11Valuation MethodologyACC Is Using LBO Approach

Topics: Free cash flow, Discounted cash flow, Net present value Pages: 7 (796 words) Published: December 6, 2014
1.1.          Valuation methodology
ACC is using LBO approach for its acquisitions and desires to maintain this acquisition policy for its latest target AirThread Connections (AC). According to this approach, AC will be financed significantly by debt which will obviously breach leverage ratios maintained by Air Thread/ACC. ACCs plans to bring down the leverage ratio to industry standards steadily to sustainable levels between the years 2008-2012. Owing to the uneven capital structures between 2008 and 2012, it will be prudent not to deploy WACC to value the target but value the target using APV. Additionally, WACC computation might be difficult to use since an adjustment discount  rate each year the capital structures change. Assuming that the project will de-lever after 2012, WACC valuation will be applied to determine the terminal value. factors the interest tax shields in its calculation and in the case of this acquisition, the Interest tax shield will be inconsistent because of year on year disbursement of the debt.  Once the debt is brought down to industry sustainable levels, we can estimate the terminal value using the WACC valuation, to estimate the Present Enterprise Value that may be suitable for the proposed acquisition. 1.2.          Cash flows valued for 2008 through 2012 The present value of the UFCF is 1 255,3. Here after the details of how we come to this result. We need to determine the discount rate using the comparable company’s averages.  

 
Equity
Net
Debt/
Debt/
Equity
Asset
Comparable Companies:
Market Value
Debt
Value
Equity
Beta
Beta
Universal Mobile
118 497 
69 130 
36,8%
58,3%
0,86 
0,64 
Neuberger Wireless
189 470 
79 351 
29,5%
41,9%
0,89 
0,71 
Agile Connections
21 079 
5 080 
19,4%
24,1%
1,17 
1,02 
Big Country Communications
26 285 
8 335 
24,1%
31,7%
0,97 
0,81 
Rocky Mountain Wireless
7 360 
3 268 
30,7%
44,4%
1,13 
0,89 
Average
 
72 538 
33 033 
28,1%
39,1%
1,00 
0,82 
 
Re-levering the asset beta on the constant capital structure assumption, Equity Beta = Asset Beta (V/E) i.e., Be = Ba*(1/1-(D/V)). Operating Results:
 
 
2008
2009
2010
2011
2012
Service Revenue
 
 
4 194,3
4 781,5
5 379,2
5 917,2
6 331,4
Plus:  Equipment Sales
 
 
314,8
358,8
403,7
444,1
475,2
Plus:  Synergy Related Business Revenue
0,0
0,0
0,0
0,0
0,0
Total Revenue
 
 
4 509,1
5 140,4
5 782,9
6 361,2
6 806,5
Less:  System Operating Expenses
 
838,9
956,3
1 075,8
1 183,4
1 266,3
Plus:  Backhaul Synergy Savings
 
0,0
0,0
0,0
0,0
0,0
Less:  Cost of Equipment Sold
 
755,5
861,2
968,9
1 065,8
1 140,4
Less:  Selling, General & Administrative
1 803,6
2 056,2
2 313,2
2 544,5
2 722,6
EBITDA
 
 
 
1 111,1
1 266,7
1 425,0
1 567,5
1 677,3
Less:  Depreciation & Amortization
705,2
804,0
867,4
922,4
952,9
EBIT
 
 
 
405,9
462,7
557,6
645,2
724,4
Tax @40%
 
 
162,4
185,1
223,0
258,1
289,7
Un-Levered Free Cash Flow:
 
 
 
 
 
 
NOPAT
 
 
 
243,5
277,6
334,6
387,1
434,6
Plus:  Depreciation & Amortization
705,2
804,0
867,4
922,4
952,9
Less:  Changes in Working Capital
 
25,9
19,7
20,0
18,0
13,9
Less:  Capital Expenditures
 
631,3
719,7
867,4
970,1
1 055,0
Un-Levered Free Cash Flow
 
291,6
342,3
314,5
321,4
318,6
PV Intermediate FCF
at 8,33%
: 1 255,3
269,2
291,7
247,4
233,4
213,6
 
1.3.          Estimated terminal value
After 5-years, a bullet payment to discharge the debt will be made, and hence the terminal value can be estimated using WACC. The terminal value is 4 286,4. Un-Levered Free Cash Flows:
 
2008
2009
2010
2011
2012
NOPAT
 
 
 
243,5
277,6
334,6
387,1
434,6
Plus:  Depreciation & Amortization
 
705,2
804,0
867,4
922,4
952,9
Less:  Changes in Working Capital
 
25,9
19,7
20,0
18,0
13,9
Less:  Capital Expenditures
 
 
631,3
719,7
867,4
970,1
1 055,0
Un-Levered Free Cash Flow
 
 ...
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