best buy written case working final

7/17/2019 Best Buy Written Case Working Final

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Team 12 BlueBBY:NYSE

Private Equity Valuation



How the economy is afecting the industry.

The consumer discretionary sector's performance has done well lately, even

though sales have not been doing too well. Due to falling energy prices falling,

money has been saved in the economy and it seems that some of the saved

money will mae its way to the discretionary sector though we're not quite

optimistic. !onsumers seem to be more concerned in saving and repaying debt of

the past, therefore we believe that a maret perform rating is "tting for the

consumer discretionary sector.

There are a few pro#s for the sector$ !onsumers have lessened their debt, the %ob

maret seems to be picing up, and there seem to be signs of wage growth,

mainly among professional %obs. !ommodity costs have also decreased, especially

energy, which raises the amount consumers have to spend, although to what

degree they will spend is in question. There is actually little correlation between

lower fuel prices and consumer spending, according to && (esearch. )urther

support for consumer spending could come from the )ederal (eserve, which has

directed that it could be more accommodative should growth in the *nited tates

or around the world slow too much.

Positive factors for the consumer discretionary sector contain$

+ow supply$ &nventories remain relatively constant. This low supply should provide

retailers with some pricing power as economic activity pics up. ccommodative

monetary policy$ Despite quantitative easing ending, the )ederal (eserve

continues to be quite obliging, which could help the consumer. !entral bans in

other developed marets also appear to be "rmly in an easing stance, which could

help strengthen the consumer. &mproving %ob maret$ The unemployment rate

continues to move down and more people are getting employed which could

mean more incomes. -age growth$ -ages are starting to show signs of

improvement, although it's too early to state a conclusive trend. &t could lead to

rising incomes.



/owever, these positive factors are o0set by other developments. )or instance,

housing improvement has delayed recently. nother potential headwind is the

recently resolved port worer dispute on the -est !oast. That has caused delays

in goods getting to retail locations, bumping pro"ts as companies either sell less

or pay more for alternative means of transportation. )inally, consumer con"dence

could tae a hit should concerns such as Ebola or geopolitical issues 1are up.

2egative factors for the consumer discretionary sector include$

Tight credit standards$ +ending remains considerably low, especially around the

housing maret, although there are signs of easing which could mean more

people would be willing to lend less and hence buy less. )ierce retail

competition$ This seems to be a0ecting margins for the sector especially due to

the presence of online retailers, which could create problems for stoc

performance if the competition continues. *ne3pected )ed rate hies$ &f this

happens due to increased in1ation, higher interest rates could be a deterrent to

the consumer discretionary sector.

-est !oast port dispute$ The 1ow of goods into the *nited tates has been

severely slowed in recent months, which could temporarily increase costs or

decrease sales.

Inside Best Buy

&n order to best analy4e 5est 5uy and its position relative to other players in the

maret we have elected to conduct a -6T analysis. The focus is on the

weanesses of their current model and the opportunities that they have the

potential of capitali4ing on. Despite having undergone a ma%or strategy overhaul

in the past year, namely the successful implementation of (enew 5lue, 5est 5uy

still has yet to stabili4e its operating margin.

7



+ooing at the positives they are leaders in the industry for bric and

mortar technology stores in number and square footage. This gives them more

face8to8face time with the client than any other retail outlet. They proved

supremacy through the "nancial crisis buy outlast their once top competitor,

!ircuit !ity, a company that has since all but completely dissipated. They also

have a sales force of over 99,999 persons that if used to their full potential could

serve as e3perts on all of the products the corporation sells.

Despite being strong 5est 5uy still faces some very imposing threats. :es,

they are close to the customer and allow them an opportunity to handle products

prior to use, this does not mean that they will capture every sale. ;uite the

contrary it is often the case that customers tae the nowledge they learn inside

of best buy stores and do their shopping elsewhere< scoping online and other

retailers for deeper discounts. 6f the sales that 5est 5uy does mae the ma%ority

come in the "scal =th quarter of the year< the time of ma%or holiday shopping the

core marets for the *, !anada, and the *>. *nfortunately if outside factors, lie

those mentioned in the list of 7? riss in the 79= annual report, come into play

5est 5uy could "nd itself in a hard place with no time left to capitali4e.

&n con%unction with these threats there are a myriad of weanesses that

negatively a0ect the company. ;uite a few of these stem from the multiple

channels that 5est 5uy operates through. They are unable to lower margins or the

cost structure, thus far, because of these restrictions. )urther, as in the e3ample

of shoppers going elsewhere, their competitors are bene"ting o0 of the

discrepancies that are driving their prices upward. Essentially 5est 5uy is su0ering

the cost associated with showing how products wor to customers while other

retailers are getting the purchase with lower prices, shipping specials, and the

ability to avoid paying sales ta3. 6n top of this, thought 5est 5uy has an online

@



and international presence, they are weaer than those of others who are pro"ting

handsomely o0 of having many strong revenue streams. Perhaps one of the

biggest weanesses for 5est 5uy is the strong brand loyalty of today#s consumer.

-ith many smaller purchases the Anewest updateB of a currently owned product is

the ne3t step. Thus they can bypass entering a store and instead pre8order online

from the company directly. &n terms of larger purchases, lie appliance, an upturn

in the custom home maret has resulted in more specialty shops with e3pansive

catalogs that cater to many price points and can often be bundled for discounts.

&n contrast of this seemingly negative outloo, there are several

opportunities for 5est 5uy to strengthen its strategic positioning in the industry.

tarting with their aforementioned employees, one of the concerns addressed was

the high turnover of the retail industry. -ith this in mind 5est 5uy should consider

following the model that pple has set wherein their employees are e3perts on

the products in store, they now all of the speci"cs and the advantages and

disadvantages of one product vis8C8vis another. /aving this level of awareness on

what they are selling could increase employee retention rates, but it sure would

mae the buying e3perience fore seamless for the customer. They currently

operate Astores8within8a8storeB for both amsung and -indows products.

*nfortunately these are two brands that can be found in some capacity in both

the indirect and direct competitors of 5est 5uy. /owever, if they were able to

acquire e3clusive retail rights, even for a limited time prior to a general release,

they could capitali4e on the desire to be the A"rstB to have the latest gadget. &n

negotiations 5est 5uy could highlight its nationwide locations and the ability for

customers to buy from them and immediately use the product. This would create

an organic review that could drive sales for the coming months. 5est 5uy could

also go the e3tra mile in the bene"ts that visiting and purchasing from their store

could provide, )or instance, in the case of the customer that comes into the store

loo to narrow down their choices and the AtestB products out, 5est 5uy could

=



o0er a discount of the item was purchased either in8store or online from them in

the ne3t 7= hours. This gives the customer time to thin and do additional

research but eventually come bac to 5est 5uy to purchase. dditionally, the

discount and the ability to have the product in8hand that day could overshadow

the advantages of online buy from another retailer. oing further, 5est5uy could

o0er complimentary delivery for items, lie large TVs and ppliances that either

would not "t in the standard car, or require multiple people to be moved. This

added convenience represents another ma%or deal breaer that, though increasing

cost slightly could bring in enough revenue to o0set the impact.

&n summation, 5est 5uy is one of the most trusted retailers in terms of

electronics in the *nited tates. /owever a recent shift in the way their products

are bought and sold has left them with a cost structure that feels more lie a

burden than a "nancially secure plan. Thus our biggest suggestion for 5est 5uy

moving forward is to leverage the stores to their full potential and mae the cost

structure wor in their favor. -ith this and the continuation of their (enew 5lue

program they can e3perience great success.

-ith the position of the "rm, the industry and the maret established we looed to

di0erent valuation methodologies. These were split into, free cash 1ow valuation,

earnings based valuations and multiples valuation< which will be discussed below

in that order.

&t is assumed throughout that cash is managed optimally and there is a minimum

cash balance. &t is also assumed that the cost of debt is weighted average

e3plained below. -e also assume equity beta to be that provided by !apital &; of

.F not the much higher @. reported elsewhere.

egression !odel

?



The approach taen here is to build a series of forecasts for revenue growth in the

free cash 1ow model. The "rst approach would focus around a regression model.

The regression used is multi8linear, using the natural logarithm of lagged revenue

from the previous quarter, using a dummy variable to control for the consistently

high ;= results and an economic sensitivity dummy variable to address the fall in

revenues since the abating of the worst of the "nancial crisis at the end

of 799. The model was statistically signi"cant, with the absolute t8stat for all of

the variables above 7 Gsee E3hibit H

This allowed for a computation of growth rates over a "ve8year forecast. 5eyond

this point the terminal value was used, as it was felt that the maret conditions

past this period were beyond the scope of the model.

-ithin the regression model we assumed that the economic conditions and

consequent revenue performance of 5est 5uy would follow a similar trend and as

such the choice was to maintain the dummy economy variable and also that the

fourth quarter would continue to sew the data for 5est 5uy. The predictions made

by the annual forecast are very strong with an average !( of .7I over the

period.

"ree #ash "low $aluation

The ne3t approach for the free cash 1ow valuation methodology was to build out

the three statement model from the assumed growth rate, this would also be the

same process taen in each of our varying growth metric free cash 1ow valuations

that follow.

F

%e&en ent $ara e: LN RunTime: Apr 19, 2015 7:22 PM "orecaste : (N LN = 2.2109 + 0.313 DQ4_ - 0.1344 Economy + 0.725 Lag1LnQR + 0.0088 Quartr - 0.007! QuartrD1

Inde&endent $aria'les: DQ4_" Economy" Lag1LnQR" Quartr" QuartrD1 %)*+ Economy (ag1(n) )uarter )uarter%1 "orecast StErr"st (ower,- /&&er,-

#c$t% 1 0 1 9.5!1!3085 !9 !9 9.092 0.121 8.851 9.333

%escri&ti0e Statistics #c$t% 2 0 1 9.09217095 70 0 9.285 0.111 9.0!2 9.507

#c$t% 10 0 1 9.43903504 78 0 9.!07 0.111 9.385 9.828

#orrelation !atri1 #c$t% 11 0 1 9.!0!!24!1 79 0 9.737 0.110 9.517 9.95!

$aria'le (N %)*+ Economy (ag1(n) )uarter )uarter%1 #c$t% 12 1 1 9.73!93217 80 0 10.153 0.111 9.932 10.374

LN 1.000 #c$t% 13 0 1 10.153203 81 81 9.53! 0.122 9.291 9.780

DQ4_ 0.3!8 1.000 #c$t% 14 0 1 9.53557827 82 0 9.712 0.112 9.488 9.93!

Economy 0.501 0.050 1.000 #c$t% 15 0 1 9.711839!3 83 0 9 .848 0.111 9.!27 10.070Lag1LnQR 0.838 -0.018 0.508 1.000 #c$t% 1! 1 1 9.84843422 84 0 10.2!9 0.112 10.04! 10.493

Quartr 0.823 0.030 0.804 0.82! 1.000 #c$t% 17 0 1 10.2!92!32 85 85 9.!25 0.125 9.375 9.874

QuartrD1 0.07! -0.280 0.202 0.511 0.241 1.000 #c$t% 18 0 1 9.!245!114 8! 0 9.812 0.113 9.585 10.038#c$t% 19 0 1 9.81157339 87 0 9.95! 0.112 9.732 10.180

egression Statistics #c$t% 20 1 1 9.9559!237 88 0 10.382 0.113 10.157 10.!08

Suare 3d4.Sr Std.Err.eg. 5#ases 5!issing t62.-7819

0.954 0.951 0.103 !7 1 2.000

Summary Ta'le

$aria'le #oef Std.Err. tStat. ;0alue (ower,- /&&er,-&ntrc't 2.211 0.571 3.872 0.000 1.0!9 3.353

DQ4_ 0.313 0.031 10.1!0 0.000 0.251 0.375

Economy -0.134 0.05! -2.387 0.020 -0.247 -0.022

Lag1LnQR 0.725 0.071 10.249 0.000 0.584 0.8!!

Quartr 0.009 0.002 3.9!7 0.000 0.004 0.013

QuartrD1 -0.008 0.001 -7.292 0.000 -0.010 -0.00!

(nnua) r*nu +orca$t

2015 51"349.12

201! !1"772.11

2017 70"037.22 2018 78"11!.88

2019 8!"740.82

E3hibit



The purpose of this approach was to "rst e3amine a buy and hold idea whereby

the company paid down its e3isting debt over the ?8year period and did not issue

more debt. -e did this with the intention of e3amining the potential for non8

leveraged buyout, by an activist investor for e3ample, to see the valuation of the

company.

&n order to do so there were a series of assumptions that needed to be made.

These are listed in table . The "rst stage was to mae assumptions based on the

income statement. The sales growth was taen from the regression model and the

rest of the items 1owed accordingly from !6 to morti4ation, although

Depreciation and morti4ation are treated as negligible as per 5est 5uy#s

accounting treatment. sset -rite8downs were held constant at an average ratio

of write8downs to assets since 799. The e0ective ta3 rate was calculated as the

interest e3pense divided by pre8ta3 income and then averaged over the period

dating bac to 799, the consequent rate G@=.?IH

was very close to the rate of domestic ta3 faced by 5est 5uy and is re1ective of a

business that holds the vast ma%ority of its assets in the *. The -6

G-eighted verage hares 6utstandingH was also held constant using the same

long8term time average, as were the dividends per share.

J

3ssum&tions

IncomeStatement

:o:salesgrowth

!6'Iof sales

'KI of sales

DepreciationIof sales

morti4ation Iof sales

ssetwritedown

Effectiveta3rate

-'6

Dividendpayout ratio

BalanceSheet

L( Iof sales

&nventoryIof !6'

6ther currentassetsIof sales

!ape3Iof sales

dditionsto intangibles

ccruedE3p.

!urr.&ncomeTa3esPayable

*nearned (evenue,!urrent

*nearned (evenue,2on8!urrent

LP Iof !6'

6ther currentliabilitiesIof !6'

+ongterm debtissuance

+ongterm debtrepayment6ther longtermliabilities

!ommon stoc

Interestates

!ash

(evolver

+ongterm debt

2<1-; 2<18; 2<1=; 2<1>; 2<1,;

7J.7MI 79.@9I @.@I .?=I .9=I

JF.=I JF.=I JF.=I JF.=I JF.=I

.MI .MI .MI .MI .MI

.FI .FI .FI .FI .FI

9.I 9.I 9.I 9.I 9.I

G9.@IH G9.@IH G9.@IH G9.@IH G9.@IH

@=.?I @?.9I @?.9I @?.9I @?.9I

@[email protected] @[email protected] @[email protected] @[email protected] @[email protected]

M.?I M.?I M.?I M.?I M.?I

=.MI =.MI =.MI =.MI =.MI

F.I F.I F.I F.I F.I

.=I .=I .=I .=I .=I

.=I .=I .=I .=I .=I

7J9. 7J9. 7J9. 7J9. 7J9.

@.J7I @.J7I @.J7I @.J7I @.J7I

77.MI 77.MI 77.MI 77.MI 77.MI

.==I .==I .==I .==I .==I

9.?I 9.?I 9.?I 9.?I 9.?I

F.I F.I F.I F.I F.I

9.?7I 9.?I 9.?I 9.?I 9.?I

9.9 9.9 9.9 9.9 9.9

J.@ ==F.9 =.M ?@. ?.997.7 997.7 997.7 997.7 997.7

@?.9 @?.9 @?.9 @?.9 @?.9

9.I 9.I 9.I 9.I 9.I

7.7I 7.7I 7.7I 7.7I 7.7I

@.I @.I @.I @.I @.I

Table 7 Table



5eyond those not e3plained in the notes on table , the additional intangibles,

unearned revenue and common stoc held constant over the period. )or the cash

rate we too a value of 9.7I equivalent to the latest e0ective )ederal (eserve @8

month (ate

. The (evolver rate of 7.FI, which was taen as the lowest of the

“the federal funds rate plus 0.5%, and !" the #ne$m#nth #nd#n &nter'an(

)*ered Rate “&+)R" plus 1.0%, and '" a -aria'le marin rate the “A+R

Marin"/ #r ii" the &+)R plus a -aria'le marin rate the “&+)R Marin". &n

additi#n, a failit fee is assessed #n the #mmitment am#unt 2. 5ased on this,

the rate would be the 9.?I N the facility fee of 9.@7?I stated in the 98> "lings N

the ? year 2ominal )ederal (ate Owhich matches the e3pected investment time

hori4on .@@I. This gives a rate equivalent to 7.FI. This compares favourably

to the Qeryl +ynch 55 average for ? year of @.=I@, the rate used for the long8

term debt.

*sing these assumptions the debt calculations were then embedded into the

model, these can be seen in table @.

http$LLwww.federalreserve.govLreleasesLh?LcurrentL

7 5est 5uy 79? 98>$ www.sec.com

@ https$LLresearch.stlouisfed.orgLfred7LseriesL5Q+/9/:55



)rom the ensuing calculations net income is derived. This transfers to the

statement of cash 1ows, continuing to use the calculations described above and

the assumptions made, the ending cash balance is derived. This is then

transferred to the balance sheet and from here the calculations and assumptions

are imputed to give the "nal of the three pro8forma statements. These are shown

below GE3hibit 7H. 5alancing the balance sheet was done by adopting a di0erent

dividends policy and from there tying retained earnings into the balance sheet to

equate assets to liabilities and shareholders# equity.

*sing these three pro8forma statements the )!)* is then derivable using the

following steps$

M

Table @



#"?(ess #hange in reuired cash;lus: #ash interest &aid(ess: Interest ta shield

Ta rate Interest e&ense ITS(ess: #a&ital e&enditures 6#"I9

"#"/

2<1- 2<18 2<1= 2<1> 2<1,338.80 1"8!9.!7 2"348.73 2"!!4.7! 2"948.00 325.59- 305.07- 997.51- !!9.70- 1"323.59-

41.33 34.35 27.39 18.!3 10.21

49.53 41.1! 32.82 22.32 12.23

17.08- 14.19- 11.32- 7.70- 4.22-301.97 851.23- 9!!.17- 1"078.54- 1"198.47-

339.44 733.51 401.12 927.4! 431.92

The )!)!E is then derivable using the following steps$

"#"/ 6calculated a'o0e9(ess: #ash interest &aid;lus: Interest ta shield(ess: 3@terta Noncontrolling interest6assume all cash96/ses9Asources o@ noncommon euity nancing:;roceeds @rom issuance o@ longterm de't;rinci&al &ayments on longterm de't6;ayments9A&roceeds @rom shortterm 'orrowings?ther 6assumed noncommoneuity transaction9

"#"#E

2<1- 2<18 2<1= 2<1> 2<1,339.4 733.5 401.1 927.5 431.941.33- 34.35- 27.39- 18.!3- 10.21-17.08 14.19 11.32 7.70 4.22

- - - - -

- - - - - 87.33- 445.97- 84.88- 583.81- 58.81-

- - - - - - - - - -

227.85 2!7.39 300.17 332.71 3!7.12

Then taing the historic trailing "ve year average of the KP ?99 the return on

equity GrEH is calculated, using a ? year ris free federal rate of .@@I and a stoc

9

E3hibit 7

E3hibit @



beta for 55:$2:E of .F=. This gives an rE of 79.JMI, high even by current

standards.

The cost of debt is calculated as the weighted average cost of the e3isting debt

structure in the 79? 98> "ling. The calculation and rate is shown in the following

table$

*sing these and the capital structure Ge3hibit =H for 79= GRanuary 79? "ling

dateH and 79M, assuming no change in capital structure over the period other

than the paying down of debt, the -!! is then calculated for both years and a

terminal value is calculated to give an overall enterprise value. -e assumed our

terminal value was equal to .I this incorporated analyst predictions on the

state of best buy, the industry and economic predictions from the federal reserve

on long run e3pected rates of DP growth and &Q) predictions of the same style.

iven the fair value of debt and equity used from the 98> "llings, the enterprise

value can "rst be calculated, as shown below. )rom here the equity value can be

calculated and divided by the number of shares outstanding to give a fair value

estimation of S7.F9. !ritical to this valuation was the -!!. The -!! chosen

included a long8term average maret return of ? years, this helped normalise a

lot of the volatility seen in recent years. This represents a signi"cantly lower than

maret price valuation for the stoc.

= s !alculated by !apital &;

"Y 2<1- 6CanD12<1-9 #a&ital Structure 3s e&orted %etails

%escri&tion Ty&e

;rinci&al %ue

6/S%9 eighted 30

#ou&onABase

ate "loating ate !aturity Seniority

3.75, Not$ Du arc 15" 201! /on$ an Not$ 349.0 21.54, 3.750, N( ar-15-201! nor

5.00, Not$ Du (ugu$t 1" 2018 /on$ an Not$ 500.0 30.8!, 5.000, N( (ug-01-2018 nor

5.50, Not$ Du arc 15" 2021 /on$ an Not$ !49.0 40.0!, 5.500, N( ar-15-2021 nor

a'ta) La$ )gaton$ a'ta) La$ 52.0 3.21, 1.900, -

9.300,

N( 201! - 2035 nor

#nancng La$ )ga on$ a' a) La$ !9.0 4.2!, 3.000, -

8.100,

N( 201! - 202! nor

#*-6ar nor n$cur R*o)*ng

rt #ac)ty (grmnt

R*o)*ng rt - N( arou$ /ncmar$ - nor

tr Dt tr /orro:ng$ 1.0 0.0!, !.700, N( 2017 nor

Total %e't 1782<.<

eighted 30 %e't rate *.=,

E3hibit =

E3hibit ?



"#"/0aluation63##method97iterated3##

1 2 D * - T$

@=.77 J@?. =97.FM M7.M@ =@@.7M

3##calculation

2!& -.<<<<

uessEquity Value79M ,1<D.,*1,DebtValue79M D8<.1>88

,*8,.12>-

-eightof2!& <.<-2>-eightofEquity ,8.1*D*

-eightofDebt D.><D>

6.4582%

&mpliedEnterpriseValueGTVH ,*8,.1228

+ess$Debt79M D8<.1>88+ess$2!& -.<<<<EquityValue79M ,1<D.,D-,

M,=FM.7

PVof )!)*sGU-!!H @7.@7 F?.M? @@F.7M J@9.?7 @79. F,M7=.M7

EnterpriseValue M,7?.M

+ess$ Debt 79= Gfair valueH ,FJJ.99

EquityValue79= J,F9.M

hares6utstanding @?7.M

Valueper share 7.F9S

"#"/0aluation63##method9

)!)*

Enter&rise$alue2<1,

3##

This valuation was then considered against a more optimistic scenario whereby

the terminal value was 7.?I, this represented a more positive outloo from our

research sources and also was the top band of federal reserves long term growth

prediction.

The 7.?I scenario ept the same debt and equity structure, there was a

subsequent marginal change in the -!!, which increased to F.=JI, this gave a

price per share of S7?.9.

7

E3hibit F



(e0eraged !odel 3ssum&tions

*sing the foundation of this model the ne3t step is to address the potential for

di0erences in capital structure. iven the low e3pected free cash 1ow, which itself

stems from the low net income of the 5est 5uy, the ability for 5est 5uy to service

its debt is lessened. This is without further consideration of the possibility of

mounting default ris and credit rating reductions for 5est 5uy. Their e3isting debt

portfolio according to )itch? is 55, which already puts them in a high yield

category. further shae up to their debt structure could force the credit rating

agencies to downgrade 5est 5uy#s debt further.

That being said, using the model outlined above, with a very positive growth rate

for revenue, the idea is to issue as much debt as 5est 5uy can reasonably handle

and pay this down over "ve years to return to a similar capital structure as before,

close to .??I debt to EV to value.

? http$LL"nance.yahoo.comLnewsLassessing8best8buy8debt8pro"le87@@9F?.html

@

"#"/0aluation63##method97iterated3##

2<1- 2<18 2<1= 2<1> 2<1, T$

@=.77 J@?. =97.FM M7.M@ =@@.7M

3##calculation

2!& -.<<<<

uess EquityValue79M 1<=,>.*<<<

Debt Value79M D8<.1>88

1118D.->88

-eight of 2!& <.<**>

-eight of Equity ,8.=2>>

-eight of Debt D.228*

6.4783%

&mpliedEnterpriseValueGTVH 1118D.->8=

+ess$ Debt 79M D8<.1>88

+ess$2!& -.<<<<

EquityValue79M 1<=,>.*<<1

G9.99H

,F@.?M

PV of )!)*s GU -!!H @7.@7 F?.M? @@F.7M J@9.?7 @79. ,?F.=9

EnterpriseValue 9,?J.@F

+ess$ Debt 79= Gfair valueH ,FJJ.99Equity Value79= ,=9.@F

'hares 6utstanding @?7.M

Valueper share 7?.9S

)!)*

Enter&rise$alue2<1,

3##



&n order to consider debt, two ratios that are compared when ratings companies

calculate debt ratings were looed at. &nterest coverage ratio shows how many

times interest can be paid bac. &n our case ?9I debt had a higher coverage.

Debt to total capital tells how much debt is owed per capital invested. The less

the better hence ?9I debt is the least and the better one in both cases.

(e0erage !odel

The intention of the leverage model is to add as much debt to the balance sheet

as possible over the investment hori4on timeline. The aim is to pay down the debt

over the period and thus return to a similar debt structure as before. &n order to

do this we considered what a large transaction of this ind could feasibly be

leveraged at, less than mega deals lie Dell#s S7=.=b buyout, but

nonetheless we wanted to eep within the realms of possibility.

=

E3hibit J



This signi"cantly altered the debt structure as we chose to tae on J9I of our

listed equity value as debt. )easibly around S.MFb would be a very signi"cant

addition to the "rm in terms of debt and we didn#t feel we could go above that.

The debt would be used to tae the company private.

This creates a huge change in the valuation of the "rm, creating a somewhat hard

to believe. -ith the optimal assumption of growth at 7.?I the value per share

comes out to be S7M?.@ Gsee "gure WH in present value terms, helped as a result

of large free cash 1ow growth in 79F and onwards.

E$3 !odel

*sing the EV model we decided to value the unlevered "rm in order to address

the question of greater valuation scope whilst continuing to use our regression

model.

?

E3hibit



*sing the EV model we were able to garner a valuation of S?.F9 per share for

best buy, representing a further wide range of data for analysis.

%e't 1!21 1533.!!75 1087.!982 1002.81!3 419.00147

!inority Interest 5 5 5 5 5

Euity 4995 3277.0134 3530.9554 3840.3774 41!5.7014

In0ested ca&ital T:1 !!21 4815.!809 4!23.!535 4848.1937 4589.7029

ITS 2!.0!8274 22.1!0!22 17.!72888 12.019829 !.58713!4

Interest E&ense 49.52828 41.155441 32.821077 22.322539 12.233253

NI 929.3 1"131.0 1"298.2 1"4!4.2 1"!39.7

N?;3T T 952.7 1"150.0 1"313.3 1"474.5 1"!45.3

3## 0.0!19092

E$3 542.82 952.72 952.72 952.72 952.72

;$FE$3 511.1707! 844.8!927 795.!1347 749.22928 705.54928 12113.8!

S/!6;$9 15720.292

In0ested ca&ital 2<1* !!21

Enter&rise $alue 22341.292(ess %e't2<1* -1!77

(ess N#I -5

Euity $alue 20!59.292

5Shares ?utstanding 352

$alue &er share 58.!!0235

T$

E$3 #alculation

2<1- 2<18 2<1= 2<1> 2<1,

Hy'rid data

/aving outlined the potential for valuation using a regression model a hybrid

multiple was determined for 55:. *sing a survey of analyst forecast, our own

economic analysis and strategic analysis of the "rm and the industry, which

formed the opening of this report, we looed to create a hybrid revenue multiple.

)or the "scal year 79?, we recognised that 5est 5uy was under pressure to

continue its (enew 5lue strategy, as such large scale investment beyond this

scheme was unliely. -e also felt 5ets 5uy would continue to feel the pressure

from online retailers. 6n a broader scale there is particular uncertainty with the

F

E3hibit M



)ederal (eserve#s decision to alter monetary policy in 79? and as such a

tempered 9.?I growth rate was decided upon.

)or the "scal year 79F we noted more signi"cantly the analyst survey, which

included data from M leading equity analyst, the data here seemed to be in line

with concerns over the economy at large we had seen in our longer term reports.

The analyst average of 7.@I revenue growth, matching with the lower led of the

)ederal (eserve#s central tendency DP prediction led us to choose 7.@I.

5y "scal year 79J we felt that 5est 5uy would be free to address new strategy

needs and should have consolidated its position as an electronics and appliances

retailer further with the liely withdrawal of some of its smaller competitors. The

outloo, echoed by the analyst survey is more buoyant therefore and is baced by

more positive data from the )ederal (eserve. -e therefore opted to go with the

analyst prediction for ?.@I growth as it echoed our belief that if 5est 5uy can

see it through this diXcult time ahead they would be in a position to grow both in

sales and in si4e.

5eyond "scal year 79J we opted to go with the )ederal (eserve guidance on the

economy, a steady rate of 7.9I falls within their central tendency prediction and

lies closer to our more pessimistic terminal value of .I used, as we feel that the

industry as a whole will continue to face sustained pressure form the big brand

retailers such as -al8Qart and online maret places.

This led to an output as follows$

J

E3hibit M



&n this case the value per share peaed at S=9?.J7 dollars in the leveraged

scenario. -e recognise the unrealistic nature of this prediction but would hasten

to compare it to a lower pro%ected price for the "rm with a higher TV using the

regression model, which we felt was already over 4ealous. &t is worth noting that

although not included in the e3cel sheet, using our hybrid forecast led to a much

more moderate price of S@.@7 a share when using a .I TV.

2<1* 2<1- 2<18 2<1= 2<1> 2<1, T$## 299.!0 !57.!3 302.77 801.43 27!.20

3## calculationN& 5.00;u$$ E<uty a)u 2019 9"103.94 Dt a)u 2019 3!0.19

Entr'r$ a)u 2019 9"4!9.13

gt o+ N& 0.00

gt o+ E<uty 9!.14,

gt o+ Dt 3.80,3## 8.*->

&m') Entr'r$ a)u >=?@ !03!.0!4711L$$A Dt 2019 -3!0.18!!31!

L$$A N& -5E<uty a)u 2019 5!70.878079

D++rnc to nta) gu$$ 3"433.0!

87<D8.<8 ;$ o@ "#"/s 6F 3##9 2>2.1* ->D.1> 2-2.>* 8D<.28 2<*.-* *7*1*.2=

Enter&rise $ 87D8=.2D (ess: %e't 2 178==.<< Euity $alue *78,<.2D 5Shares ?ut D-2.1, $alue &er sh 1D.D2G

"#"/ 0aluation 63## method9

"#"/ 0aluation 63## method9 2<1* 2<1- 2<18 2<1= 2<1> 2<1, T$## >8"357.35@ !95.79 407.8! 903.07 9"311.75

3## calculationN& 5.00;u$$ E<uty a)u 2019 197"941.7!

Dt a)u 2019 101.03 Entr'r$ a)u 2019 198"047.79

gt o+ N& 0.00

gt o+ E<uty 99.95,

gt o+ Dt 0.05,

3## 8.->,

&m') Entr'r$ a)u >=?@ 197941.75!9

L$$A Dt 2019 -101.0304112L$$A N& -5

E<uty a)u 2019 197835.72!5

D++rnc to nta) gu$$ 10!.03

1,=7,*1.=8;$ o@ "#"/s 6F 3##9 6=7>=<.129 81=.<D D*<.8< =1<.1, 87>,-.,- 1*D7>=1.,=

Enter&rise $alue 1**7-8-.8D (ess: %e't 2<1* 6@air 0alue9 178==.<< Euity $alue 2<1* 1*27>>>.8D 5Shares ?utstanding D-2.1,

$alue &er share *<-.=2G

"#"/ 0aluation 63## method97 iterated 3##

E3hibit 9



!ulti&le $aluation

&n general multiples are classi"ed into two categories$ operating multiple and

equity multiple. 6ne of each of the categories of multiples are used here for

valuation purposes$ Price to Earnings ratio which is an equity multiple and

EVLE5&TD which is an operating multiple. !omparable "rms were determined

M

E3hibit



mainly by type of business that is business that largely deal with electronics that

are similar to the types of electronics that 5est 5uy sells e.g TV#s, +aptops, !ell

phones. &n addition to that those companies that had an online

electronics retail presence were considered. ome discounts for

si4e were considered as well. fter doing the multiple valuation it was reali4ed

that ma4on and E5ay, although competitors with similar lines of business were

dropped since the si4e of both the companies was too big and was turning out to

be an e3treme outlier in the calculations. The Price Earnings ratio was calculated

as follows$ the current stoc price of the comparable "rm divided by the earning

per share of the years 79=, 79?, 79F and 79J. Then the average of the

calculated PLE is taen and multiplied by the 5est 5uy earning per share GEPH for

that year. The share price for 79= Gyear ended Qarch @ 79?H came out to be

[email protected], this estimation is S9. overvalued than the prevailing share price. The

79? price was SMM.9F the reasoning behind this could be that consumers have

more to spend on electronic goods due to savings from falling energy prices.

nother reason could be boosted pro"ts due to the new => TV technology which

has a high potential to succeed as consumers have already started to show

interest in the new technology. pple recently released pple watches which will

also have a demand with pple enthusiasts. &n the year 79F stoc price is

e3pected to fall by half to S=?.@F. This could be because consumers will be

spending less on electronic goods at 5est 5uy having spent already on the new

technology that had come out in 79?.

79

E3hibit 7



)or the EVLE5&TD multiple, each comparable company#s multiple was multiplied

by 5est 5uy#s E5&TD after which company debt was subtracted resulting in

equity value which was divided by number of shares to get implied share value.

The implied share value equaled S7?.M= which was S9.M= less than the actual

share price. The reasoning behind this lower share price is because in the

calculations -almart#s debt was much higher than the enterprise value resulting

in a negative equity value and hence a negative share price, which is not possible

in reality and that brought down the share price. -almart is a giant corporation,

much bigger than 5est 5uy, it was included only due to the similarity of the

electronics business.

#onclusion

-e therefore are led to surmise that there are a wide range of potential values for

5est 5uy, on the one hand there are a series of forecasts, including our multiples

forecast that places 5est 5uy "rmly within the bell curve of its current price, on

the other hand with no debt addition and no renewal of retired debt, the valuation

of 5est 5uy falls below that of the publicly traded value of the shares quite

signi"cantly. This re1ects the much more real assumption we made in our

qualitative analysis that we see 5est 5uy and the overall maret facing some

tough times ahead in the *. 2onetheless there is a lot to be said for the potential

of adding "nancial leverage and as such the valuation derived from a leveraged

buyout placed the value of 5est 5uy signi"cantly higher. -e recognise this is

unrealistic in terms of "gures and assume there to be errors in the way this is

accounted for. 2evertheless, our belief is that with a signi"cant amount of debt

added to it and with the hopeful bacing of investors who see 5est 5uy a safe

steady retailer, there is potential for a leveraged buyout.

7

best buy written case working final

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