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Valuation of AirThread Connections

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by

Tyler Goebel

on 26 November 2013

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Transcript of Valuation of AirThread Connections

Valuation of AirThread Connections
American Cable Communications (ACC)
Acquisition of AirThread Connections (ATC)
Attractiveness of ATC
Access to 200 markets, serving 80 million people
Acquisition would give ACC controlling interest in 25 operating markets
Provide coverage in areas ACC does not currently have a network
Approach to Valuation
Discounted Cash Flow (DCF) model

Tyler Goebel Joshua Oviatt Rujeko Gundani


Intense competition
Rapid change to due technological innovation
Success is dependent on economies of scale
Current industry practice is to use acquisitions to gain market share
Current Environment
ACC currently lacks wireless services
Advantages to acquisition:
Bundled Service Offerings (Video, Internet, Landline and Wireless)
Expansion into business markets
Cost reductions
Improved network utilization
Market Multiples
Steps to DCF Valuation
1) Calculate Weighted Average Cost of Capital

2) Calculate future free cash flows (FCF)

3) Find Present Value (PV) of FCF

4) Calculate PV of Terminal Value

5) Calculate PV of Interest Tax Shields

6) Value Non-Operating Assets

7) Apply Private Company Discount

ATC's WACC
Hamada Equation: ßL = ßU[1 + (1 - T)(D/E)]
Cost of Equity: ke = kRF + ßL(kM - kRF)
WACC = E/V x Re + D/V x Rd x (1-tax rate)
ATC's WACC
Use the Hamada Equation to un-lever comparable equity Betas
Average Beta for comparable firms = 0.82
Use 50% D/E Ratio to calculate WACC used to find PV of FCF
Use 40.1% D/E Ratio to calculate WACC to find PV of Terminal Value
PV of FCF (Base Case)
WACC of 7.04%
PV of FCF = $1299.46 MM
PV of Terminal Value
FCF in 2012 = $318.65 MM
g = 2.5%
r= 7.62%
Terminal Value = $6 380.67 MM
PV = $4420.03
*New WACC used to reflect the bullet payment at the end of 2012 which reduced D/E ratio to the industry average (40.1%)
PV of Interest Tax Shields
Interest Expense*Tax Rate
Tax Rate = 40%
Discount Rate = 5.5% (cost of borrowing)
PV = $284.78 MM
Market Multiple Valuation
Base Case Valuation
PV of FCF = $1 299.46
PV of Terminal Value = $4420.03
PV of Interest Tax Shields = $284.78
Value of Non-Operating Assets = $1 719.63
Enterprise Value (EV) = $7 723.91
EV (Net of 10% Illiquidity Discount) = $6951.52
Synergies Case
PV of FCF = $2037.16
PV of Terminal Value = $9148.95
PV of Interest Tax Shields = $248.78
Value of Non-Operating Assets = $1719.63
EV= $13 189.89
EV (Net of 10% Illiquidity Discount) = $11 870.90
Potential Synergies
Synergies Case
kRF = 5.5% -1.25% = 4.25%
Equity Risk Premium 5%
-

Tax Shields
- Non Operating Assets
-

Free Cash Flows
-

Terminal Value

-Tax Shield
-Non Operating Assets
-Cash Flows
-Terminal Value
Sensitivity of Synergy Revenue
How does Growth Rate Affect Terminal Value?
2.5% Growth Rate reflects our expectation of future inflation rates.

Cost of going public is 10%, Enterprise value was adjusted to reflect the discount
Enterprise Value
DCF Model
Expected
Base
PV of Non Operating Assets
Historic P/E multiple of 19.1x
Equity in earnings of affiliates
PV = $1719.23
The average industry EBITDA multiple is 9.17x which gives AirThread a value of approximately $10,322.98 which is in line with DCF estimated values.
Suggested Airthread Purchase Price?
$6,951.52
< $10,322.98 > $
11,870.90
A purchase offer of approximately $10,322.98 should be near intrinsic value based on both DCF and market multiple valuations
Effect of Illiquidity Discount on Enterprise Value
Full transcript