Team 12 Blue

BBY:NYSE
Private Equity Valuation

How the economy is affecting 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 make its way to the discretionary sector though we're not quite
optimistic. Consumers seem to be more concerned in saving and repaying debt of
the past, therefore we believe that a market perform rating is fitting for the
consumer discretionary sector.
There are a few pros for the sector: Consumers have lessened their debt, the job
market seems to be picking up, and there seem to be signs of wage growth,
mainly among professional jobs. Commodity 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 ISI Research. Further
support for consumer spending could come from the Federal Reserve, which has
directed that it could be more accommodative should growth in the United States
or around the world slow too much.
Positive factors for the consumer discretionary sector contain:

Low supply: Inventories remain relatively constant. This low supply should provide
retailers with some pricing power as economic activity picks up. Accommodative
monetary policy: Despite quantitative easing ending, the Federal Reserve
continues to be quite obliging, which could help the consumer. Central banks in
other developed markets also appear to be firmly in an easing stance, which could
help strengthen the consumer. Improving job market: The unemployment rate
continues to move down and more people are getting employed which could
mean more incomes. Wage growth: Wages are starting to show signs of
improvement, although it's too early to state a conclusive trend. It could lead to
rising incomes.

However, these positive factors are offset by other developments. For instance,
housing improvement has delayed recently. Another potential headwind is the
recently resolved port worker dispute on the West Coast. That has caused delays
in goods getting to retail locations, bumping profits as companies either sell less
or pay more for alternative means of transportation. Finally, consumer confidence
could take a hit should concerns such as Ebola or geopolitical issues flare up.

Negative factors for the consumer discretionary sector include:

Tight credit standards: Lending remains considerably low, especially around the
housing market, although there are signs of easing which could mean more
people would be willing to lend less and hence buy less. Fierce retail
competition: This seems to be affecting margins for the sector especially due to
the presence of online retailers, which could create problems for stock
performance if the competition continues. Unexpected Fed rate hikes: If this
happens due to increased inflation, higher interest rates could be a deterrent to
the consumer discretionary sector.
West Coast port dispute: The flow of goods into the United States has been
severely slowed in recent months, which could temporarily increase costs or
decrease sales.

Inside Best Buy

In order to best analyze Best Buy and its position relative to other players in the
market we have elected to conduct a SWOT analysis. The focus is on the
weaknesses of their current model and the opportunities that they have the
potential of capitalizing on. Despite having undergone a major strategy overhaul
in the past year, namely the successful implementation of Renew Blue, Best Buy
still has yet to stabilize its operating margin.

Looking at the positives they are leaders in the industry for brick and
mortar technology stores in number and square footage. This gives them more
face-to-face time with the client than any other retail outlet. They proved
supremacy through the financial crisis buy outlast their once top competitor,
Circuit City, a company that has since all but completely dissipated. They also
have a sales force of over 100,000 persons that if used to their full potential could
serve as experts on all of the products the corporation sells.

Despite being strong Best Buy still faces some very imposing threats. Yes,
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. Quite the
contrary it is often the case that customers take the knowledge they learn inside
of best buy stores and do their shopping elsewhere; scoping online and other
retailers for deeper discounts. Of the sales that Best Buy does make the majority
come in the fiscal 4th quarter of the year; the time of major holiday shopping the
core markets for the US, Canada, and the UK. Unfortunately if outside factors, like
those mentioned in the list of 25 risks in the 2014 annual report, come into play
Best Buy could find itself in a hard place with no time left to capitalize.

In conjunction with these threats there are a myriad of weaknesses that

negatively affect the company. Quite a few of these stem from the multiple
channels that Best Buy operates through. They are unable to lower margins or the
cost structure, thus far, because of these restrictions. Further, as in the example
of shoppers going elsewhere, their competitors are benefiting off of the
discrepancies that are driving their prices upward. Essentially Best Buy is suffering
the cost associated with showing how products work to customers while other
retailers are getting the purchase with lower prices, shipping specials, and the
ability to avoid paying sales tax. On top of this, thought Best Buy has an online

and international presence, they are weaker than those of others who are profiting
handsomely off of having many strong revenue streams. Perhaps one of the
biggest weaknesses for Best Buy is the strong brand loyalty of todays consumer.
With many smaller purchases the newest update of a currently owned product is
the next step. Thus they can bypass entering a store and instead pre-order online
from the company directly. In terms of larger purchases, like appliance, an upturn
in the custom home market has resulted in more specialty shops with expansive
catalogs that cater to many price points and can often be bundled for discounts.

In contrast of this seemingly negative outlook, there are several

opportunities for Best Buy to strengthen its strategic positioning in the industry.
Starting with their aforementioned employees, one of the concerns addressed was
the high turnover of the retail industry. With this in mind Best Buy should consider
following the model that Apple has set wherein their employees are experts on
the products in store, they know all of the specifics and the advantages and
disadvantages of one product vis--vis another. Having this level of awareness on
what they are selling could increase employee retention rates, but it sure would
make the buying experience fore seamless for the customer. They currently
operate stores-within-a-store for both Samsung and Windows products.
Unfortunately these are two brands that can be found in some capacity in both
the indirect and direct competitors of Best Buy. However, if they were able to
acquire exclusive retail rights, even for a limited time prior to a general release,
they could capitalize on the desire to be the first to have the latest gadget. In
negotiations Best Buy 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. Best Buy could
also go the extra mile in the benefits that visiting and purchasing from their store
could provide, For instance, in the case of the customer that comes into the store
look to narrow down their choices and the test products out, Best Buy could

offer a discount of the item was purchased either in-store or online from them in
the next 24 hours. This gives the customer time to think and do additional
research but eventually come back to Best Buy to purchase. Additionally, the
discount and the ability to have the product in-hand that day could overshadow
the advantages of online buy from another retailer. Going further, BestBuy could
offer complimentary delivery for items, like large TVs and Appliances that either
would not fit in the standard car, or require multiple people to be moved. This
added convenience represents another major deal breaker that, though increasing
cost slightly could bring in enough revenue to offset the impact.

In summation, Best Buy is one of the most trusted retailers in terms of

electronics in the United States. However a recent shift in the way their products
are bought and sold has left them with a cost structure that feels more like a
burden than a financially secure plan. Thus our biggest suggestion for Best Buy
moving forward is to leverage the stores to their full potential and make the cost
structure work in their favor. With this and the continuation of their Renew Blue
program they can experience great success.
With the position of the firm, the industry and the market established we looked to
different valuation methodologies. These were split into, free cash flow valuation,
earnings based valuations and multiples valuation; which will be discussed below
in that order.
It is assumed throughout that cash is managed optimally and there is a minimum
cash balance. It is also assumed that the cost of debt is weighted average
explained below. We also assume equity beta to be that provided by Capital IQ of
1.86 not the much higher 3.1 reported elsewhere.
Regression Model

The approach taken here is to build a series of forecasts for revenue growth in the
free cash flow model. The first approach would focus around a regression model.
The regression used is multi-linear, using the natural logarithm of lagged revenue
from the previous quarter, using a dummy variable to control for the consistently
high Q4 results and an economic sensitivity dummy variable to address the fall in
revenues since the abating of the worst of the financial crisis at the end
Exhibit 1
Dependent Variable:
Independent Variables:

LN
RunTime: Apr 19, 2015 7:22 PM
DQ4_, Economy, Lag1LnQR, Quarter, QuarterD1

Forecasted : LN

Descriptive Statistics
Correlation Matrix
Variable

LN
DQ4_
Economy
Lag1LnQR
Quarter
QuarterD1

LN

DQ4_

Economy

Lag1LnQR

1.000
0.368
0.501
0.838
0.823
0.076

1.000
0.050
-0.018
0.030
-0.280

1.000
0.508
0.804
0.202

Quarter

QuarterD1

1.000
0.826
0.511

1.000
0.241

1.000

R Square

Adj.RSqr

Std.Err.Reg.

#Cases

#Missing

t(2.5%,61)

0.954

0.951

0.103

67

2.000

Std.Err.

t-Stat.

P-value

Lower95%

Upper95%

0.571
0.031
0.056
0.071
0.002
0.001

3.872
10.160
-2.387
10.249
3.967
-7.292

0.000
0.000
0.020
0.000
0.000
0.000

1.069
0.251
-0.247
0.584
0.004
-0.010

3.353
0.375
-0.022
0.866
0.013
-0.006

Regression Statistics

Summary Table
Variable

Intercept
DQ4_
Economy
Lag1LnQR
Quarter
QuarterD1

Coeff

2.211
0.313
-0.134
0.725
0.009
-0.008

LN = 2.2109 + 0.313 DQ4_ - 0.1344 Economy + 0.725 Lag1LnQR + 0.0088 Quarter - 0.0076 QuarterD1
DQ4_

Fcst# 1
Fcst# 2
Fcst# 10
Fcst# 11
Fcst# 12
Fcst# 13
Fcst# 14
Fcst# 15
Fcst# 16
Fcst# 17
Fcst# 18
Fcst# 19
Fcst# 20

Economy

0
0
0
0
1
0
0
0
1
0
0
0
1

Lag1LnQR

1
1
1
1
1
1
1
1
1
1
1
1
1

9.56163085
9.09217095
9.43903504
9.60662461
9.73693217
10.153203
9.53557827
9.71183963
9.84843422
10.2692632
9.62456114
9.81157339
9.95596237

Quarter

Annual revenue forecast

2015
51,349.12
2016
61,772.11
2017
70,037.22
2018
78,116.88
2019
86,740.82

QuarterD1

69
70
78
79
80
81
82
83
84
85
86
87
88

69
0
0
0
0
81
0
0
0
85
0
0
0

Forecast

StErrFst

Lower95%

Upper95%

9.092
9.285
9.607
9.737
10.153
9.536
9.712
9.848
10.269
9.625
9.812
9.956
10.382

0.121
0.111
0.111
0.110
0.111
0.122
0.112
0.111
0.112
0.125
0.113
0.112
0.113

8.851
9.062
9.385
9.517
9.932
9.291
9.488
9.627
10.046
9.375
9.585
9.732
10.157

9.333
9.507
9.828
9.956
10.374
9.780
9.936
10.070
10.493
9.874
10.038
10.180
10.608

of 2010. The model was statistically significant, with the absolute t-stat for all of
the variables above 2 (see Exhibit 1)

This allowed for a computation of growth rates over a five-year forecast. Beyond
this point the terminal value was used, as it was felt that the market conditions
past this period were beyond the scope of the model.
Within the regression model we assumed that the economic conditions and
consequent revenue performance of Best Buy 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 skew the data for Best Buy. The predictions made
by the annual forecast are very strong with an average CAGR of 8.28% over the
period.
Free Cash Flow Valuation
The next approach for the free cash flow valuation methodology was to build out
the three statement model from the assumed growth rate, this would also be the
same process taken in each of our varying growth metric free cash flow valuations
that follow.

The purpose of this approach was to first examine a buy and hold idea whereby
the company paid down its existing debt over the 5-year period and did not issue
more debt. We did this with the intention of examining the potential for nonleveraged buyout, by an activist investor for example, to see the valuation of the
company.
In order to do so there were a series of assumptions that needed to be made.
These are listed in table 1. The first stage was to make assumptions based on the
income statement. The sales growth was taken from the regression model and the
rest of the items flowed accordingly from COGS to Amortization, although
Depreciation and Amortization are treated as negligible as per Best Buys
accounting treatment. Asset Write-downs were held constant at an average ratio
of write-downs to assets since 2010. The effective tax rate was calculated as the
interest expense divided by pre-tax income and then averaged over the period
dating back to 2001, the

Table 1

consequent rate (34.5%)

Table 2

Assumptions

2015P

2016P

2017P

2018P

2019P

IncomeStatement
YoY salesgrowth
COGS%of sales
SG&A %of sales
Depreciation %of sales
Amortization %of sales
Asset writedown
Effective taxrate
WASO
Dividend payout ratio

27.29%
76.4%
18.9%
1.6%
0.1%
(0.3%)
34.5%
353.6
19.5%

20.30%
76.4%
18.9%
1.6%
0.1%
(0.3%)
35.0%
353.6
19.5%

13.38%
76.4%
18.9%
1.6%
0.1%
(0.3%)
35.0%
353.6
19.5%

11.54%
76.4%
18.9%
1.6%
0.1%
(0.3%)
35.0%
353.6
19.5%

11.04%
76.4%
18.9%
1.6%
0.1%
(0.3%)
35.0%
353.6
19.5%

BalanceSheet
A/R%of sales
Inventory%of COGS
Other current assets%of sales
Capex%of sales
Additionsto intangibles
Accrued Exp.
Curr. Income TaxesPayable
Unearned Revenue, Current
Unearned Revenue, Non-Current
A/P %of COGS
Other current liabilities%of COGS
Longtermdebt issuance
Longtermdebt repayment
Other longtermliabilities
Common stock

4.9%
16.8%
1.4%
1.4%
270.8
3.72%
22.91%
1.44%
0.15%
16.1%
0.52%
0.0
87.3
1002.2
35.0

4.9%
16.8%
1.4%
1.4%
270.8
3.72%
22.9%
1.44%
0.15%
16.1%
0.5%
0.0
446.0
1002.2
35.0

4.9%
16.8%
1.4%
1.4%
270.8
3.72%
22.9%
1.44%
0.15%
16.1%
0.5%
0.0
84.9
1002.2
35.0

4.9%
16.8%
1.4%
1.4%
270.8
3.72%
22.9%
1.44%
0.15%
16.1%
0.5%
0.0
583.8
1002.2
35.0

4.9%
16.8%
1.4%
1.4%
270.8
3.72%
22.9%
1.44%
0.15%
16.1%
0.5%
0.0
58.8
1002.2
35.0

0.1%
2.2%
3.1%

0.1%
2.2%
3.1%

0.1%
2.2%
3.1%

0.1%
2.2%
3.1%

0.1%
2.2%
3.1%

Interest Rates
Cash
Revolver
Longtermdebt

was very close to the rate of domestic tax faced by Best Buy and is reflective of a
business that holds the vast majority of its assets in the USA. The WASO
(Weighted Average Shares Outstanding) was also held constant using the same
long-term time average, as were the dividends per share.

Beyond those not explained in the notes on table 1, the additional intangibles,
unearned revenue and common stock held constant over the period. For the cash
rate we took a value of 0.12% equivalent to the latest effective Federal Reserve 3month Rate1. The Revolver rate of 2.16%, which was taken as the lowest of the
the federal funds rate plus 0.5%, and (3) the one-month London Interbank
Offered Rate (LIBOR) plus 1.0%, and (b) a variable margin rate (the ABR
Margin); or (ii) the LIBOR plus a variable margin rate (the LIBOR Margin). In
addition, a facility fee is assessed on the commitment amount2. Based on this,
the rate would be the 0.5% + the facility fee of 0.325% stated in the 10-K filings +
the 5 year Nominal Federal Rate [which matches the expected investment time
horizon] 1.33%. This gives a rate equivalent to 2.16%. This compares favourably
to the Meryl Lynch BB average for 5 year of 3.14%3, the rate used for the longterm debt.
Using these assumptions the debt calculations were then embedded into the
model, these can be seen in table 3.

1 http://www.federalreserve.gov/releases/h15/current/
2 Best Buy 2015 10-K: www.sec.com
3 https://research.stlouisfed.org/fred2/series/BAMLH0A1HYBB
8

Table 3

From the ensuing calculations net income is derived. This transfers to the
statement of cash flows, 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 final of the three pro-forma statements. These are shown
below (Exhibit 2). Balancing the balance sheet was done by adopting a different
dividends policy and from there tying retained earnings into the balance sheet to
equate assets to liabilities and shareholders equity.
Using these three pro-forma statements the FCFU is then derivable using the
following steps:

Exhibit 2

CFO
Less Change in required cash
Plus: Cash interest paid
Less: Interest tax shield
Tax rate
Interest expense
ITS
Less: Capital expenditures (CFI)
FCFU

2015
338.80
325.59 41.33

2016
1,869.67
305.07 34.35

2017
2,348.73
997.51 27.39

2018
2,664.76
669.70 18.63

2019
2,948.00
1,323.59
10.21

49.53
17.08 301.97 339.44

41.16
14.19 851.23 733.51

32.82
11.32 966.17 401.12

22.32
7.70 1,078.54 927.46

12.23
4.22
1,198.47
431.92

The FCFCE is then derivable using the following steps:

Exhibit 3

FCFU (calculated above)

Less: Cash interest paid
Plus: Interest tax shield
Less: After-tax Noncontrolling interest
(assume all cash)
(Uses)/sources of non-common equity fnancing:
Proceeds from issuance of long-term debt
Principal payments on long-term debt
(Payments)/proceeds from short-term borrowings
Other (assumed non-common-equity transaction)
FCFCE

2015
339.4
41.33 17.08
-

2016
733.5
34.35 14.19
-

2017
401.1
27.39 11.32
-

2018
927.5
18.63 7.70
-

2019
431.9
10.21
4.22
-

87.33 227.85

445.97 267.39

84.88 300.17

583.81 332.71

58.81
367.12

Then taking the historic trailing five year average of the S&P 500 the return on
equity (rE) is calculated, using a 5 year risk free federal rate of 1.33% and a stock

10

beta for BBY:NYSE of 1.864. This gives an rE of 20.79%, high even by current
standards.
The cost of debt is calculated as the weighted average cost of the existing debt
structure in the 2015 10-K filing. The calculation and rate is shown in the following
table:

Exhibit 4
FY 2015 (J an-31-2015) Capital Structure As Reported Details
Description
3.75% Notes Due March 15, 2016
5.00% Notes Due August 1, 2018
5.50% Notes Due March 15, 2021
Capital Lease Obligations

Type
Bonds and Notes
Bonds and Notes
Bonds and Notes
Capital Lease

Financing Lease Obligations

Capital Lease

Five-Year Senior Unsecured Revolving Revolving Credit

Credit Facility Agreement
Other Debt
Other Borrowings
Total Debt
Weighted Av Debt rate

Principal Due
(USD)
349.0
500.0
649.0
52.0
69.0

Weighted Av
21.54%
30.86%
40.06%
3.21%
4.26%

1.0

0.06%

Coupon/Base
Rate
3.750%
5.000%
5.500%
1.900% 9.300%
3.000% 8.100%
NA
6.700%

Floating Rate
NA
NA
NA
NA

Maturity
Mar-15-2016
Aug-01-2018
Mar-15-2021
2016 - 2035

Seniority
Senior
Senior
Senior
Senior

NA

2016 - 2026

Senior

Various Benchmarks

Senior

NA

2017

Senior

1,620.0
4.79%

Using these and the capital structure (exhibit 4) for 2014 (January 2015 filing
date) and 2019, assuming no change in capital structure over the period other
than the paying down of debt, the WACC is then calculated for both years and a
terminal value is calculated to give an overall enterprise value. We assumed our
terminal value was equal to 1.8% this incorporated analyst predictions on the
state of best buy, the industry and economic predictions from the federal reserve
on long run expected rates of GDP growth and IMF predictions of the same style.

Given the fair value of debt and equity used from the 10-K fillings, the enterprise
value can first be calculated, as shown below. From here the equity value can be
calculated and divided by the number of shares outstanding to give a fair value
estimation of $21.60. Critical to this valuation was the WACC. The WACC chosen
included a long-term average market return of 15 years, this helped normalise a
lot of the volatility seen in recent years. This represents a significantly lower than
market price valuation for the stock.
Exhibit 5

4 As Calculated by Capital IQ
11

FCFUvaluation (WACCmethod),iterated WACC

FCFUvaluation (WACCmethod)

1
341.22

2
735.18

3
402.69

4
928.93

TV
433.29

FCFU
WACCcalculation
NCI
Guess Equity Value2019
Debt Value2019

5.0000
9103.9419
360.1866
9469.1285

EnterpriseValue2019
Weight of NCI
Weight of Equity
Weight of Debt

0.0528%
96.1434%
3.8038%
6.4582%

WACC
Implied EnterpriseValue(=TV)
Less: Debt 2019
Less: NCI
Equity Value2019

9469.1226
-360.1866
-5.0000
9103.9359

PV of FCFUs (@WACC)
Enterprise Value
Less: Debt 2014 (fair value)
Equity Value2014
#Shares Outstanding
Valueper share

321.32

651.95

336.29

730.52

320.88

9,469.12
6,924.92

9,285.89
1,677.00
7,608.89
352.19
21.60

This valuation was then considered against a more optimistic scenario whereby
the terminal value was 2.5%, this represented a more positive outlook from our
research sources and also was the top band of federal reserves long term growth
prediction.
The 2.5% scenario kept the same debt and equity structure, there was a
subsequent marginal change in the WACC, which increased to 6.478%, this gave a
price per share of $25.10.

Exhibit 6

12

FCFUvaluation (WACCmethod),iterated WACC

2015
341.22

2016
735.18

2017
402.69

2018
928.93

2019

TV
433.29

FCFU
WACCcalculation
NCI
Guess Equity Value 2019
Debt Value 2019

5.0000
10798.4000
360.1866
11163.5866

EnterpriseValue2019
Weight of NCI
Weight of Equity
Weight of Debt

0.0448%
96.7288%
3.2264%
6.4783%

WACC
Implied Enterprise Value(=TV)
Less: Debt 2019
Less: NCI
Equity Value 2019

11163.5867
-360.1866
-5.0000
10798.4001
(0.00)

PV of FCFUs (@ WACC)
Enterprise Value
Less: Debt 2014 (fair value)
Equity Value 2014
#Shares Outstanding
Value per share

321.32

651.95

336.29

730.52

320.88

11,163.59
8,156.40

10,517.36
1,677.00
8,840.36
352.19
$
25.10

Leveraged Model Assumptions

Using the foundation of this model the next step is to address the potential for
differences in capital structure. Given the low expected free cash flow, which itself
stems from the low net income of the Best Buy, the ability for Best Buy to service
its debt is lessened. This is without further consideration of the possibility of
mounting default risk and credit rating reductions for Best Buy. Their existing debt
portfolio according to Fitch5 is BB, which already puts them in a high yield
category. A further shake up to their debt structure could force the credit rating
agencies to downgrade Best Buys 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 Best Buy can reasonably handle
and pay this down over five years to return to a similar capital structure as before,
close to 11.55% debt to EV to value.

5 http://finance.yahoo.com/news/assessing-best-buy-debt-profile213301651.html
13

In order to consider debt, two ratios that are compared when ratings companies
calculate debt ratings were looked at. Interest coverage ratio shows how many
times interest can be paid back. In our case 50% debt had a higher coverage.
Debt to total capital tells how much debt is owed per capital invested. The less
the better hence 50% debt is the least and the better one in both cases.
Leverage Model
The intention of the leverage model is to add as much debt to the balance sheet
as possible over the investment horizon timeline. The aim is to pay down the debt
over the period and thus return to a similar debt structure as before. In order to
do this we considered what a large transaction of this kind could feasibly be
Exhibit 7

leveraged at, less than mega deals like Dells $24.4b buyout, but

nonetheless we wanted to keep within the realms of possibility.

14

This significantly altered the debt structure as we chose to take on 70% of our
listed equity value as debt. Feasibly around $8.96b would be a very significant
addition to the firm in terms of debt and we didnt feel we could go above that.
The debt would be used to take the company private.
This creates a huge change in the valuation of the firm, creating a somewhat hard
to believe. With the optimal assumption of growth at 2.5% the value per share
comes out to be $295.38 (see figure *) in present value terms, helped as a result
of large free cash flow growth in 2016 and onwards.

Exhibit 8

EVA Model
Using the EVA model we decided to value the unlevered firm in order to address
the question of greater valuation scope whilst continuing to use our regression
model.

15

Using the EVA model we were able to garner a valuation of $58.60 per share for
best buy, representing a further wide range of data for analysis.

Exhibit 9

EVA Calculation
2015
1621
5
4995
6621

2016
1533.6675
5
3277.0134
4815.6809

2017
1087.6982
5
3530.9554
4623.6535

2018
1002.8163
5
3840.3774
4848.1937

2019
419.00147
5
4165.7014
4589.7029

ITS
Interest Expense
NI
NOPAT T

26.068274
49.52828
929.3
952.7

22.160622
41.155441
1,131.0
1,150.0

17.672888
32.821077
1,298.2
1,313.3

12.019829
22.322539
1,464.2
1,474.5

6.5871364
12.233253
1,639.7
1,645.3

WACC

0.0619092

EVA
PV@EVA
SUM(PV)
Invested capital 2014
Enterprise Value
Less Debt2014
Less NCI
Equity Value
#Shares Outstanding
Value per share

542.82
511.17076
15720.292
6621
22341.292
-1677
-5
20659.292
352
58.660235

952.72
844.86927

952.72
795.61347

952.72
749.22928

952.72
705.54928

Debt
Minority Interest
Equity
Invested capital T-1

TV

12113.86

Hybrid data
Having outlined the potential for valuation using a regression model a hybrid
multiple was determined for BBY. Using a survey of analyst forecast, our own
economic analysis and strategic analysis of the firm and the industry, which
formed the opening of this report, we looked to create a hybrid revenue multiple.
For the fiscal year 2015, we recognised that Best Buy was under pressure to
continue its Renew Blue strategy, as such large scale investment beyond this
scheme was unlikely. We also felt Bets Buy would continue to feel the pressure
from online retailers. On a broader scale there is particular uncertainty with the

16

Federal Reserves decision to alter monetary policy in 2015 and as such a

tempered 0.5% growth rate was decided upon.
For the fiscal year 2016 we noted more significantly the analyst survey, which
included data from 9 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 2.3% revenue growth, matching with the lower led of the
Federal Reserves central tendency GDP prediction led us to choose 2.3%.
By fiscal year 2017 we felt that Best Buy would be free to address new strategy
needs and should have consolidated its position as an electronics and appliances
retailer further with the likely withdrawal of some of its smaller competitors. The
outlook, echoed by the analyst survey is more buoyant therefore and is backed by
more positive data from the Federal Reserve. We therefore opted to go with the
analyst prediction for 5.83% growth as it echoed our belief that if Best Buy can
see it through this difficult time ahead they would be in a position to grow both in
sales and in size.
Beyond fiscal year 2017 we opted to go with the Federal Reserve guidance on the
economy, a steady rate of 2.0% falls within their central tendency prediction and
lies closer to our more pessimistic terminal value of 1.8% used, as we feel that the
industry as a whole will continue to face sustained pressure form the big brand
retailers such as Wal-Mart and online market places.

Exhibit 9

This led to an output as follows:

17

FCFU valuation (WACC method), iterated WACC

FCFU valuation (WACC method)
FCFU

2014

2015
(8,357.35)

2016
695.79

2017
407.86

2018
903.07

WACC calculation
NCI
Guess Equity Value 2019
Debt Value 2019
Enterprise Value 2019

2019
9,311.75

TV

5.00
197,941.76
101.03
198,047.79

Weight of NCI
Weight of Equity
Weight of Debt
WACC

0.00
99.95%
0.05%
6.589%

Implied Enterprise Value (=TV)

Less: Debt 2019
Less: NCI
Equity Value 2019

197941.7569
-101.0304112
-5
197835.7265

Difference to initial guess

106.03

PV of FCFUs (@ WACC)

(7,870.12)

Enterprise Value
Less: Debt 2014 (fair value)
Equity Value 2014
#Shares Outstanding
Value per share

617.03

340.60

710.19

6,895.95

197,941.76
143,871.97

144,565.63
1,677.00
142,888.63
352.19
$
405.72

In this case the value per share peaked at $405.72 dollars in the leveraged
scenario. We recognise the unrealistic nature of this prediction but would hasten
to compare it to a lower projected price for the firm with a higher TV using the
regression model, which we felt was already over zealous. It is worth noting that
although not included in the excel sheet, using our hybrid forecast led to a much
more moderate price of $13.32 a share when using a 1.8% TV.
Exhibit 10
FCFU valuation (WACC method)
2014
FCFU

2015
299.60

2016
657.63

2017
302.77

2018
801.43

WACC calculation
NCI
Guess Equity Value 2019
Debt Value 2019
Enterprise Value 2019

TV
276.20

5.00
9,103.94
360.19
9,469.13

Weight of NCI
Weight of Equity
Weight of Debt
WACC

0.00
96.14%
3.80%
6.458%

Implied Enterprise Value (=TV)

Less: Debt 2019
Less: NCI
Equity Value 2019

6036.064711
-360.1866316
-5
5670.878079

Difference to initial guess

PV of FCFUs (@ WACC)

2019

3,433.06
282.14

583.18

252.84

630.26

204.54

6,036.06
4,414.27

Enterprise Value 6,367.23

Less: Debt 2014 (fair
1,677.00
value)
Equity Value 20144,690.23
#Shares Outstanding
352.19
Value per share
$
13.32

18

Multiple Valuation

Exhibit 11

In general multiples are classified into two categories: operating multiple and
equity multiple. One of each of the categories of multiples are used here for
valuation purposes: Price to Earnings ratio which is an equity multiple and
EV/EBITDA which is an operating multiple. Comparable firms were determined

19

mainly by type of business that is business that largely deal with electronics that
are similar to the types of electronics that Best Buy sells e.g TVs, Laptops, Cell
phones. In addition to that those companies that had an online
Exhibit 12

electronics retail presence were considered. Some discounts for

size were considered as well. After doing the multiple valuation it was realized
that Amazon and EBay, although competitors with similar lines of business were
dropped since the size of both the companies was too big and was turning out to
be an extreme outlier in the calculations. The Price Earnings ratio was calculated
as follows: the current stock price of the comparable firm divided by the earning
per share of the years 2014, 2015, 2016 and 2017. Then the average of the
calculated P/E is taken and multiplied by the Best Buy earning per share (EPS) for
that year. The share price for 2014 (year ended March 31 2015) came out to be
$36.29, this estimation is $0.11 overvalued than the prevailing share price. The
2015 price was $99.06 the reasoning behind this could be that consumers have
more to spend on electronic goods due to savings from falling energy prices.
Another reason could be boosted profits due to the new 4K TV technology which
has a high potential to succeed as consumers have already started to show
interest in the new technology. Apple recently released Apple watches which will
also have a demand with Apple enthusiasts. In the year 2016 stock price is
expected to fall by half to $45.36. This could be because consumers will be
spending less on electronic goods at Best Buy having spent already on the new
technology that had come out in 2015.

20

For the EV/EBITDA multiple, each comparable companys multiple was multiplied
by Best Buys EBITDA 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 $25.94 which was $10.94 less than the actual
share price. The reasoning behind this lower share price is because in the
calculations Walmarts 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. Walmart is a giant corporation,
much bigger than Best Buy, it was included only due to the similarity of the
electronics business.
Conclusion
We therefore are led to surmise that there are a wide range of potential values for
Best Buy, on the one hand there are a series of forecasts, including our multiples
forecast that places Best Buy firmly 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 Best Buy falls below that of the publicly traded value of the shares quite
significantly. This reflects the much more real assumption we made in our
qualitative analysis that we see Best Buy and the overall market facing some
tough times ahead in the US. Nonetheless there is a lot to be said for the potential
of adding financial leverage and as such the valuation derived from a leveraged
buyout placed the value of Best Buy significantly higher. We recognise this is
unrealistic in terms of figures and assume there to be errors in the way this is
accounted for. Nevertheless, our belief is that with a significant amount of debt
added to it and with the hopeful backing of investors who see Best Buy a safe
steady retailer, there is potential for a leveraged buyout.

21