Fitch: Best Buy LBO Rumors Abound, but Hurdles Evident
NEW YORK -- June 13, 2012
Fitch Ratings believes market speculation surrounding a potential Best Buy
leveraged buyout (LBO) is notable, although we believe significant challenges
would stand in the way of consummating such a deal.
Last week's resignation of Best Buy's founder Richard Schulze gave rise to the
rumors of a leveraged management buyout, although Schulze did not formally
announce his intent regarding his 20% stake in the company. The departure of
the company's CEO in April had already added uncertainty surrounding the
company's future operating strategy.
In the event a buyout occurred, Best Buy's bondholders would be protected by
change of control language and limitations on liens covenants. Each of Best
Buy's three bond issues allows bondholders to put their notes back to the
company at a price of 101 in the event some entity acquires more than 50% of
the company's voting shares and the bonds are downgraded to below investment
grade by each of the rating agencies. In addition, liens are limited to the
greater of 15% of consolidated net tangible assets or 10% of consolidated
At first look, Best Buy appears attractive from an LBO perspective, with the
company trading at 2.2x LTM EV/EBITDA. Best Buy still generates meaningful
profitability, with EBITDA in the range of $3.3 billion to $3.4 billion
(between 2009 to 2011), and its free cash flow remains strong. We also note
the company has ample liquidity, with $1.4 billion in cash as of May 5, 2012
and a reasonable leverage profile. Potential buyers could also consider major
cost cutting and accelerating the downsizing of the company's retail foot
print versus current management plans.
However, as with any potential LBO, value and risk remain key factors. Despite
Best Buy's strong cash flow and seemingly attractive valuation multiple, we
believe there are significant hurdles. Best Buy faces headwinds around
same-store sales, market share, and competition that are more pronounced than
for other retailers with similar leverage. We think there is a potential for
an accelerating shift in consumer electronics sales to the online channel, as
price-conscious consumers gravitate toward the lowest prices, making it
difficult for the company to maintain market share.
We note consumer electronics retailers are seeing significant secular threats,
leading to questions as to the viability of their business models and whether
there is room for even one national brick-and-mortar player. Both Best Buy and
RadioShack were downgraded two notches by Fitch in 2011 as negative comparable
store sales highlighted the challenge of maintaining competitive traction in a
crowded and highly commoditized consumer electronics sector.
In addition, 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 could be insufficient to
offset the pressures facing its business. Retail LBOs are typically
unsuccessful unless a retailer has strong positioning within its category and
the ability to grow market share on an ongoing basis in a sector that is
characterized by minimal growth and heavy competition.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
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opinions expressed are those of Fitch Ratings.
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