Best Buy: How A $26 Bid Almost Left The Firm at Zero

Best Buy Co., Inc. (BBY) is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services.

I've written several times about BBY, the most recent one on 11-20-2012. You can read that post and "catch up" to the news at hand by clicking on the link:

Best Buy (BBY) - The Whole Story; How a $26 Bid Delay Might Leave the Company at Zero

I started the saga of BBY with the stock trading just below $22 on news of a potential takeover (private) by its former Chairman for $24-26 / share). I also wrote about BBY (last time) with the stock trading at $11.94. As of Friday, the stock is popping, and here's the relevant news:

(Reuters) - Best Buy Co Inc (BBY) shares rose as much as 17 percent on Thursday as it became clearer that company founder Richard Schulze may have firmed up financing to buy out the consumer electronics retailer.

Shares reached as high as $14.44 after a report from the Minneapolis Star Tribune that Schulze is expected to make a fully financed offer for the company by a mid-December deadline.

Schulze's bid would be at least $5 billion to $6 billion, the newspaper reported late Wednesday, citing the source.

Schulze's bid at that level would be well below his initial offer range in August, when he said he could acquire Best Buy for $24 to $26 per share, or a total of $8.16 billion to $8.84 billion. -- Source: Reuters via Yahoo! Finance; Best Buy shares up 17percent on $5 billion founder bid report, written by Phil Wahba and Dhanya Skariachan and Olivia Oran

So there you go -- a spurned $24-$26 bid has turned into what seems to be a welcomed bid in the $15-$17 range. Ouch... Having said that, the choice for BBY management now may be between the new lower bid and insolvency.

Let's turn to the BBY two-year Charts Tab(below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).


We can see the steady but large destruction of shareholder value over the last two years with stock falling from the mid $30's to now half of that eve on a big up day. In Apr of 2010, this was a $48 stock.

On the vol side we can see how elevated the implied has gotten. I noted this last time I wrote about the firm, and back then the IV30™ was just 79%. Now we're looking at over 90%. I've included the IV30™ two-year chart below.


The trend is an easy one to identify -- "up." The 52 wk range in IV30™ is [28.32%, 96.06%], putting the current level in the 91st percentile (annual). That annual high was reached on 12-10-2012 (i.e. three days ago).

Let's turn to the Skew Tab, below.


We can see that the option market now clearly reflects the higher likelihood of an event (news) within Dec expiry as it's elevated to the back two months. That upside bend to the OTM calls in Dec reflects the risk (potential) of an upside move in the near-term. In English, it reflects the possibility of a takeover bid in Dec expiry. But, the picture is a bit unrepresentative of reality as many of hose calls are less than a nickel bid.

Finally, let's look to the Options Tab (below).


Across the top we can see the monthly vols are priced to 114.42%, 83.82% and 63.51%, respectively. There is news in Dec for sure -- the question is, is the news a takeover, or is the news "no news." Either way, it's a vol event.

Disclosure: This is trade analysis, not a recommendation.

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