lbo tutorial best buy co limestone capital michael karp jawwad siddiqui jan iyengar alexander banh 2

7/27/2019 Lbo Tutorial Best Buy Co Limestone Capital Michael Karp Jawwad Siddiqui Jan Iyengar Alexander Banh 2

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LBO Tutorial Best Buy Co.September 16, 2012

Michael Karp | TMT Portfolio ManagerJawwad Siddiqui | TMT Analyst

Jan Iyengar | TMT AnalystAlexander Banh | Chief Strategy Officer

This presentation is for informational purposes only, and is not an offer to buy or sell or asolicitation to buy or sell any securities, investment products or other financial product orservice, an official confirmation of any transaction, or an official statement of LimestoneCapital Investment Club. Any views or opinions presented are solely those of the author

and do not necessarily represent those of Limestone Capital.


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Overview

What is a Leveraged Buyout?

2LBO Overview ValuationCompany

An LBO (leveraged buyout) is when a

firm (usually a Private Equity firm)

uses a higher than normal amount of

debt (known as leverage) to finance

the purchase of a company.

1) Pay for company with acombination of existing cash and

leverage2) Burden of leverage is placed on

target companys balance sheet3) Annual cash flows of target

company used to pay off debt4) P/E firm holds target for a set

amount of years, helping it groworganically, through acquisitions, orby installing new management

5) P/E firm sells target for a profit atthe end of holding period

Without Leverage With Leverage

Initial Value $100,000.00 $100,000.00

Cash Paid/Down Payment $100,000.00 $10,000.00

Debt Used $0.00 $90,000.00

Y1 Rent Income $10,000.00 $10,000.00

Y2 Rent Income $10,000.00 $10,000.00

Y3 Rent Income $10,000.00 $10,000.00

Y4 Rent Income $10,000.00 $10,000.00

Y5 Rent Income $10,000.00 $10,000.00

Ending Debt $0.00 $40,000.00

Ending Value $200,000.00 $200,000.00

Total Profit $150,000.00 $150,000.00Returns 150% 1500%

* Due to leverage, returns for the P/E firm are a lot larger than they would be without

leverage


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The Ideal Target

What is a Leveraged Buyout?

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Stable cash flows, lots of tangible assets, strong management team

Tax savings from interest expense and depreciation from writing up assetsenable LBO investors to offer targets substantial premiums over current marketvalue

Strategic buyers will still pay more

Leverage makes LBO vulnerable to business cycle fluctuations

LBO Overview ValuationCompany


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Event-driven upside, with viable business model amidst underperforming

peers, supports int rinsic valuation to limi t downside.

Investment Thesis

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Business Model:Tangible, in-person electronic sales, still viable. Competitorsare failing, BBY has survived while Circuit City have liquidated & Radio Shack hasbegun losing money

Industry: Growing mobile segment of Best Buys Business

Event Driven Upside Thesis:Tentative bid from Richard Schulze at $24-26 totake Best Buy private, large upside if deal goes through

Valuation Argument: Limited downside. Intrinsic valuation close to current shareprice.



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Company Overview

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Current Stock Price: $18.58 52 Week: $16.25 - $28.52 Industry: Retail Headquarter: Richfield, Minnesota Founder: Richard Schulze Employees: 167,000 (2012) Locations: 1,103 domestic stores and 85

international stores

Operations: U.S., Canada, Mexico, PuertoRico and China

CEO: Hubert J olyInterim CEO: Mike MikanChairman: Hatim Tiyabi

Company Profile Management, Subsidiaries

Best Buy Mobile, The Carphone WarehouseFive Star, Future Shop, Geek SquadMagnolia Audio Video, Pacific Sales

The Phone House

2012 Revenue by Region 2012 Revenue by Segment



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Company Overview

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Acts as an intermediary betweenmanufacturers and consumers Sells a wide selection of products and

accessories Also offers a vast range of service offerings,

such as extended warranties, installation andrepair; knowledgeable sales staff

Operates in 2 segments: Domestic (w/in

U.S.) and International Seasonal business with majority of sales

coming in Q4 during the holiday season

Sales dropped to $10.55 billion, down 3%from a year earlier Net income fell to $12MM, or 4 cents a

share, in Q2, from $150MM, (39cents/share), a year earlier.

Business Model Q2 2012 Financial Highlights

Growth will be driven by ongoing trends, such as, digitalization, mobility, and portability Growth opportunities to stem from the expanding consumer base in Asia, Latin America and Middle

East markets Intensifying price competition will continue to benefit online retailers Semiconductor industry will continue to fuel innovation in consumer electronics

Industry Outlook



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Recent Developments

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April 10, 2012CEO Brain Dunn

resigns after allegedrelationship withemployee

Aug 6, 2012Schulze offers totake Best Buyprivate for $24-$26 a share

March 29, 2012Posts $1.7 billionquarterly loss, says willclose 50 large U.S.stores



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SWOT Analysis

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Service and support offerings (e.g. salesrepresentatives, geek squad, repair services,etc.)

Integrated and distinct store formats Economies of scale

Competitors operate low cost operatingstructures and seek to compete for salespurely on price

Economic downturn continues to hurt sales

Strengths Weaknesses

Risks

With Going Private: Risk of in insider self-dealing Competition and Technology: Amazon? eBay? Mobile Stores? Companys liquidity and accounting policies

Poison Pill Borrowed 1.5B through three bond offerings with maturity dates in 2013, 2016 and 2021.



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Valuation

9LBO Overview ValuationCompany


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Valuation

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IMPLIED SHARE PRICE $16.78


lbo tutorial best buy co limestone capital michael karp jawwad siddiqui jan iyengar alexander banh 2

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