AirThread Connections

J. Zhang Consulting: Mohammad Alkhamis, Marci McCall, Lindsay Ramirez, Sarah Spring, Mavis Yu

ACC

Review of AirThread Acquisition

• Opportunity to acquire AirThread Connections

• Base-Case Valuation of AirThread Connections:

What our competitor’s will be willing to pay

Value of AirThread Connections “as-is”

• Upside Valuation of AirThread Connections:

AirThread has strategic ﬁt with current ACC operations Potential synergies for future service offerings

• Recommendation:

Purchase AirThread Connections for amount between

$8.162 B and $13.525 B.

ACC

Outline of Valuation Steps

• Base-Case Valuation of AirThread Connections:

Calculate the present value of free cash ﬂows

Project the terminal value of ATC’s operations

Calculate the present value of the interest tax subsidy Estimate value of non-operating assets

Determine private company discount, if any

Proceed with ﬁnal valuation and terminal value calculation • Upside Valuation of AirThread Connections:

Calculate the present value of free cash ﬂows with synergies Incorporate data from Steps 2 – 5 as seen above

Proceed with ﬁnal valuation and terminal value calculation

ACC

Adjusted Present Value

• Used Adjusted Present Value (APV) valuation method

• Value AirThread assuming 100% equity ﬁnancing

• Avoids calculating debt-to-equity ratio for consecutive years • Use “Return on Assets” to discount 2008 – 2012 cash ﬂows • Return on Assets = 7.82%

ACC

Base-Case Operating FCFs

• Total Present Value of Unlevered Cash Flows 2008 – 2012: $1.272 B

Excludes terminal value

ACC

Calculating Terminal Value

• Common Assumption:

Future cash ﬂows look like the last FCF, times a growth factor • Using Weighted-Average Cost of Capital (WACC) we discount all perpetual future cash ﬂows

• Terminal Value of Perpetual Future Cash Flows:

$6.322 B

ACC

Projected Growth Rate

• U.S. Department of Commerce – Bureau of Economic Analysis U.S. Gross Domestic Product data from 1930 onward

Tables show percent Δ from preceding periods

• Decided on period from 1976 – 2006

Three most recent decades to capture trends

Will use 30-year average percent Δ rate in nominal terms • 30-year nominal GDP % Δ = + 7.28% (Growth Rate Upper Bound) • 30-year real GDP % Δ = + 3.33%

• 30-year inﬂation = + 0.91% (Growth Rate Lower Bound) (1 + Rnom) = (1 + Rreal)*(1 + i)

• Projected Future Growth Rate of AirThread = 3.50%

ACC

Weighted Average Cost of Capital

• Use a Market Multiples Method Approach:

Debt / Value = 29% ; Equity / Value = 71%

βequity= 0.90 (assuming a portfolio of companies)

• Using CAPM Requity = 8.77% , Rdebt = 5.50% , Rasset = 7.82% • Weighted Average Cost of Capital Equation (WACC) = 7.19% • Terminal Value of Perpetual Future Cash Flows:

$6.322

ACC

Interest Tax Subsidy

• Assumption:

Debt is ﬁve times (5x) EBITDA

• Using a rate between Rdebt and Rasset we discount the interest payments.

• Here, debt does not have a signiﬁcant impact on AirThread’s value • Value of Interest Tax Subsidy = $278 M

ACC

Value of Non-Operating Assets

• AirThread Income Statement shows “Equity in Earnings of Afﬁliates” • Assumption:

ATC investments are within wireless communications industry

• Calculated weight-based P/E ratio for comparable companies • Valuation: $90M “Equity in Earnings of Afﬁliates” * 19.22 P/E Ratio • Value of AirThread Non-Operating Assets = $1.730 B

ACC

Base-Case Valuation Results

Item

Unlevered Operating FCFs (w/o Terminal Value)

Interest Tax Subsidy

Base Value

($Millions)

1,272

278

Terminal Value

6,322

Value of Non-Operating Assets

1,730

Total Value before Private Company Discount

9,603

Private Company Discount (15%)

(1,440)

Total Base-Case Value of AirThread Connections

$8,162...