Best Buy Co., Inc. Strategic Opportunities Discussion Materials provides an analysis of Best Buy's current position and strategic alternatives. It recommends that Best Buy be acquired by a consortium of private equity firms through a leveraged buyout. A buyout would allow Best Buy to address its underlying problems of poor customer retention, a weak online presence, and an inefficient distribution network without quarterly reporting pressures. An analysis values Best Buy at $9.7 billion, implying an enterprise value to EBITDA multiple of 4.1x based on comparable company analyses and discounted cash flow valuations.

1. Best Buy Co., Inc. Strategic Opportunities
Discussion Materials | February 21, 2014
1

2. LSP Capital Partners
 Robert J. Liu
 Indiana University, Kelley School of Business, 2017
 Majors: Accounting, Finance & Mathematics
 Clayton R. Stoker
 Indiana University, Kelley School of Business, 2017
 Majors: Accounting & Finance
 Jacob J. Pechukas
 Indiana University, Kelley School of Business, 2017
 Majors: Accounting & Finance
2

3. Table of Contents
I.
Executive Summary
4
II.
Specialty Retail & Consumer Electronics Industry
6
III. Best Buy Overview
9
IV. Valuation Summary
12
V.
16
Sale to Another Sponsor
VI. Appendix
23
3

4. I.
Executive Summary
4

5. Executive Summary
 Overview
LSP Capital Partners
recommends that Best Buy’s
shareholders and board agree to a
buyout by a consortium of
private equity firms
By going private, Best Buy will
be able to fix its underlying
problems without the pressure of
immediate returns hanging above
the company
 Best Buy is one of the last big box retailers with approximately 1,100 locations across America
 The company is currently in the process of making the transition from a traditional brick and mortar electronics retailer
into a diversified multiplatform vendor, but is running into issues competing against low cost and online retailers due
to a previously bloated infrastructure and a weak online presence
 Current Positioning
 In the fourth quarter of 2013, Best Buy took market share at cost. Black Friday weekend sales were satisfactory but were
weakened due to weather and a late holiday season

During the first few weeks in December Best Buy took huge hits due to irrational price competition across the industry
as a whole
 Online sales jumped 23.5% over the last year due to shifting consumer trends. Best Buy is poised to capitalize on the
trend of increasing online sales if it is able to improve its online presence and supply chain
 Strategic Alternatives Assessment
 Wall Street seems to believe that EPS is the best indicator of future success but Best Buy’s transformation will take more
than a few quarters, therefore LSP Capital Partners believes an LBO would allow Best Buy to reorganize itself to better
position itself for many years to come
 Given Best Buy’s cash generation capabilities, a transaction financed primarily through debt could provide exceptional
returns to its financial sponsors
 Shareholders wanting to exit this investment due to its recent earnings report may be motivated to accept a takeover
bid at premium to cut their losses
 Recommendations
 The transaction will be structured with cash and debt
 Due to the transaction size, LSP Capital Partners suggests that a syndicate of private equity firms work together to
finance the buyout
5

6. II.
Specialty Retail & Consumer Electronics Industry
6

7. Macroeconomic Landscape


Consumer spending recorded its strongest gain in three years in the fourth quarter of 2013, but a decrease in January 2014 was
most likely the result of cold weather or potentially a sign of limited consumer spending growth in the second half of 2014

Unemployment, the strongest driver of consumer spending has been steadily decreasing over the past four years, driving up
spending but a reversal in the rate could weaken the economy and retail industry as a whole

11
The increase in consumer confidence in the economy as a whole has been driving up retail sales and could lead to stronger
spending as we progress through 2014

Macroeconomic
trends have shown
steady signs of
improvement
which bodes well
for the industry as
a whole, however a
reversal could
potentially cause
issues in the future
10-year treasury bonds rose to a 2.65%, a 2 week high, after Federal Reserve Chair Janet Yellen signaled that the Fed would
continue to taper its bond buying program despite recent mediocre economic data
Over the past year, banks are opening up lines of credit more freely to sub-prime borrowers in all areas but housing which can
lead to short term spending increases and could provide a tailwind to retail sales
US Unemployment Rate
10
90.0
Consumer Sentiment Index
85.0
80.0
9
8
7
75.0
70.0
65.0
60.0
6
5
Source: Federal Reserve Bank of Saint Louis
55.0
Fear regarding the nation’s
debt ceiling drove the index
to a two year low
50.0
Source: Federal Reserve Bank of Saint Louis
7

8. Industry Outlook

The United States
consumer
electronics market
is forecast to have a
value of $121.8
billion by 2017, an
increase of 32.9%
since 2012
Consumer Electronics
 Growth in 2014 is expected to be modest but exceeding that of 2013 due to new growth drivers and product lines. Drivers include but
are not limited to: new video game consoles, video games, wearable, and smart TVs. Smartphones and tables expected to continue
growing but at a lesser rate than previous years
 China is continuing to see growth in consumer electronics as a product of the burgeoning middle class purchasing an increased amount
of discretionary items such as electronics
 Even price-conscious customers seek an acceptable level of customer service from knowledgeable employees, especially when
purchasing big ticket items such as high-tech consumer electronics
 Electronics retailers have began to outsource the production of TVs, MP3 players, and other products to low-cost Chinese
manufacturers and then sell them under their own private label brand. This has allowed retailers to better compete with low cost
competitors such as Wal-Mart
 The United States consumer electronics market is forecasted to have a value of $121.8 billion by 2017, an increase of 32.9% since 2012

Specialty Retailers
Brick and mortar retailers have began to notice increasing popularity of online sales and mobile and have began to focus their strategy
more on this growing trend
Online sales as a percentage of total retail sales was 5.2% in 2012, and is expected to grow to 10-15%
Increased competition from online and low cost competitors has forced Specialty Retailers to differentiate themselves through
services to attract customers from purchasing in store
Social media has show increasing popularity among specialty retailers due to the opportunity for low-cost marketing and promotion
Retailers have began to seek new opportunities for growth overseas due to the saturated growth in the US retail market





U.S. Retail E-commerce Sales as a Percentage of Total Sales
Best Buy US E-commerce Sales as Percentage Of Total Sales
7.00%
Online sales are
projected to rise at
a CAGR of almost
9% between 2013
and 2017
7.00%
6.00%
6.00%
5.78%
5.00%
5.15%
4.00%
3.00%
4.30%
3.40%
3.60%
4.65%
5.78%
5.00%
5.15%
4.00%
3.85%
3.00%
2.00%
3.40%
3.60%
4.65%
3.85%
2.00%
1.00%
4.30%
1.00%
0.00%
0.00%
2007
Source: BBY 10-K
2008
2009
2010
2011
2012
2013
2007
2008
2009
2010
2011
2012
2013
Source: Census Bureau of the Department of Commerce
8

9. III. Best Buy Overview
9

10. Challenges Facing Best Buy
 Overview
 Best Buy’s previous cost cutting has been effective, however not been fast enough to keep up with the streamlined corporations such as
Amazon and Wal-Mart
 Best Buy has poor customer loyalty, primarily due to the low quality of customer service and a lack of incentives to keep coming back
 Large databases of customer information are not being used effectively to attract customers into the store
 E-commerce site is inefficient and confusing when compared to main competitors, AMZN and WMT
Poor customer
retention, a weak
online presence,
and an inefficient
distribution
network are the
 Customer Loyalty
three top challenges
 Lack of integration of customer databases is
plaguing Best Buy
BBY Closing Prices
50
45
Closing Price (in dollars)
unacceptable info of consumer preferences and
purchase history
 Many Geek Squad users did not buy their
product through BBY
 Little to no rewards system in place; leaves
customers feeling as if there is not a point to
being loyal to BBY
 Online Presence
 70% of customers begin purchases online
(whether to buy or browse); does very little to
track website traffic on per-customer basis
 Website is confusing and inefficient and is
where a majority of the market share is lost
 Distribution
 BBY delivery time: 7 days
 AMZN delivery time: 2 days
 Stores are not being utilized as distribution
centers even though a majority of the stores
have the items ordered in-stock
 Weak supply chain makes the cost of open box
returns extremely high
40
35
30
25
20
15
10
5
0
1/2/2013
4/2/2013
7/2/2013
10/2/2013
1/2/2014
Source: Bloomberg
10

11. Opportunities and Growth Drivers
Assuming BBY
makes changes to
the problems they
currently face, they
can foresee
moderate growth in
the future –
however the
company will have
to suffer through
losses in order to
fully fix the issues
 Current Opportunities
 International Sector: India and China
 Partnerships with “enemies” of Amazon, such as Google, which would help improve service/distribution
 Partnerships with vendors could potentially limit the supply of consumer products, especially electronics, and eliminate price competitiveness
between BBY and WMT & AMZN
 Current Growth Drivers
 Rate of cost reductions in restructuring supply chains for returns and delivery, having marketing on the same page as merchandising, and
merchandising by seasonal drivers
 High market shares show that customers value BBY products and services
 Vendor partnerships: BBY is final brick and mortar store for consumer electronics
 Bottom Line
 Improve customer retention via improved service, website, and stronger integration of customer databases
 Establish partnerships to better control market and improve distribution
 Continue cost cutting efforts by eliminating bloated infrastructure
Percentage of Sales by Region
0.47%
Gross Profit (in millions)
3.49%
Gross Profit
14000
10.69%
11.39%
73.96%
13000
12000
11000
10000
9000
8000
United States
Europe
Source: Credit Suisse Equity Research Report
Canada
China
Other
2011
2012
2013
2014
Year
2015
2016
2017
Source: Best Buy 10-Q
11

12. IV. Valuation Summary
12

13. Best Buy Co., Inc. Valuation Summary
($ in millions, except for share price)
By running four valuation
models, a target of 4.1x LTM
EBITDA multiple is derived as
the mean
A 4.1x multiple results in a total
purchase price of $9,711 million,
using Best Buy’s LTM EBITDA
Current Valuation: $8,068
Current Share Price: $24.89
52 Week Trading Range:
Implied EV/EBITDA of 2.1x-6.3x
Mean Valuation: $9,711
Implied EV/EBITDA: 4.1x
$14,909
($44.66)
$4,906
($15.75)
Comparable Companies Analysis:
Implied EV/EBITDA of 4.0x-5.0x
$11,880
$9,504
Discounted Cash Flow Analysis:
Implied EV/EBITDA of 3.5x-4.5x
$7,865
Leveraged Buyout Analysis:
Implied EV/EBITDA of 3.8x-4.3x
$9,376
$9,029
$4,000
$6,000
$8,000
$10,217
$10,000
$12,000
$14,000
$16,000
13

14. Comparable Companies Analysis
Company Name
Best Buy Co., Inc.
Staples Inc.
Williams-Sonoma Inc.
Dixons Retail PLC
Gamestop Corp.
Office Depot Inc.
Ticker
Closing
Price
% of
52 Wk
High
BBY
$25.0
56%
$8,574
$8,075
0.2x
SPLS
WSM
DXNS
GME
ODP
$13.1
$54.6
$48.4
$36.1
$5.2
76%
89%
91%
63%
85%
$8,517
$5,184
$2,878
$4,124
$2,708
$9,108
$5,059
$2,623
$3,475
$2,682
0.4x
1.2x
0.2x
0.4x
0.3x
$8,574
$2,708
$5,331
$4,654
$9,108
$2,623
$5,170
$4,267
$35,435
$245,239
$164,118
$245,239
$2,708
$52,975
$8,517
High
Low
Mean
Median
Target Corp.
Wal-Mart Stores Inc.
Amazon.com Inc.
TGT
WMT
AMZN
High
Low
Mean
Median
EBITDA
LTM
2013A
2014E
Metric
$2,376
$2,402
$2,072
$56.4
$75.3
$353.7
77%
93%
87%
Equity
Value
Enterprise
Value
LTM
Multiple Range
4.0x-5.0x
3.1x-4.1x
4.0x-5.0x
EV/Revenue
2013A
2014E
EBITDA
Margin
EBIT
Margin
2.5x
3.7x
5.3%
3.6%
4.8x
7.0x
3.3x
3.0x
5.4x
5.0x
7.5x
5.2x
3.8x
5.0x
7.8%
13.7%
3.9%
10.5%
2.4%
5.9%
10.3%
2.2%
7.1%
0.5%
10.6x
3.4x
6.1x
5.0x
7.0x
2.5x
4.3x
4.1x
7.5x
3.7x
5.0x
5.0x
13.7%
2.4%
7.3%
6.6%
10.3%
0.5%
4.9%
4.7%
0.7x
0.6x
1.7x
7.4x
8.2x
38.7x
7.7x
8.0x
44.4x
7.3x
7.6x
23.1x
9.1%
7.8%
5.4%
6.1%
5.9%
1.0%
2.0x
0.2x
0.8x
0.6x
38.7x
3.4x
10.1x
7.4x
44.4x
2.5x
9.6x
5.4x
23.1x
3.7x
7.6x
5.2x
13.7%
2.4%
7.3%
7.8%
10.3%
0.5%
4.7%
5.9%
2014E
LTM
0.1x
0.2x
3.4x
0.4x
1.0x
0.1x
0.3x
0.1x
0.4x
1.1x
0.2x
0.3x
2.0x
4.9x
8.5x
5.2x
3.7x
10.6x
1.2x
0.2x
0.4x
0.3x
1.0x
0.1x
0.3x
0.2x
2.0x
0.2x
0.7x
0.4x
$49,516
$303,454
$154,862
0.7x
0.6x
2.1x
0.8x
0.6x
1.9x
$303,454
$2,623
$59,873
$8,075
2.1x
0.2x
0.7x
0.4x
1.9x
0.1x
0.6x
0.4x
EV/EBITDA
2013A
Implied Enterprise
Value
$9,504 - $11,880
$7,446 - $9,848
$8,288 - $10,360
Revenue
LTM
2013A
2014E
Metric
$44,753
$49,621
$42,659
Multiple Range
0.25x-0.30x
0.15x-0.20x
0.35x-0.40x
Implied Enterprise
Value
$11,188 - $13,426
$7,443 - $9,924
$14,931 - $17,064
14

15. Best Buy Co., Inc., Discounted Cash Flow Analysis
Historical Period
CAGR
2011A
2012A
$49,747.0
N/A
36,229.0
72.8%
13518.0
27.2%
10,029.0
20.2%
$50,705.0
1.9%
37,035.0
73.0%
13670.0
27.0%
10,242.0
20.2%
EBITDA
3,489.0
3,428.0
% Margin
Less: D&A
D&A as a % of Capital Expenditures
7.0%
(968.0)
130.1%
6.8%
(1,078.0)
140.7%
EBIT
Less: Provision for Taxes
EBIAT
$2,521.0
(779.0)
$1,742.0
$2,350.0
(709.0)
$1,641.0
Plus: D&A
Less: Capital Expenditures
Less: Increase in Net Working Capital
Unlevered Free Cash Flow
968.0
(744.0)
(222.0)
$1,744.0
1,078.0
(766.0)
368.0
$2,321.0
Sales/Revenue
Revenue Growth
Less: COGS (excluding D&A)
% Sales
Gross Profit
% Margin
Selling, General, & Administrative
% Sales
('10-'12)
1.0%
Projection Period
2013
2014E
2015E
2016E
CAGR
2017E
2013-2017
(0.9%)
(3.5%)
(2.9%)
$43,776.5
2.5%
32,832.4
75.0%
10944.1
25.0%
8,755.3
20.0%
$44,871.0
2.5%
33,653.2
75.0%
11217.7
25.0%
8,974.2
20.0%
$45,992.7
2.5%
34,494.5
75.0%
11498.2
25.0%
9,198.5
20.0%
$47,142.5
2.5%
35,356.9
75.0%
11785.6
25.0%
9,428.5
20.0%
2.5%
1,857.8
2,188.8
2,243.5
2,299.6
2,357.1
6.1%
4.4%
(667.5)
89.0%
0.6%
$42,708.8
(15.8%)
33,163.4
77.7%
9545.4
22.4%
7,687.6
18.0%
5.0%
(750.00)
100.0%
5.0%
(750.00)
100.0%
5.0%
(750.00)
100.0%
5.0%
(750.00)
100.0%
$1,190.3
(476.1)
$714.2
$1,438.8
(575.5)
$863.3
$1,493.5
(597.4)
$896.1
$1,549.6
(619.9)
$929.8
$1,607.1
(642.9)
$964.3
667.5
(750.0)
(100.0)
$531.7
750.0
(750.0)
(200.0)
$663.3
750.0
(750.0)
(200.0)
$696.1
750.0
(750.0)
(200.0)
$729.8
750.0
(750.0)
(200.0)
$764.3
7.8%
7.8%
9.5%
Financial Assumptions
Tax Rate
40.0%
Net Debt (mm)
($501.0)
Shares (mm)
Total Price Per Share
Total Enterprise Value
Terminal EBITDA Multiple
Terminal EBITDA Multiple
Discount
7.6%
3.5x
$8,420.1
4.0x
$9,237.2
348.9
4.5x
$10,054.4
Discount
7.6%
3.5x
$25.57
8.6%
24.62
26.85
29.09
9.6%
23.71
25.85
27.98
Rate
8.6%
8,087.5
8,867.7
9,647.9
Rate
(WACC)
9.6%
7,771.9
8,517.1
9,262.3
(WACC)
4.0x
$27.91
4.5x
$30.25
15

16. V. Sale to Another Sponsor
16

17. Leveraged Buyout Analysis: Overview
Transaction Assumptions
Current Share Price
Offer Price Premium
Offer Price Per Share
Target Diluted Shares Outstanding
Offer Value
+ Long-Term Debt (Including CPLTD)
+ Preferred
+ Minority Interest
- Cash & Equivalents
Transaction Value
$250.0
2.50x
1.50x
$24.8
20.0%
$29.7
348.9
$10,374.9
1,624.0
0.0
2.0
(2,170.0)
$9,830.9
Minimum cash level
Senior debt / EBITDA
Subordinated debt / EBITDA
Transaction Multiples
Transaction Value / Sales
Transaction Value / EBITDA
Transaction Value / EBIT
Pro Forma
0.23x
5.3x
8.3x
Sources
Cash
Senior debt
Subordinated debt
Sponsor's equity
Total sources
Amount
$1,920.0
4,644.6
2,786.8
2,751.3
$12,102.6
Percent
15.9%
38.4%
23.0%
22.7%
100.0%
Uses
Purchase of equity
Refinancing of existing debt
Transaction expenses
Total uses
Amount
$10,374.9
1,624.0
103.7
$12,102.6
Percent
85.7%
13.4%
1.0%
100.1%
2018
19.0%
25.7%
31.6%
2019
20.0%
24.7%
28.7%
IRR Returns
EBITDA exit multiple
3.8x
4.3x
4.8x
2017
16.1%
26.7%
35.9%
17

18. Leveraged Buyout Analysis: Cash Flow and Returns Analysis
Free cash flow for debt paydown
Scheduled (paydown) / borrowings
Cash flow available for debt sweep
Discretionary (paydown) / borrowings
Excess cash flow
2014
$455.9
0.0
455.9
(455.9)
$0.0
2015
$538.1
0.0
538.1
(538.1)
$0.0
2016
$626.2
0.0
626.2
(626.2)
$0.0
Projected Years
2017
2018
$720.6
$821.6
0.0
0.0
720.6
821.6
(720.6)
(821.6)
$0.0
$0.0
2019
$929.6
0.0
929.6
(929.6)
$0.0
2020
$1,047.3
0.0
1,047.3
(1,047.3)
$0.0
2021
$1,178.4
0.0
1,178.4
(1,178.4)
$0.0
2019
$2,861.7
2020
$3,004.8
2021
$3,155.0
Returns Analysis - EBITDA Exit Multiple Method
Initial investment:
$2,751.3
2014
$2,242.2
EBITDA
Implied enterprise value @ EBITDA multiple of:
3.8x
4.3x
4.8x
2015
$2,354.3
2016
$2,472.0
Projected Years
2018
2017
$2,725.4
$2,595.6
Implied equity value @ EBITDA multiple of:
3.8x
4.3x
4.8x
$8,946.4
$10,123.6
$11,300.8
$9,393.8
$10,629.8
$11,865.8
$9,863.4
$11,161.3
$12,459.1
$10,356.6
$11,719.3
$13,082.0
$10,874.4
$12,305.3
$13,736.1
$11,418.2
$12,920.6
$14,422.9
$11,989.1
$13,566.6
$15,144.1
$7,431.33
250.0
LESS: Debt
PLUS: Cash
$8,520.4
$9,641.5
$10,762.6
$6,975.39
250.0
$6,437.26
250.0
$5,811.05
250.0
$5,090.46
250.0
$4,268.88
250.0
$3,339.27
250.0
$2,291.92
250.0
$1,339.1
$2,460.2
$3,581.3
$2,221.0
$3,398.2
$4,575.4
$3,206.5
$4,442.5
$5,678.5
$4,302.4
$5,600.2
$6,898.0
$5,516.1
$6,878.9
$8,241.6
$6,855.6
$8,286.4
$9,717.3
$8,328.9
$9,831.3
$11,333.7
$9,947.2
$11,524.7
$13,102.2
8.0%
27.1%
43.7%
16.1%
26.7%
35.9%
19.0%
25.7%
31.6%
20.0%
24.7%
28.7%
20.3%
23.6%
26.6%
20.2%
22.7%
25.0%
Equity return @ EBITDA multiple of:
3.8x
4.3x
4.8x
(19.3%)
23.5%
66.3%
18

19. Leveraged Buyout Analysis: Debt and Credit Analysis
Credit Statistics
Debt / EBITDA
EBITDA / Interest (net)
Debt Repayment
Cumulative free cash flow
Delevering - Senior debt
Delevering - Total debt
Pro Forma
4.0x
1.6x
2014
3.1x
1.5x
2015
2.7x
1.5x
Year 3
$1,620.3
34.9%
21.8%
Year 4
$2,340.9
50.4%
31.5%
Year 5
$3,162.5
68.1%
42.6%
Offer price
premium
12.0%
14.0%
16.0%
18.0%
20.0%
22.0%
24.0%
26.0%
28.0%
IRR Returns
2017
2018
26.7%
25.7%
39.7%
35.3%
36.0%
32.6%
32.6%
30.1%
29.5%
27.8%
26.7%
25.7%
24.2%
23.8%
21.8%
22.0%
19.6%
20.4%
17.5%
18.8%
2019
24.7%
32.2%
30.1%
28.1%
26.3%
24.7%
23.1%
21.7%
20.4%
19.2%
19

20. Potential Financial Sponsors
LSP Capital Partners
views these eight
private equity firms as
the most capable to
lever BBY
All firms listed have
had prior investments
dealing with:
distribution,
information
technologies, and/or
consumer retail
The most efficient way
to lever BBY would be
a consortium of two to
three firms listed,
consisting of at least
one top tier firms listed
at the uppermost table
Total Assets
(M)
$66,000.00
$48,000.00
Typical
Industries
Retail, Consumer
Consumer/Retail,
Media, Telecom,
Industrials
Previous
Investments
Staples
Neiman Marcus,
Petco, Paradyne
Total Assets
(M)
$6,925.00
$5,000.00
Distribution and Retail
Business Services,
Consumer Goods and
Services, Tech
Distribution
Lytx, ECI Software
Solutions, CSSN
Checkers Drive-In
Resurants Inc.
Typical
Industies
Previous
B&M Retail, David's Bridal
Investments
$40,370.00
Chemicals,
Consumer
Products, Retail,
Tech
Del Monte, The
Nielsen Company
B.V., Toys R Us
$2,000.00
$31,567.00
Consumer and Retail,
automotive, real estate
The Nielsen Company
B.V.
$8,000.00
Consumer Goods and
Services,
Communications,
Agriculture, Chemicals,
Oreck Corporation,
Caribbean Reasturants
Inc., El Pollo Loco
20

21. Key Risks of the Business
Best Buy, although has
many internal changes to
make, has been put in their
current situation because of
external factors
Once Best Buy fixes itself
internally, in terms of
service and operations, these
risks will still remain to
Best Buy and other similar
retailers
•
Online
Retailers
Low-cost
Retailers
Consumer
Electronics
Trends
•
•
Online retailers such as Newegg and Amazon are service-oriented online retailers with highly integrated
information systems regarding their customers
Majority of BBY’s market share is lost to online retailers
A standardized internet sales tax would hurt Best Buy’s current efforts in upgrading their e-commerce
site more so than its competitors who already hold much of the online market segment and would cause
drastic changes to their marketing and merchandising efforts
•
•
•
•
•
•
•
Low-cost retailers like Wal-Mart compete with large retailers because of their extremely low prices
In order to reduce price competitiveness, Best Buy would need to form strong partnerships with its
vendors to help limit the supply going to other retailers
Wal-Mart is run and founded on a low-cost business model – a company like Best Buy trying to compete
with them based on the price would only cause them to lose potential profits
Saturated growth in tablet and smartphone markets – likely to see growth and adoption rates decline
Best Buy’s private label brand may be outperformed by other brands
Transition from premium smartphones and tablets to low-margin substitutes
Weak macroeconomic environment forcing consumers to cut back heavily on spending for discretionary
items
Percentage of Cell Phones by Operating
System
100.00%
Although trends show that
smartphone adoption was
very rapid, soon it will
begin to slow as the
consumer market begins to
saturate
80.00%
Windows
60.00%
BlackBerry
40.00%
Android
20.00%
Apple
0.00%
2011
2012
2013
Source: Pew Research Center
21

22. Strategic M&A Weaknesses
Dixons Retail is based out of Europe, where
Best Buy is currently not even a top market
share holder and is currently reducing
operations in Europe.
HH Gregg, although has done very well
in recent years, is still too small and
would not have enough capital to
acquire a large retailer such as Best Buy
Global Retail M&A Activity
600
160000
140000
500
120000
400
100000
300
80000
60000
200
40000
100
20000
0
0
2007
2008
2009
2010
Number Of Deals
2011
2012
2013
Value Of Deals(US$m)
Newegg is far to small to be able to acquire the
needed capital to purchase Best Buy. Even though
Newegg has a successful website, this would not
solve Best Buys operational issues
A strategic M&A would not allow Best Buy to fix its main operational problems which have
caused the gross profit to decline the past few years. Due to its size, there may be no interest
in a merger or acquisition especially with the trend of decreased transaction size shown on
the graph to the right. It is very unlikely that Best Buy would benefit from any Synergies as
no potential buyers would help solve Best Buy’s internal operational issues outlined below.
 Service Changes
 Increase customer loyalty by focusing more on customer service, both in-store
and on-line
 Initiate rewards programs which will increase customer retention and create
barriers for companies such as Amazon and Wal-Mart to acquire customers from
Best Buy’s market share
 Restructure website to make more user-friendly, track customer purchase and
browsing history
 Operational Changes
 Integrate all individual databases on customer information to better tailor to the
customer and purchasing drivers
 Speed up distribution
 Turning stores from brick and mortar retailers to both retail stores and
distribution centers to reach customers faster and further improve their
customer relationships
 Lack of vendor relationships which, in turn, increases price competitiveness in
the market with major adversaries like Amazon and Wal-Mart
Source: Thomson One
22

23. VI.
Appendix
23

24. Appendix A: Best Buy Co., Inc.,: Weighted Average Cost of Capital
WACC Calculation
Comparable Companies Unlevered Beta
Target Capital Structure
Market
Marginal
Unlevered
Equity
Tax Rate
Beta
16.3%
Equity-to-Total Capitalization
83.7%
Cost of Debt
Cost of Debt
Tax Rate
After-tax Cost of Debt
Best Buy Co, Inc
Staples Inc
Williams-Sonoma Inc
1.7%
40.0%
1.0%
Dixons Retail Plc
Gamestop Corporation
Office Depot Inc
1.37
1.29
0.86
1.04
0.90
1.52
Average
1.12
12.1%
1.01
2.73%
Median
1.04
18.3%
0.91
Market Risk Premium
Levered Beta
7.25%
1.01
Best Buy Co., Inc. Relevered Beta
Cost of Equity
10.1%
1
Risk-free Rate
2
Levered Beta Value of Debt Value of Equity
Debt/
Debt-to-Total Capitalization
Cost of Equity
Company
Market
$1,669.0
1973.5
3.8
546.7
0.0
495.2
$8,574.1
8,517.4
5,184.4
2,878.2
4,124.0
2,708.3
19.5%
23.2%
0.1%
19.0%
0.0%
18.3%
40.0%
35.0%
35.0%
24.0%
35.0%
0.0%
1.23
1.12
0.86
0.91
0.90
1.29
8.6%
Relevered Beta
Target
Target
Debt/
Marginal
Relevered
Beta
WACC
Mean
Unlevered
Equity
Tax Rate
Beta
0.91
19.5%
40.0%
1.01
1 Note: 10-year treasury rate, sourced from treasury.gov on 2/19/2014
2 Note: Obtained from Ibbotson SBI Valuation Yearbook
24

25. Appendix B: Leveraged Buyout Debt Payment Schedule
Senior debt
Beginning balance
Discretionary (paydown) / borrowings
Ending balance
$4,644.6
(455.9)
$4,188.6
$4,188.6
(538.1)
$3,650.5
$3,650.5
(626.2)
$3,024.3
$3,024.3
(720.6)
$2,303.7
$2,303.7
(821.6)
$1,482.1
$1,482.1
(929.6)
$552.5
$552.5
(552.5)
$0.0
$0.0
0.0
$0.0
Average balance
Interest rate
Interest expense
$4,416.6
5.0%
$220.8
$3,919.6
5.0%
$196.0
$3,337.4
5.0%
$166.9
$2,664.0
5.0%
$133.2
$1,892.9
5.0%
$94.6
$1,017.3
5.0%
$50.9
$276.3
5.0%
$13.8
$0.0
5.0%
$0.0
Subordinated debt
Beginning balance
Scheduled (paydown) / borrowings
Ending balance
$2,786.8
0.0
$2,786.8
$2,786.8
0.0
$2,786.8
$2,786.8
0.0
$2,786.8
$2,786.8
0.0
$2,786.8
$2,786.8
0.0
$2,786.8
$2,786.8
0.0
$2,786.8
$2,786.8
(494.8)
$2,291.9
$2,291.9
(1,178.4)
$1,113.5
Average balance
Interest rate
Interest expense
$2,786.8
6.5%
$181.1
$2,786.8
6.5%
$181.1
$2,786.8
6.5%
$181.1
$2,786.8
6.5%
$181.1
$2,786.8
6.5%
$181.1
$2,786.8
6.5%
$181.1
$2,539.3
6.5%
$165.1
$1,702.7
6.5%
$110.7
Cash
Beginning balance
PLUS: Excess cash flow
Ending balance
$250.0
0.0
$250.0
$250.0
0.0
$250.0
$250.0
0.0
$250.0
$250.0
0.0
$250.0
$250.0
0.0
$250.0
$250.0
0.0
$250.0
$250.0
0.0
$250.0
$250.0
0.0
$250.0
Average balance
Interest rate
Interest (income)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
$250.0
1.2%
($3.0)
Interest Expense (net)
Senior Debt
Subordinated Debt
Cash
Interest expense (net)
220.8
181.1
(3.0)
$399.0
196.0
181.1
(3.0)
$374.1
166.9
181.1
(3.0)
$345.0
133.2
181.1
(3.0)
$311.3
94.6
181.1
(3.0)
$272.8
50.9
181.1
(3.0)
$229.0
13.8
165.1
(3.0)
$175.9
0.0
110.7
(3.0)
$107.7
25

26. Appendix C: Best Buy Co., Inc., Discounted Cash Flow Analysis Sensitivities
Implied Perpetuity Growth Rate
Total Equity Value
Terminal EBITDA Multiple
Terminal EBITDA Multiple
Discount
7.6%
3.5x
(1.5%)
4.0x
(0.5%)
4.5x
0.4%
Discount
7.6%
3.5x
$8,921.1
4.0x
$9,738.2
4.5x
$10,555.4
Rate
8.6%
(0.6%)
0.5%
1.3%
Rate
8.6%
8,588.5
9,368.7
10,148.9
(WACC)
9.6%
0.3%
1.4%
2.2%
(WACC)
9.6%
8,272.9
9,018.1
9,763.3
Total Enterprise Value
Total Equity Value
Terminal Perpetuity Growth Rate
2.0%
2.5%
3.0%
Discount
7.6%
$12,351.8
$13,350.0
$14,565.2
Rate
8.6%
10,445.2
11,127.6
(WACC)
9.6%
9,041.2
9,532.0
Terminal Perpetuity Growth Rate
2.0%
2.5%
3.0%
Discount
7.6%
$12,852.8
$13,851.0
$15,066.2
11,931.8
Rate
8.6%
10,946.2
11,628.6
12,432.8
10,097.2
(WACC)
9.6%
9,542.2
10,033.0
10,598.2
Implied Terminal EBITDA Multiple
Total Price Per Share
Terminal Perpetuity Growth Rate
2.0%
2.5%
3.0%
Discount
7.6%
5.9x
6.5x
7.3x
Rate
8.6%
5.0x
5.4x
(WACC)
9.6%
4.4x
4.7x
Terminal Perpetuity Growth Rate
2.0%
2.5%
3.0%
Discount
7.6%
$36.84
$39.70
$43.18
6.0x
Rate
8.6%
31.37
33.33
35.63
5.1x
(WACC)
9.6%
27.35
28.76
30.38
26