Lbo Tutorial Best Buy Co Limestone Capital Michael Karp Jawwad Siddiqui Jan Iyengar Alexander Banh 2
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Transcript of 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.
LBO Overview ValuationCompany
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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
LBO Overview ValuationCompany
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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
LBO Overview ValuationCompany
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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
LBO Overview ValuationCompany
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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.
LBO Overview ValuationCompany
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Valuation
9LBO Overview ValuationCompany
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Valuation
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IMPLIED SHARE PRICE $16.78
LBO Overview ValuationCompany