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Valuation of AirThread Connections
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N N S Manogana (M092) -
Rasa Rahul (M112) P V Praneeth (M099)
Case overview: American Cable Communication (“ACC”) was looking at potential acquisition targets to
increase profitability as well as viability. With competition making significant investments to build out their product capabilities ACC needed to scale up its business to make sure it wasn’t left behind. One of the potential targets was AirThread Connections (“ATC”), a large regional cellular provider. The deal would be
beneficial in terms of: 1. Better product offerings: The two business combined would complement each other and help them in providing bundled services 2. Entering new markets: Could help the companies expand into the business market thereby reducing their reliance on the retail/residential customers ensuring smoother and more stable cash flows. Increased cost and operating efficiency 3.
Value addition: ACC’s fiber lines could save ATC more than 20% in backhaul costs
Based on our valuation we arrive at a firm value in the range of $9.4- $11.3bn. We believe this should be the range within which ACC should buyout ATC. However ATC being a private firm suffers from illiquidity and using a private company discount of 15% we arrive at a valuation in the range of $8-$9.5bn. Firm value
Using DCF
9,439
Using EV/EBITDA Multiple
11,290
Firm value (applying a 15% private company discount)
Using DCF
8,023
Using EV/EBITDA Multiple
9,597
Terminal value Long term growth rate
7,215.1 3.0%
WACC calculations
Unlevered beta Equity Risk Premium Rf
0.81 5% 4.25%
D/V 2008 2009 2010 2011 2012
D/E
0.48 0.48 0.48 0.48 0.25
Beta
0.92 0.92 0.91 0.91 0.33
1.26 1.26 1.25 1.25 0.97
COE
10.54% 10.53% 10.52% 10.50% 9.10%
Rate of debt
5.50% 5.50% 5.50% 5.50% 5.50%
Tax rate
COD
40% 40% 40% 40% 40%
3.30% 3.30% 3.30% 3.30% 3.30%
WACC
7.1% 7.1% 7.1% 7.1% 7.7%
DCF
Historical Year Ended
Projected Year Ending
2005
2006
2007
2008
2009
2010
2011
2012
2827.0
3214.4
3679.3
4194.3
4781.5
5379.2
5917.2
6331.4
13.7%
14.5%
14.0%
14.0%
12.5%
10.0%
7.0%
258.7
267.0
314.8
358.8
403.7
444.1
475.2
8.0%
7.3%
7.5%
7.5%
7.5%
7.5%
7.5%
3030.7
3473.1
3946.3
4665.1
5409.3
6169.9
6931.3
7510.6
% yoy growth rate
n/a
14.6%
13.6%
18.2%
16.0%
14.1%
12.3%
8.4%
System operating expenses
604.1
639.7
717.1
838.9
942.9
1050.0
1130.9
1190.3
21.4%
19.9%
19.5%
20.0%
19.7%
19.5%
19.1%
18.8%
511.9 251.3 %
568.9 219.9 %
640.2 239.8 %
755.5
861.2
968.9
1065.8
1140.4
240.0%
240.0%
240.0%
240.0%
240.0%
SG&A
1217.7
1399.6
1555.6
1803.6
2056.2
2313.2
2544.5
2722.6
% of total revenue EBIT (Operating Income) % of revenue
40.2%
40.3%
39.4%
38.7%
38.0%
37.5%
36.7%
36.3%
206.9
309.4
451.1
561.9
745.0
970.4
1267.7
1504.4
5.2%
8.9%
14.9%
12.0%
13.8%
15.7%
18.3%
20.0%
124.1
185.6
270.7
337.1
447.0
582.2
760.6
902.6
40%
40%
40%
490.1
555.5
582.3
40% 653.1 14.0% 705.2
40% 757.3 14.0% 804.0
40% 925.5 15.0% 867.4
40% 1060.5 15.3% 922.4
40% 1164.1 15.5% 952.9
108.0%
106.2%
93.7%
87.0%
81.9%
Service revenue % growth
Equipment revenue
203.7
% of service revenue Total Revenue
% of service revenue
COGS Equipment COGS
EBIT(1-t)
Tax rate
Capex % of total revenue
D&A % of capex
(52)
Net capex
Accounts receivable Inventory Prepaid Expenses Accounts payable Deffered Service revenue Accrued Liabilities Non cash WC ∆
Non cash WC
% of revenue Free Cash Flow % of revenue
*all figures in $millions
58
138
211
362.4 46.15x 92.7 163.83 x 32.1 1.1% 254.1 39.20x
407.4 45.63x 117.2 163.09 x 35.0 1.1% 254.9 35.18x
435.5 42.61x 101.0 136.18 x 41.6 1.2% 260.8 32.23x
