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Fitch: Best Buy LBO Rumors Abound, but Hurdles Evident
Published on:
Fitch Ratings says that it believes market speculation surrounding a potential Best Buy leveraged buyout (LBO) is notable, although they 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 capitalization.
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.
Fitch also noted that 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, they 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. Fitch thinks 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.
Fitch noted 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.
Additionlly, 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.
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