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ARCH COMMUNICATION INC.

BF-2 CASE STUDY





Prepared by:
Kamran Ul Haque
Sheikh Salman Noor
Salman Sadruddin
Sarmad Ahmed Khan


As we know that,
EV/EBITDA = (1-t) x [1-(Net Investment / EBITDA)] / WACC g
From Exhibit 2 following calculations have been done to find the value of g.

1. In 2005E Arch Communication CAPEX = $79.5 and depreciation is significantly higher at
$118.6M.
2. Based on forecast EV/EBITDA of 10, the required terminal growth rate is approximately 13.85%.
However, when we evaluated Arch Communication, underlying growth in Revenues between
1995 and 2005 we found the growth at the point of the terminal value calculation in 2005 to be
only 2.90%.
Pager Units Year End Revenue per Unit Total Revenue Change in Revenue%
1995 2,006,000 11.00 22,066,000.00
1996E 3,121,000 8.95 27,932,950.00 26.59
1997E 3,826,000 8.29 31,717,540.00 13.55
1998E 4,667,720 7.88 36,781,633.60 15.97
1999E 5,507,910 7.48 41,199,166.80 12.01
2000E 6,334,096 7.19 45,542,150.24 10.54
2001E 7,157,529 6.97 49,887,977.13 9.54
2002E 7,944,857 6.76 53,707,233.32 7.66
2003E 8,659,894 6.63 57,415,097.22 6.90
2004E 9,266,086 6.49 60,136,898.14 4.74
2005E 9,729,391 6.36 61,878,926.76 2.90

3. Net Investment / EBITDA has decreased dramatically by 2005. In an industry reliant on
technology investment this level of investment appears very low which further questions the
terminal growth rate.


Tax Rate
0.4
WACC
13.9
1-T
Net Inv.
(CAPEX) EBITDA CAPEX /EBITDA WACC EV/EBIDTA g=WACC-((1-t)(1-(CAPEX/EBITDA))*EBITDA)/EV
1995 0.6 446.8 47.2 9.466101695 13.9 14.3 14.25522105
1996 0.6 428.8 102.4 4.1875 13.9 18.9 14.00119048
1997E 0.6 111.7 135.9 0.821927888 13.9 12.9 13.89171758
2002E 0.6 108.4 283.9 0.381824586 13.9 10.0 13.86
2003E 0.6 100.2 312.7 0.320434922 13.9 10.0 13.85
2004E 0.6 90.4 337.5 0.267851852 13.9 9.3 13.85
2005E 0.6 79.5 356.8 0.222813901 13.9 12.0 13.86

Reviewing the EV / EBITDA multiples of Arch Communication competitors (assessment based on risk,
growth and cash flow characteristics) in the paging sector, the range of EV / EBITDA in 1997 is between
9.3 and 12.0. We have substituted the competitors EV / EBITDA values above and found that the growth
rate does not change significantly from 13.85%
Competitor (EV/EBITDA)
MetroCall MobileMedia PageNet Average
1994 15.8 14.4 21.8 17.3
1995 11.0 27.8 16.6 18.47
1996 11.4 11.0 13.6 12.00
1997 9.3 10.0 12.0 10.43

In conclusion, the use of EV / EBITDA multiple significantly overestimates the growth factor for the
calculation of the terminal value. We have therefore re-calculated the terminal value using a growing
perpetuity.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
EBITDA

102 136 171 198 226 255 284 313 338 357
D & A

156 196 255 270 279 287 218 171 125 119
INT.

78 96 101 106 108 108 104 96 83 65
CAPEX

429 112 115 114 114 113 108 100 90 80
(Pre Interest) FCF

-326 24 57 84 111 143 176 213 247 277
TOTAL ASSETS 785 1058 974 834 678 514 340 230 160 125 86
TERMINAL VALUE (EBITDA)



3,568
Implied g = 6.13%
PV (EBITDA X 10)

$1106
PV (FCF)

$275
FIRM VALUE

$1381
DEBT

$858
PCS

$6.5
NET VALUE

$530
PRICE (PER SHARE)

$26.35

NET VALUE NET VALUE PER SHARE
DCF & Growing perpetuity method of calculating the terminal value $ 530 $ 26.35
Analyst Valuation of Arch Communication $ 962.1 $ 47.0
CONSLUSION:
Analyst Valuation and the EV / Multiple valuations rely on the EV / Multiple ratio, and thus a growth rate
of 13.85 which results in significantly over valuing Arch Communication. The valuation using growing
perpetuity for the terminal value provides the most realistic valuation of 26.35 per share in 1996.
We value Arch Communication at $26.35 per share.

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