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Background
Changes in the communication industry that began in mid-
1990s, American cable Corporation (ACC) became an
aggressive acquirer of cable and communication related
businesses
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
Expenditure
ROC =