TEXT-S&P cuts Best Buy rating to 'BB+'
Overview -- U.S. consumer electronics retailer Best Buy's founder and largest shareholder, Richard Schulze, has offered to buy the remaining shares of the company for a purchase price in the range of $24.00 to $26.00 per share (about $9 billon). -- We believe that Best Buy's credit profile would weaken materially because such a transaction would add substantial amounts of debt and hinder cash flow protection measures. -- We are lowering our corporate credit rating one notch to 'BB+' from 'BBB-', keeping the ratings on CreditWatch with negative implications, and assigning a '3' recovery rating to the company's senior unsecured debt. -- The CreditWatch listing reflects the possibility of a multi-notch downgrade should Mr. Schulze complete a leveraged buyout depending on the final purchase price, if any, and our continuing concerns about the retail consumer electronic sector, Best Buy's current business model, and any possible restructuring plans. Rating Action On Aug. 6, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating and other ratings on Best Buy Co. Inc. to 'BB+' from 'BBB-'. The ratings remain on CreditWatch with negative implications, where they were originally placed on April 4, 2012. At the same time, we assigned our '3' recovery rating to the company's senior unsecured debt, indicating our expectations for meaningful (50% to 70%) recovery under a simulated default scenario. While numerically, the recovery expectations for the senior unsecured debt are greater than 70%, we are capping the recovery rating at '3' given the potential for additional indebtedness. The rating action is a result of founder and largest shareholder, Richard Schulze's proposal to acquire the company for a purchase price in the range of $24.00 to $26.00 per share. We estimate at the current proposal would result in a total purchase price of approximately $9 billion. The transaction, if completed, would materially weaken Best Buy's credit protection metrics because we believe it will add a significant amount of debt. Rationale In our opinion, a meaningfully debt-financed transaction by Mr. Schulze would weaken Best Buy's credit protection metrics considerably from current levels. As of the first quarter ended May 5, 2012, the company's adjusted total debt to EBITDA was 1.9x and interest coverage was 6.5x. Depending on the amount of debt to be used in a buyout and our view of a turnaround plan for the company's operations given the changing industry dynamics, we could lower the rating by multiple notches. We estimate that a $9 million transaction, would result in pro forma debt leverage of about 3.8x and EBITDA to interest coverage of about 2.5x. CreditWatch We aim to resolve the CreditWatch as soon as possible, subject to the timing of a proposed transaction, if any. If no transaction occurs, we would expect to resolve the CreditWatch based on the current management team's business strategy, cost-reduction and growth initiatives to improve the company's business model, and its implications for our overall assessment of the company's credit profile. In addition, our analysis will focus on our view of the secular changes in the industry and Best Buy's ability to adapt its model to those changes. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Key Credit Factors: Business And Financial Risks In The Retail Industry, Sept. 18, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, April 4, 2006 Ratings List Downgraded; Remaining On CreditWatch To From Best Buy Co. Inc. Corporate Credit Rating BB+/Watch Neg/-- BBB-/Watch Neg/-- Senior Unsecured BB+/Watch Neg BBB-/Watch Neg Recovery Rating Assigned Best Buy Co. Inc. Senior Unsecured BB+/Watch Neg Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings referenced herein can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.