1. What does it mean if a company “trades at a discount”? Is Amtelecom Group Inc. (AGI) really trading at a discount?
If the market value of a stock is lower than its intrinsic value, this stock is defined as “trades at a discount”. To figure out whether AGI stock is traded at a discount to comparable companies, as its management believed, we can simply apply multiple which comes from the average multiple of its comparable companies. Considering fluctuation of future after-tax earnings caused by the change in capital structure, we prefer to use TEV/EBITDA multiple in this case. Amtelecom Group consists of two lines of business which has to been taken into consideration. We separately calculate the value of both companies and their summation. In this way, we get a relative conservative outcome which indicates the Enterprise Value of AGI is 56.9 million (Note 1). As it is mentioned in the case that AGI’s current stock price implied a TEV of 53.7 million, the stock is really traded at a discount.
2. Do you agree with AGI’s decision to break up the company? To sell the communications business rather than the courier business？
We agree the decision “break up” made by AGI. As well as this, we support the specific decision to sell the communications business. As being mentioned in the context, the board has realized the business combination was sub-optimal. Although we cannot simply come into a conclusion that breaking up the company is the best choice for the board, it is obvious selling some business to refund the company is the easiest action the board can take. According to Exhibit 3b and Exhibit 6a, ICS is incurring losses at this moment. Apparently, it is not wise to sell ICS courtier in this case because the aim of the board is to maximize the value of shareholders. Referring to Exhibit 4, sale of courier services takes up 80% of the total sale, but only 18.6% EBITDA realized. ICS’s business revenue is remarkable compared with FedEx and UPS’ revenue (Exhibit 10) which indicates that ICS would have a potential to be profitable in the future. Exhibit 3b shows that high expenditure payment is a crucial reason of today’s loss. Board of AGI has already noticed this problem and shifted value-enhancing efforts inwards, including the action to close the U.S. courier operation to reduce its oversea business expense. By selling Amtelecom Communications, the followed three conditions are also perfectly met. 1) Retirement of current bank debt in full;
2) Payment of reasonable dividend to AGI shareholders;
3) The courier business had to be left with sufficient capital to stay in business.
3. Briefly analyze the communications industry and identify key success factors. Briefly analyze the strengths and weaknesses of Amtelecom Communications.
3.1 Communication industry & key success factors
Profile: Since 1997, the industry had grown at a compound rate of 12.9 percent and in 2001 the size of the industry was $23.9 billion (2.5 percent of GDP). The industry is still in the high-speed growth period and will not be in maturity in next few years. Incumbents: There are two types of ILECs in this industry: former Stentor ILEC’s and Independent ILECs. The former ones are subject to competition in all markets that they severed while the latter provided local phone service on a monopoly basis as competition in their markets was not permitted. New entrants: New carriers can operate in the Former Stentor ILEC territories, but in fact the new entrants’ competition was rather limited. These CLECs (competitive local exchange carriers) are competing in the territories of most Independent ILECs, like Sprint Canada Inc., AT&T Canada and GT Inc. Regulation: The Telecommunications Act plays a role to govern the provision of telecommunications services. All carriers are required to seek approval from the CRTC, empowered by the ACT, for service pricing. Key success factors: As an industry relying heavily on...
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