Develop a projection of debt-free FCF for AirThread using the information provided in the case.
Estimate a terminal value considering both the GG model and an exit EBITDA approach. Explain how you calculated g for the GGM. Also explain your final choice of terminal value.
Develop a WACC for the acquisition. Assume an industry average D/E ratio. Do not use a private company discount as discussed on page 7. Calculate the value of Airthread operating assets based on the above with and without synergies. Add the value of excess cash, securities, investments ( non-operating assets) to arrive at a total value of the firm. Subtract from this amount the anticipated debt to arrive at a value of equity.
The analysis above suffers from the fact that it is a highly levered transaction using a constant WACC discount rate, when in fact the leverage is changing rapidly. One solution is to use APV. Another is to use the LBO technique, which is what I want you to do in this case, using the following: -Ignore non operating assets initially
-Assume same debt as case above but that debt is paid down with any positive cash flow each year. Don’t forget to adjust interest payments accordingly. Assume principal payments are at end of each year. - Calculate the amount that can be paid for equity to give equity a 15% IRR over the holding period. Do this for the synergy case only. - Add the value of initial debt and the value of non-operating assets to arrive at the value for the total entity under this approach.
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