Valuation of AirThread Connections

Base 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 wasnt 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: ACCs 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

Firm value (applying a 15% private company discount)

11,290

Using DCF

8,023

Using EV/EBITDA Multiple

Terminal value
Long term growth rate

9,597
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

DCF

D/E
0.48
0.48
0.48
0.48
0.25

0.92
0.92
0.91
0.91
0.33

Beta
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
40%
40%
40%
40%
40%

COD
3.30%
3.30%
3.30%
3.30%
3.30%

WACC
7.1%
7.1%
7.1%
7.1%
7.7%

Historical Year Ended

2005
2006
2007
Service revenue
% growth
Equipment revenue
% of service revenue
Total Revenue
% yoy growth rate
System operating
expenses
% of service revenue
COGS
Equipment COGS
SG&A
% of total revenue
EBIT (Operating
Income)
% of revenue
EBIT(1-t)
Tax rate
Capex
% of total revenue
D&A
% of capex
Net capex
Accounts receivable
Inventory
Prepaid Expenses
Accounts payable
Deffered Service
revenue
Accrued Liabilities
Non cash WC
Non cash WC
% of revenue

2827.0

Projected Year Ending

2009
2010

2008

2011

2012

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%

203.7

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

n/a

14.6%

13.6%

18.2%

16.0%

14.1%

12.3%

8.4%

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%

1217.7

1399.6

1555.6

1803.6

2056.2

2313.2

2544.5

2722.6

40.2%

40.3%

39.4%

38.7%

38.0%

37.5%

36.7%

36.3%

206.9
5.2%
124.1
40%

309.4
8.9%
185.6
40%

451.1
14.9%
270.7
40%

490.1

555.5

582.3

561.9
12.0%
337.1
40%
653.1
14.0%
705.2
108.0%

745.0
13.8%
447.0
40%
757.3
14.0%
804.0
106.2%

970.4
15.7%
582.2
40%
925.5
15.0%
867.4
93.7%

1267.7
18.3%
760.6
40%
1060.5
15.3%
922.4
87.0%

1504.4
20.0%
902.6
40%
1164.1
15.5%
952.9
81.9%

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

111.4
14.19x
42.9
5.47x
78.8

123.3
13.81x
47.8
5.44x
133.6
54.8

143.4
14.03x
59.2
6.10x
114.7
-18.9
0.48%

(52)

1.58%

(47)

58

138

211

485.5
41.67x
135.0

553.5
41.67x
153.8

622.6
41.67x
173.1

684.9
41.67x
190.4

732.9
41.67x
203.8

154.36x
56.6
1.4%
405.1
35.54x

154.36x
64.4
1.4%
460.5
35.54x

154.36x
71.8
1.4%
513.3
35.54x

154.36x
78.2
1.4%
559.1
35.54x

154.36x
82.9
1.4%
592.9
35.54x

163.2
14.01x
78.1
6.85x
30.7
-84.0

186.1
14.01x
88.8
6.85x
36.4
5.7

209.3
14.01x
98.9
6.85x
45.9
9.5

230.3
14.01x
107.8
6.85x
56.3
10.4

246.4
14.01x
114.3
6.85x
65.9
9.5

-1.80%

0.10%

0.15%

0.15%

0.13%

Free Cash Flow

% of revenue
Year
Present Value Factor

473.21
10.1%
1
1.071

488.04

PV of Free Cash Flow

*all figures in $millions

442

426

514.61

9.0%
2
1.146

612.12

8.3%
3
1.227
419

681.85

8.8%
4
1.314
466

9.1%
5
1.446
472