Best Buy Credit Ratings Cut to “Junk” After Buyout Bid

Best Buy Credit Ratings Cut to “Junk” After Buyout Bid

Fitch Ratings and Standard & Poor’s both downgraded their credit ratings for Best Buy, saying that a buyout by founder Richard Schulze would add significant debt.

There have been diverse reactions to Best Buy founder Richard Schulze’s Monday bid to take the retailer private, with some analysts hailing the move as a possible game changer for the struggling company, while others remain skeptical.

But the prospect that a buyout would add significant debt has led both Fitch Ratings and Standard & Poor’s Rating Services (S&P) to downgrade their credit ratings for Richfield-based Best Buy to “junk” status.

Schulze, who owns roughly 20.1 percent of Best Buy’s shares, on Monday submitted a written proposal to the company’s board, offering to purchase the shares he does not already own for $24 to $26 per share in cash. Schulze is currently seeking permission from the board to form a buyout group and perform due diligence.

S&P said that it believes “Best Buy’s credit profile would weaken materially” in the event of a private takeover by Schulze, “because such a transaction would add substantial amounts of debt and hinder cash flow protection measures.”

The agency lowered Best Buy’s corporate credit rating one notch, from BBB- to BB+. A BB+ rating is one level below investment grade, and is often referred to as “junk.” BB ratings indicate that a company is “less vulnerable in the near-term” but face “major ongoing uncertainties to adverse business, financial, and economic conditions,” according to S&P’s website.

Best Buy’s rating also remains on “credit watch with negative implications”—an indicator that a more significant downgrade could occur. S&P first placed Best Buy’s rating on watch with negative implications in April, after the retailer reported poor fiscal 2011 earnings and announced plans to shutter 50 of its big-box stores, add 100 new smaller Best Buy Mobile stores, and cut 400 positions.

Fitch, meanwhile, said Monday that it has downgraded Best Buy’s “Issuer Default Rating” to BB+ from BBB-. In addition, the agency announced that it has placed Best Buy’s ratings on “rating watch negative”—a move that is a direct result of Schulze’s buyout proposal.

Fitch cited Best Buy’s decline in same-store sales and also detailed what it calls “significant competitive hurdles,” including a loss of market share to online retailers.

“Best Buy’s restructuring efforts, including accelerated store closings and a reengineering of its operations to take excess costs out of the system—as a public entity or as a private firm—will be beneficial but may be insufficient to offset the pressures facing its business,” Fitch said.

Junk bonds may have a higher likelihood of default, but they are reportedly attractive to some investors, as they can potentially pay higher yields.

Schulze’s buyout bid has been met with some positive reactions. Shares of the company’s stock closed up 13 percent at $19.99 on Monday, following Schulze’s announcement. They were trading down about 0.65 percent at $19.86 late Tuesday morning.

Lee Schafer, a Star Tribune columnist and a former Twin Cities Business contributor, reported Monday that Wall Street’s reaction to the deal signifies that the market does not anticipate a more attractive proposal than $26 per share—and suggested that Best Buy should take Schulze up on his offer.

Schulze, who formerly served as chairman of Best Buy’s board, resigned in June on the heels of a scandal involving ex-CEO Brian Dunn. Schulze has said that he is in discussions with former Best Buy executives—including former CEO Brad Anderson and former President and Chief Operating Officer Allen Lenzmeier—who have voiced interest in returning to the company if he completes a successful takeover.

Best Buy is currently Minnesota’s third-largest public company based on revenue, which totaled $50.7 billion for the fiscal year that ended in March. It has recently shuttered stores and laid off workers as it attempts to reinvent itself and to compete with online retailers like Amazon.com. In May, the company announced that its first-quarter earnings fell 25 percent, due in part to restructuring costs and a decline in same-store sales.

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