Best Buy Purchases Assets and Closes Stores

Best Buy (NYSE:BBY) will spend $1.3 billion to purchase Carphone Warehouse’s (CPW) interest in the Best Buy Mobile profit share agreement. Under the terms of its existing arrangement, CPW receives 50% of the net earnings from Best Buy Mobile stores in the US and Canada. Best Buy agreed to pay $1.3 billion in exchange for full rights to all US and Canadian Best Buy Mobile profits, resulting in a negative EPS impact of $3.40 in Q4:12. For FY:13, Best Buy estimates that CPW would have received pre-tax profits of $120 – 140 million, suggesting that the acquisition of CPW’s stake will be accretive to Best Buy’s FY:13 diluted EPS by $0.24 – 0.27.

Best Buy also announced that it will be closing its 11 pilot big box stores in the UK by the end of the CY:11. As a result, in FY:12, it will incur $140 – 150 million of pre-tax restructuring costs, a $0.28 – 0.30 impact to diluted EPS (mainly in Q3:12). For FY:13, Best Buy expects pre-tax savings from the closure of the stores of $60 – 70 million, or $0.11 – 0.13 diluted EPS.

Best Buy also incurred a goodwill impairment charge of $1.2 billion due to CPW stake purchase and UK store closures, resulting in a FY:12 negative diluted EPS impact of $3.15.

Best Buy announced that it had agreed to acquire mindSHIFT Technologies, an IT service provider for small and mid-sized businesses, for $167 million.

Fiscal year change. Beginning in FY:13, the fiscal YE will shift to the Saturday nearest the end of January from the Saturday nearest the end of February.

Increasing our FY:12 pro forma EPS estimate to $3.58 from $3.52, and for FY:13, to $4.12 from $3.70, to reflect increased Best Buy Mobile profit share.

We think that Best Buy significantly overpaid for CPW’s Best Buy Mobile profit stake, especially given a number of cheaper alternatives. At the midpoint of FY:13 pre-tax profits for CPW’s stake, Best Buy is paying a 10x EBIT multiple. Competitors GameStop and RadioShack trade at only 5x forward EBIT, and would provide Best Buy with ≈ 6,600 and 7,300 (including kiosks) locations, respectively.

Maintaining our NEUTRAL rating and our 12-month price target of $27, which reflects a P/E multiple of 8x our FY:12 EPS estimate of $3.58. This multiple is below its historical 12 – 15x multiple due to slowing growth and execution issues.

Michael Pachter is an analyst at Wedbush Morgan.

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