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Valuation of AirThread Connections

Changes in the communication industry that began in mid-
1990s, American cable Corporation (ACC) became an
aggressive acquirer of cable and communication related
Technological and regulatory changes would necessitate
industry consolidation
Growing needs of economies of scale
Increased network utilisation
Consequently the strategic planning group regularly
screened potential acquisition candidates
In early December 2007 ACC approached by investment
bankers for a possible acquisition of a AirThread Connections
a large regional cellular phone company
Rationale for the acquisition
ACC would gain access to wireless technology and spectrum
Industry had moved towards a bundled services business model
Methodological Approach
ACC uses an LBO type of framework
Maximise returns by minimizing its equity and taking
advantage of interest actions
Debt burden is then paid down using the targets
cash flows until a sustainable D/V ratio is attained
Does the debt policy have an impact on valuation?
Value = FCFn/(1+r)n + Terminal Value
During the explicit period the capital structure is
changing while in the terminal period the capital
structure can be taken to be constant
What is known about the debt balance prior to the
terminal period?
Debt balance explicitly forecast and by extension
interest tax shield explicitly estimated
Bifurcated approach
Valuation involves a two-step process
Initial intermediate period with explicit debt balances and
interest actions
Terminal value period based on a target capital structure
Can we use both APV and WACC methods?
Points to note
Only operating cash flows are valued
In Exhibit 5 investment in affiliates is shown which in all
probability are not apart of operations
Un-levered intermediate-term cash flow + intermediate-
term taxis + TV CF representing going concern +Value of
non-operating assets = value of the enterprise
Non-operating assets and minority interest present a
special concern in this valuation as the case is silent about
the cash generated by equity investments in affiliates or
whether such investments can be sold
Operating results and un levered free cash flow
Unlevered Cash Flow FCF = NOPAT +
Depreciation less Working Capital less Capital

NOPAT = Service revenue + Equipment sales

System operating Expenses Equipment COGS
SG&A Depreciation = EBIT and EBIT (1-t) =

EBIT (1-t) - Net operating assets = FCF

operating assets less operating liabilities =

Net operating Assets
Cost of capital
Ex 7provides data on comparable companies to
estimate average asset beta
Underlying assumption. Firms in the same industry have
similar customers operations and assets and as a result
they have similar business risks
There are however significant shortcomings in the
application of comparative companies
Ex 7 Sample size is very small, comprised of
companies that are significantly larger than AirThread.
Problems of reliability and standard
In addition to small sample there is a question as to
whether the companies are truly comparable
Marginal Tax rate 40%, debt beta = 0; MRP 5%, Risk
free rate 4.25%; Cost of debt 5.50% (Ex 7) beta
assuming zero debt and assuming 28.1% debt
Long term growth rate
reinvestment rate) x (Return on capital) =
Long term EBIT Growth rate

Net Reinvestment rate =


For 2012 NOPAT = 674.6; Invested Capital =

4107.5 ROC = 16.4%
Net Reinvestment 139.0 Reinvestment rate
EBIT growth rate 3.4%
Valuation of Intermediate Operating Cash Flows
Ex 6 debt amortisation
Interest tax shield annually (interest expenses x
tax rate)
Discount tax shields at yield to maturity (What if
interest tax shields are very risk?)
Ability to generate sufficient operating income
Net operating losses can complicate
Personal tax rates (investors consider after tax
Terminal Value
PV of terminal value
FCFn (1+g) / (rwacc g)
Discount to today
Value of Non-Operating Assets
Estimate value of investments
Average P/e multiple Ex 7
Apply multiple to 2007 earnings shown in historical
Other topics
Value of synergies
Value as is
Value including synergies

Airthread an illiquid asset

Illiquidity discount

Cost of financial distress