Air Thread Reference

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Valuation of!
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...
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