare losses after falling 8.5 percent (Adds details on Best Buy and Schulze; updates share price)

By Dhanya Skariachan and Jessica Wohl

June 7 (Reuters) - Best Buy Co Inc founder and chairman Richard Schulze resigned from the company's board on Thursday and said he was exploring options for his 20.1 percent ownership stake, a move seen as a possible precursor of a Schulze-led private takeover.

Schulze's announcement came just two months after CEO Brian Dunn abruptly left the chain, and adds to management distractions as Best Buy struggles to compete with online and discount retailers.

Shares of Best Buy pared losses on Thursday afternoon to trade down 1.4 percent, after falling as much as 8.5 percent in the morning. The stock was already rocked in April when Dunn left amid a probe that later found he had engaged in an improper relationship with a female employee.

Best Buy said last month that Schulze would step down as chairman after the June 21 annual meeting, after he failed to tell the board about Dunn's relationship. He had planned to remain a director through the 2013 annual meeting.

The 71-year-old Schulze is by far Best Buy's largest shareholder, with 69.78 million shares as of April 11, according to Thomson Reuters data. He served as the retailer's chief executive for 36 years, until 2002.

Minneapolis-based Best Buy is struggling with the increasing trend of customers who visit stores to test pricey electronics, only to end up buying the items online from Amazon.com Inc and others. At the same time, Wal-Mart Stores Inc and Target Corp are flexing their competitive muscle by devoting space to popular Apple Inc devices in some of their stores.

Best Buy's sales at stores open at least 14 months, or same-store sales, have fallen in seven of the last eight quarters.

In May, interim CEO Mike Mikan said that Best Buy needs to "change substantially" to fend off rivals and that it would shed more light on a turnaround plan later this summer.

Earlier this year, Best Buy said it would close 50 large U.S. stores as it tries to turn around the business, a move some analysts said was far weaker than what is needed.

"We surmise that Schulze had some disagreement with the board and current management team around the strategies being considered," said Bernstein Research analyst Colin McGranahan, who has a "market-perform" rating on Best Buy shares.

Mikan is one of the candidates being considered as Spencer Stuart conducts Best Buy's months-long search for a new CEO.

Aside from stiff competition, Best Buy is also facing an electronics industry that has lacked compelling products that entice consumers.

Last week, Walmart U.S. Chief Merchandising and Marketing Officer Duncan Mac Naughton said there is a "lack of innovation" from manufacturers. Walmart, for its part, has tried to boost sales with services such as "disc to digital" movie conversion.

Schulze's announcement implies "little interest so far" for his stake from private equity firms, though the "fire sale" aspect of his sale could attract new bidders, McGranahan said.

"It is not obvious who or if there are buyers for such a substantial (though non-controlling) stake" at this point, said McGranahan.

A leveraged buyout of Best Buy would be tough to pull off, said BB&T Capital Markets analyst Anthony Chukumba.

"Even as depressed as their share price is right now, to (make an offer for) Best Buy, you're talking about probably a $10 billion deal," he said. "That's a much larger deal than I think is feasible in the current market environment."

As of Wednesday, Best Buy's market capitalization was $6.56 billion.

Investors initially worried on Thursday about the potential dilution that will arise if Schulze sells his nearly 70 million shares. The stock later pared losses after some investors perceived that Schulze's move might not be all bad for the company, Chukumba said.

He said that to some extent, investors realized that Schulze might be leaving the board "so he can team up with some private equity guys and make a run at the company."

'ICONIC ENTREPRENEUR'

Best Buy began in 1966 when Schulze opened the first Sound of Music store in Minnesota, and went public in 1985. It has had just three permanent CEOs, and all were insiders with long tenures at Best Buy.

Back in 1988, Best Buy hired Goldman Sachs to evaluate business options after dismal quarterly results. A few weeks later Schulze changed course, saying that Best Buy would press on with its own five-year growth plan.

After Schulze, Best Buy's largest shareholder is Fidelity Management & Research Co, which owned 24.2 million shares, or 7.06 percent, as of March 31, according to Thomson Reuters data. Tradewinds Global Investors LLC owned 14.9 million shares, or 4.3 percent, and Vanguard Group Inc owned 11.8 million shares, or 3.5 percent.

Best Buy named Hatim Tyabji as chairman, two weeks earlier than planned. Tyabji has been a Best Buy director since 1998. He is also chairman and CEO of Bytemobile Inc and chairman of Jasper Wireless Inc.

The board's audit committee, in its recent investigation report, criticized Schulze for the way he confronted Dunn on his own, saying "he created serious risks of employee retaliation and company liability."

Some analysts, investors and corporate governance experts have also criticized Schulze in the past for what they alleged were potential conflicts of interest in the boardroom. Almost two years ago, research company Management CV Inc raised issues about favoritism granted to Schulze's relatives, and transactions connected to Schulze's immediate family and some board members.

On Thursday, Best Buy called Schulze "an iconic entrepreneur" who "changed the landscape of American retail."

There are no U.S. Securities and Exchange Commission rules to prevent a person serving on the board of a public company from considering plans to sell their stake. However, leaving the board could make such a process easier. Having access to the kinds of material information typically shared with the board would make selling shares difficult, given the need to wait for approved trading windows.

Best Buy shares were down 1.4 percent at $19.61 on Thursday afternoon, off an earlier low at $18.19. The stock is down about 13 percent since the day before Dunn's departure was announced. (Reporting by Jessica Wohl in Chicago and Dhanya Skariachan and Phil Wahba in New York; Editing by John Wallace, Maureen Bavdek and Matthew Lewis)