Valuation of AirThread Connections
(Shaojin Ding/ Jin Wang/ Wenqi Gu/
Shijia Wu/ Tongtong Yin/ Canran Xie)
Given the background of ACC and AirThread, do you think the acquisition is a good idea? Briefly explain your answer. Yes. First, American Cable Communication (ACC) and AirThread could help each other compete in the industry that was moving more and more bundled service offerings. Second, the acquisition could help both companies expand into the business market. Third, ACC was in a unique position to add value to AirThread’s operations because the acquisition could save AirThread more than 20% in backhaul costs. The reasons above make us believe that the synergy is positive and the acquisition is a good idea.
Based on the projected cash flow information provided in the case, what is the stand- alone value of AirThread? Show the cash flow forecasts, discount rate, and your valuation model.
(Hint: pay attention to the Working Capital Assumptions provided in Ex 1. For example, Accounts Receivable 41.67× means on average it takes 41.67 days to receive payment from customers. ) According to Jennifer Zhang’s analysis, we divide the stand-alone value of AirThread into two parts—operating value and non-operating value-- and then add the two parts together to get the result. First, when we calculate the operating value, we use the DCF model. We pick the risk-free rate from historical annual returns investments on T-bonds from 1928 to 2007 and use the geometric average, which is 5.4%, and collect the 5% equity market risk premium from the casebook. We assume the equity as the average equity of the industry, which is 0.96 (but we exclude one company that is Agile Connections, because the net income of this company is negative), and then use the Harris and Pringle Method to levered (=1.467) because we assume that the D/E ratio (=52.5%) does not change. According to the CAPM Model, we get the cost of equity (=13%). We get the cost of debt( =5.50%) by using Jennifer’s estimation. And we get the tax rate, which is 40%. Finally, we get the WACC, which is 9.49%. (Exhibit 1) We use the cash flows from Jennifer’s projection for 2008 to 2012, and transfer the multiples of working capital assumptions to numbers. ( Accounts receivable is based on total revenue. Days Sales Equip.Rev is based on equipment revenue. And Days payable, Deferred Service Revenue and Days Accrued Liabilities are based on total cash operating expenses.) (Exhibit 2) According to the casebook, the reinvestment rate is defined as capital expenditures plus investments in working capital minus depreciation divided by net operating profit after taxes, and the ROC (return on capital) is defined as net operating profit after taxes divided by the book value of equity plus debt. We assume the debt and equity from 2008 to 2012 are the average long-term debt and common stock & Paid-In Capital of 2005 to 2007. And then we use the to get the revenue constant growth rate (=1.61%). (We assume the negative growth rate in 2009 is abnormal, so we remove this rate from our calculation.) (Exhibit 3) Using all the data above, we get the operating value through DCF model, which is $4,401.16m. Next, we use the market multiple approach to calculate the non-operating value part. We choose the weighted average P/E ratio of comparable firms (exclude Agile Connection too) as the multiple (=19.22). And we use the equity in earnings of affiliates of AirThread to multiple 19.22 and then get the non-operating value, which is $1,730.22m. (Exhibit 4) Finally, we add the operating value, which is $4,401.16m, and the non-operating value, which is $1,730.22m, and then get the stand-alone value of AirThread, which is $6,131.38m.
Given the projected synergy and financing method, what is the value of AirThread as a merger target? What methodology should be used to value AirThread, given the characteristics of the expected cash flows after the merger? (Hint:...
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