-- 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
-- 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.
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
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.
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.
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
Downgraded; Remaining On CreditWatch
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