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Valuation methodology

ACC is using LBO approach for its acquisitions and desires to m


acquisition policy for its latest target AirThread Connections (AC). According to this approac
financed significantly by debt which will obviously breach leverage ratios maintained by Ai
ACCs plans to bring down the leverage ratio to industry standards steadily to sustainable le
the years 2008-2012.
Owing to the uneven capital structures between 2008 and 2012, it will be prudent not to d
value the target but value the target using APV. Additionally, WACC computation might be
since an adjustment discountrate each year the capital structures change. Assuming that
de-lever after 2012, WACC valuation will be applied to determine the terminal value.factor
shields in its calculation and in the case of this acquisition, the Interest tax shield will be in
because of year on year disbursement of the debt.
Terminal value wi
by : After 5-years, a bullet payment to discharge the debt will be made, and hence the term
be estimated using WACC

AIRTHREAD ACQUISITION

Comparable Companies:
Universal Mobile
Neuberger Wireless
Agile Connections
Big Country Communications
Rocky Mountain Wireless
Average

Equity
Market Value

Net
Debt

Debt/
Value

Debt/
Equity

118,497

69,130

37%

58%

189,470

79,351

30%

42%

21,079

5,080

19%

24%

26,285

8,335

24%

32%

7,360

3,268

31%

44%

28.1%

40.1%

Debt/
Value
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
28.1%
35.0%
40.0%
45.0%
47.0%
50.0%

Debt/
Equity
0.0%
5.3%
11.1%
17.6%
25.0%
33.3%
39.1%
53.8%
66.7%
81.8%
88.7%
100.0%

Asset
Beta
0.82
0.82
0.82
0.82
0.82
0.82
0.82
0.82
0.82
0.82
0.82
0.82

Equity
Beta
0.82
0.86
0.91
0.96
1.02
1.09
1.13
1.25
1.36
1.48
1.54
1.63

Cost of
Equity
8.33%
8.54%
8.78%
9.05%
9.35%
9.69%
9.92%
10.52%
11.05%
11.66%
11.94%
12.41%

Equity
Beta
0.86
0.89
1.17
0.97
1.13

1.00

Asset
Beta
0.64
0.71
1.02
0.81
0.89
0.82

Assumptions:
Marginal Tax Rate
Debt Beta

40.0%
0.00

Market Risk Premium


Risk-Free Rate

5.00%
4.25%

Cost of Debt

5.50%

Cost of
Debt
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%

WACC
8.33%
8.28%
8.23%
8.19%
8.14%
8.09%
8.06%
8.00%
7.95%
7.90%
7.88%
7.85%

Cost of Capital

Average industry EBIT


Average Industry P/E

5531.6
0

AIRTHREAD ACQUISITION

Operating Results:
Service Revenue
Plus: Equipment Sales
Plus: Synergy Related Business Revenue
Total Revenue
Less: System Operating Expenses
Plus: Backhaul Synergy Savings
Less: Cost of Equipment Sold

Intermediate Operating Cash Flows

2008
4,194.3
314.8
0.0
4,509.1
838.9
0.0
755.5

2009
4,781.5
358.8
0.0
5,140.4
956.3
0.0
861.2

2010
5,379.2
403.7
0.0
5,782.9
1,075.8
0.0
968.9

Less: Selling, General & Administrative


EBITDA
Less: Depreciation & Amortization
EBIT
Tax @40%
Un-Levered Free Cash Flow:
NOPAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
PV Intermediate FCF

8.33%

Service Revenue Growth


Equipment Sales/Service Revenue
Total Revenue Growth
Wireless Service Gross Profit Margin
Equipment Sales Gross Profit
Selling, General & Administrative
EBITDA
Depreciation & Amortization
EBIT
Effective Tax Rate
Cap-x/Revenue

1,255.3

1,803.6
1,111.1
705.2
405.9
162.4

2,056.2
1,266.7
804.0
462.7
185.1

2,313.2
1,425.0
867.4
557.6
223.0

243.5
705.2
25.9
631.3
291.6

277.6
804.0
19.7
719.7
342.3

334.6
867.4
20.0
867.4
314.5

269.2

291.7

247.4

Operating Margins:
14.0%
14.0%
7.5%
7.5%
14.3%
14.0%
80.0%
80.0%
-140.0%
-140.0%
40.0%
40.0%
24.6%
24.6%
15.6%
15.6%
9.0%
9.0%
40.0%
40.0%
14.0%
14.0%

12.5%
7.5%
12.5%
80.0%
-140.0%
40.0%
24.6%
15.0%
9.6%
40.0%
15.0%

perating Cash Flows

2011
5,917.2
444.1
0.0
6,361.2
1,183.4
0.0
1,065.8

2012
6,331.4
475.2
0.0
6,806.5
1,266.3
0.0
1,140.4

2,544.5
1,567.5
922.4
645.2
258.1

2,722.6
1,677.3
952.9
724.4
289.7

387.1
922.4
18.0
970.1
321.4

434.6
952.9
13.9
1,055.0
318.6

233.4

213.6

10.0%
7.5%
10.0%
80.0%
-140.0%
40.0%
24.6%
14.5%
10.1%
40.0%
15.3%

7.0%
7.5%
7.0%
80.0%
-140.0%
40.0%
24.6%
14.0%
10.6%
40.0%
15.5%

Based on projected cashflows excluding the benefits of Synergy

Changes in Working Capital:


Accounts Receivable
Plus: Inventory
Plus: Prepaid Expenses
Less: Deferred Revenue
Less: Accounts Payable
Less: Accrued Liabilities
Net Working Capital
Increase in NWC

2007

2008

2009

2010

435.5
101.0
41.6
143.4
260.8
59.2
114.6
0

521.9
135.0
46.9
163.2
335.5
64.7
140.4
25.8

595.0
153.9
53.5
186.1
382.4
73.7
160.1
19.7

669.4
173.1
60.1
209.3
430.2
82.9
180.1
20.0

2011

2012

736.3
190.4
66.2
230.3
473.2
91.2
198.1
18.0

787.9
203.7
70.8
246.4
506.4
97.6
212.0
13.9

AIRTHREAD ACQUISITION

Interest Tax Shields:


Interest Expense
Tax Rate
Tax Shield
Interest Rate
PV of Intermediate Tax Shields

2008
199.5
40.0%
79.8

2009
183.1
40.0%
73.2

2010
165.8
40.0%
66.3

75.6

65.8

56.5

5.50%
284.8

2011
147.6
40.0%
59.0

2012
128.3
40.0%
51.3

47.7

39.3

Intermediate Tax Shields

AIRTHREAD ACQUISITION
Terminal Value With Lon-Term D/V of 28.1%

Un-Levered Free Cash Flows:


NOPAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
PV of FCF

8.33%

1,255.3

2008
243.5
705.2
25.9
631.3
291.6

2009
277.6
804.0
19.7
719.7
342.3

269.2

291.7

Interest Tax Shields


PV of Interest Tax Shields
Total Intermediate Term Value
TV Growth Rate
TV WACC Cash Flow
Value of Operating Assets
Value of Non-Operating Assets
Total Enterprise Value

284.8
1,540.1
2.9%
4,286.7
5,826.8
0.0
5,826.8

79.8
75.6

73.2
65.8

2010
334.6
867.4
20.0
867.4
314.5

2011
387.1
922.4
18.0
970.1
321.4

2012
434.6
952.9
13.9
1,055.0
318.6

247.4

233.4

213.6

66.3
56.5

59.0
47.7

51.3
39.3

6,316.3

Adjusted Present Value


Excludes Synergy

AIRTHREAD ACQUISITION

Long-Term Growth Rate:


NOPAT
Invested Capital
ROC
Net Reinvestment
NOPAT
Reinvestment Rate

estmd from without synergy CF


2012
434.6
4,039.5
10.8%
116.0
434.6
26.7%

Est. EBIT Growth Rate

2.9%

Growth Rate

AIRTHREAD ACQUISITION

Date:
1/31/2008
2/28/2008
3/31/2008
4/30/2008
5/31/2008
6/30/2008

Payment
41
41
41
41
41
41
41

Annual
Interest
5.5%
17
17
17
17
17
17

Principal
24
24
24
24
24
24

Balance
3,758
3,734
3,711
3,687
3,663
3,639
3,615

7/31/2008
8/31/2008
9/30/2008
10/31/2008
11/30/2008
12/31/2008
1/31/2009
2/28/2009
3/31/2009
4/30/2009
5/31/2009
6/30/2009
7/31/2009
8/31/2009
9/30/2009
10/31/2009
11/30/2009
12/31/2009
1/31/2010
2/28/2010
3/31/2010
4/30/2010
5/31/2010
6/30/2010
7/31/2010
8/31/2010
9/30/2010
10/31/2010
11/30/2010
12/31/2010
1/31/2011
2/28/2011
3/31/2011
4/30/2011
5/31/2011

41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41

17
16
16
16
16
16
16
16
16
16
15
15
15
15
15
15
15
15
14
14
14
14
14
14
14
14
14
13
13
13
13
13
13
13
12

24
24
24
25
25
25
25
25
25
25
25
25
26
26
26
26
26
26
26
26
27
27
27
27
27
27
27
27
28
28
28
28
28
28
28

3,591
3,567
3,542
3,518
3,493
3,468
3,443
3,418
3,393
3,368
3,343
3,317
3,292
3,266
3,240
3,214
3,188
3,162
3,136
3,109
3,083
3,056
3,029
3,002
2,975
2,948
2,921
2,893
2,866
2,838
2,811
2,783
2,755
2,726
2,698

Amortization
Period
120
1
2
3
4
5
6

Date:
6/30/2011
7/31/2011
8/31/2011
9/30/2011
10/31/2011
11/30/2011

Payment
41
40.78
40.78
40.78
40.78
40.78
40.78

Annual
Interest
5.50%
12.37
12.24
12.11
11.97
11.84
11.71

7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41

12/31/2011
1/31/2012
2/28/2012
3/31/2012
4/30/2012
5/31/2012
6/30/2012
7/31/2012
8/31/2012
9/30/2012
10/31/2012
11/30/2012
12/31/2012

40.78
40.78
40.78
40.78
40.78
40.78
40.78
40.78
40.78
40.78
40.78
40.78
2,176.29

11.58
11.44
11.31
11.17
11.04
10.90
10.76
10.63
10.49
10.35
10.21
10.07
9.93

Amortization Schedule

Principal
28.41
28.54
28.67
28.80
28.94
29.07

Balance
2,698
2,669.79
2,641.25
2,612.57
2,583.77
2,554.83
2,525.76

Amortization
Period
84
42
43
44
45
46
47

Interest Expense per Annum (


2008
2009
199.45
183.10

Principal payment per Ann


289.90
306.25
After-Tax Interest Expense per
119.7
109.9

29.20
29.34
29.47
29.61
29.74
29.88
30.02
30.15
30.29
30.43
30.57
30.71
2,166.36

2,496.56
2,467.22
2,437.75
2,408.14
2,378.40
2,348.52
2,318.51
2,288.36
2,258.07
2,227.64
2,197.07
2,166.36
0.00

48
49
50
51
52
53
54
55
56
57
58
59
60

Amortization Schedule

st Expense per Annum ($mn)


2010
165.83

ncipal payment per Annum


323.52
ax Interest Expense per Annum
99.5

2011
147.58

2012
128.30

341.77

2,496.56

88.5

77.0