Warning to Best Buy: S&P Cuts Rating to Junk on Deal, Warns of More Downgrades

August 6, 2012 by Jon C. Ogg

Source: Jon Ogg
Best Buy Co. Inc. (NYSE: BBY) surged on news that founder and 20.1% owner Richard Schulze has sent a letter to the board of directors saying that he is set to offer $24 to $26 per share to acquire the troubled electronics retailer.  It is great news for the common holders if the deal can be brought to fruition.  Isn’t it?  Not according to Standard & Poor’s.  S&P announced this Monday afternoon that it was downgrading the corporate credit rating based upon the offer.

The downgrade could be one of question, but it is damaging.  The S&P downgrade takes the credit profile to JUNK!  S&P’s downgrade went from “BBB-” as the lowest of ‘investment grade’ down to “BB+” as the highest rung of credit ratings in the junk bond universe.

The market capitalization rate of Best Buy was $6 billion before the deal was brought up, but Schulze owns roughly 20% of the company.  Schulze’s due diligence should be limited but he still has to be given permission.  Best Buy’s current board of directors may want to pay attention to what S&P has to say.

S&P’s report signals that the credit profile would weaken materially because it would add lots of debt and would hinder the cash flow protection measures.

To make matters worse, S&P is keeping the electronics retailer on CreditWatch with negative implications.  That is a warning that another downgrade may be issued. S&P even hinted at a ‘multi-notch’ downgrade depending upon the final buyout price.

Best Buy shares are still up 13% at $19.97 on the day but shares were up at $21.60 earlier today. Nearly 50 million shares have traded hands this Monday.

There is one other measure to consider here for the speculators.  Schulze is probably the only person in the world that would want to (or could) successfully take this retailer over.