1. The document presents a case study valuation of Arch Communication Inc using different terminal value calculation methods.
2. Using an EV/EBITDA multiple of 10 and growth rate of 13.85% significantly overvalued the company compared to using a growing perpetuity method.
3. The growing perpetuity method implied a terminal growth rate of 6.13% and valued Arch Communication at $26.35 per share, which was considered the most realistic valuation.
1. The document presents a case study valuation of Arch Communication Inc using different terminal value calculation methods.
2. Using an EV/EBITDA multiple of 10 and growth rate of 13.85% significantly overvalued the company compared to using a growing perpetuity method.
3. The growing perpetuity method implied a terminal growth rate of 6.13% and valued Arch Communication at $26.35 per share, which was considered the most realistic valuation.
1. The document presents a case study valuation of Arch Communication Inc using different terminal value calculation methods.
2. Using an EV/EBITDA multiple of 10 and growth rate of 13.85% significantly overvalued the company compared to using a growing perpetuity method.
3. The growing perpetuity method implied a terminal growth rate of 6.13% and valued Arch Communication at $26.35 per share, which was considered the most realistic valuation.
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.
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
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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