Valuation of Airthread Connections

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Introduction This is a takeover report which will analyse American Cable Communications (ACC) decision-making of acquisition. ACC is one of the largest cable operators in the US by the end of 2007. The company provided video, internet and landline telephone service, but it did not have any kind of wireless offering. The cable industry has been developing enormously over the last decades because of the advances in technology, changes in regulation and shifts in competitive dynamics. In order to gain competitive advantage in the long run, ACC needs to become an aggressive acquirer. Air Thread Connections (ATC) is one of the options available to be acquired because of ATC owns greater technical resources in wireless service, and it is one of the largest regional wireless companies in the US. This report will analyse the initial valuation of ATC based on discounted cash flow analysis as well as market multiples approach, based on the analyse, it will decide whether the acquisition should be made or not.

Body The valuation of Air Thread Connections can be divided into two separate projection periods. During the first five years from 2008 to 2012, ACC borrowed 3758 million to acquire ATC by LBO with 5.5% of an annual interest rate payable monthly over and over 10 years. But at the end of year 5, it will make a bullet payment to repay all remaining debtor, in order to render ATC’s D/E ratio closer to the industry average. Which is good for ATC due to the deceasing debt then decreased the financial risk. Therefore, in the period of 2008 to 2012, ATC’s debt level is predetermined so that APV valuation method is suitable for this period. Because of the interest tax shield, an APV method needs to separate the valuation into two parts: unleveraged project and the interest tax shield. If ATC cannot maintain a constant debtto-equity ratio during 2008-2012, APV method is more suitable than the WACC. After 2012, ACC will make a bullet payment to get a constant D/E ratio...
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