Fitch: Best Buy's European Exit Slight Credit Positive
NEW YORK -- May 1, 2013
Best Buy Co, Inc.'s (Best Buy) planned sale of its 50% interest in Best Buy
Europe is viewed by Fitch Ratings as a slight credit positive. The sale of its
interest in Best Buy Europe will enable Best Buy's management to focus on
strengthening its core North American business, enhancing its liquidity, and
modestly reducing its financial leverage.
Best Buy plans to sell its interest in the joint venture it created in 2008
with Carphone Warehouse Group plc (CPW) to CPW for $775 million. CPW entered
into the Best Buy Europe joint venture in June 2008, paying $2.25 billion for
a 50% interest. The sale will generate pretax proceeds of $775 million. In
addition, Best Buy will pay CPW $45 million to terminate obligations under
existing agreements and will take a noncash asset impairment charge of
approximately $200 million.
In the fiscal year ending February 2013, Best Buy Europe generated revenues of
$5.6 billion (or 11.2% of Best Buy's total volume), had an estimated EBITDA of
$300 million to $325 million, an estimated rent expense of around $225
million, and $596 million in debt outstanding as of February 2013. Based on
this, we estimate that the sale of Best Buy Europe will reduce Best Buy's
leverage (lease-adjusted debt/EBITDA) by 0.2x-0.3x from a reported 3.2x as of
Feb. 2, 2013.
However, we note that our EBITDA and rent expense estimates were prepared
using CPW financials that are based on IFRS accounting and could therefore be
materially different from the numbers recognized under GAAP accounting. As
disclosed in the company's press release, Best Buy expected revenues of $5.5
billion to $5.6 billion and adjusted non-GAAP earnings per share to be
immaterial from Best Buy Europe in 2013. Therefore, the impact to leverage
could be slightly better or worse than our expectations.
In 2012, Best Buy's revenues declined by 1%, EBITDA declined by 24% to $2.5
billion, and adjusted leverage increased to 3.2x versus the mid-2.0x range the
company maintained between 2009 and 2011. We expect top line and EBITDA to
remain under pressure as we continue into 2013. Fitch believes that, despite
having dominant market shares in many categories, it could be difficult and
expensive for Best Buy to retain its current market share as price-conscious
consumers gravitate toward the lowest prices within the online and brick and
Fitch rates Best Buy's Issuer Default Rating (IDR) at 'BB-', with a Negative
Rating Outlook. Best Buy faces competitive headwinds that are pressuring
comparable store sales, profitability, and its credit profile.
Additional information is available on www.fitchratings.com.
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