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7/17/2019 Best Buy Written Case Working Final
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Team 12 BlueBBY:NYSE
Private Equity Valuation
7/17/2019 Best Buy Written Case Working Final
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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.
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/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
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+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
@
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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
=
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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
?
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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
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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
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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$LLresearch.stlouisfed.orgLfred7LseriesL5Q+/9/:55
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)rom the ensuing calculations net income is derived. This transfers to the
statement of cash 1ows, continuing to use the calculations described above and
the assumptions made, the ending cash balance is derived. This is then
transferred to the balance sheet and from here the calculations and assumptions
are imputed to give the "nal of the three pro8forma statements. These are shown
below GE3hibit 7H. 5alancing the balance sheet was done by adopting a di0erent
dividends policy and from there tying retained earnings into the balance sheet to
equate assets to liabilities and shareholders# equity.
*sing these three pro8forma statements the )!)* is then derivable using the
following steps$
M
Table @
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#"?(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 @
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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 ?
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"#"/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$alue2<1,
3##
This valuation was then considered against a more optimistic scenario whereby
the terminal value was 7.?I, this represented a more positive outloo from our
research sources and also was the top band of federal reserves long term growth
prediction.
The 7.?I scenario ept the same debt and equity structure, there was a
subsequent marginal change in the -!!, which increased to F.=JI, this gave a
price per share of S7?.9.
7
E3hibit F
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(e0eraged !odel 3ssum&tions
*sing the foundation of this model the ne3t step is to address the potential for
di0erences in capital structure. iven the low e3pected free cash 1ow, which itself
stems from the low net income of the 5est 5uy, the ability for 5est 5uy to service
its debt is lessened. This is without further consideration of the possibility of
mounting default ris and credit rating reductions for 5est 5uy. Their e3isting debt
portfolio according to )itch? is 55, which already puts them in a high yield
category. further shae up to their debt structure could force the credit rating
agencies to downgrade 5est 5uy#s debt further.
That being said, using the model outlined above, with a very positive growth rate
for revenue, the idea is to issue as much debt as 5est 5uy can reasonably handle
and pay this down over "ve years to return to a similar capital structure as before,
close to .??I debt to EV to value.
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@=.77 J@?. =97.FM M7.M@ =@@.7M
3##calculation
2!& -.<<<<
uess EquityValue79M 1<=,>.*<<<
Debt Value79M D8<.1>88
1118D.->88
-eight of 2!& <.<**>
-eight of Equity ,8.=2>>
-eight of Debt D.228*
6.4783%
&mpliedEnterpriseValueGTVH 1118D.->8=
+ess$ 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##
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 15/22
&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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 16/22
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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 17/22
*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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 18/22
)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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 19/22
&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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 20/22
!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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 21/22
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
7/17/2019 Best Buy Written Case Working Final
http://slidepdf.com/reader/full/best-buy-written-case-working-final 22/22
)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