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 delever 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 companys averages.
Equity

Net

Debt/

Debt/

Equity

Asset

Debt

Value

Equity

Beta

Beta

Universal Mobile

Market
Value
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

Comparable Companies:

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:
Service Revenue
Plus: Equipment Sales
Plus: Synergy Related Business Revenue
Total Revenue
Less: System Operating Expenses

2008

2009

2010

2011

2012

4 194,3

4 781,5

5 379,2

5 917,2

6 331,4

314,8

358,8

403,7

444,1

475,2

0,0

0,0

0,0

0,0

0,0

4 509,1
838,9

5 140,4
956,3

5 782,9
1 075,8

6 361,2
1 183,4

6 806,5
1 266,3

Plus: Backhaul Synergy Savings

0,0

Less: Cost of Equipment Sold

0,0

0,0

0,0

0,0

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
Less: Depreciation & Amortization

1 111,1
705,2

1 266,7
804,0

1 425,0
867,4

1 567,5
922,4

1 677,3
952,9

405,9
162,4

462,7
185,1

557,6
223,0

645,2
258,1

724,4
289,7

NOPAT
Plus: Depreciation & Amortization

243,5
705,2

277,6
804,0

334,6
867,4

387,1
922,4

434,6
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

269,2

291,7

247,4

233,4

213,6

EBIT
Tax @40%
Un-Levered Free Cash Flow:

PV Intermediate FCF

1.3.

at 8,33%

: 1 255,3

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
Plus: Depreciation & Amortization

243,5
705,2

277,6
804,0

334,6
867,4

387,1
922,4

434,6
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

269,2

291,7

247,4

233,4

213,6

79,8

73,2

66,3

59,0

51,3

75,6

65,8

56,5

47,6

39,3

PV of FCF

8,33%

1 255,3

Interest Tax Shields

PV of Interest Tax Shields

284,8

Total Intermediate Term Value

TV Growth Rate
Terminal Value WACC Cash Flow

1.4.

1 540,1
2,9%
4 286,4

Value of Non-Operating Assets

6 315,9

Based on the above calculations and the data from the Exhibit 7, we come to the value of non-operating assets:
1717,7

Total Intermediate Term Value

TV Growth Rate

1 540,1
2,9%

TV WACC Cash Flow

4 286,4

Value of Operating Assets

5 826,5

Value of Non-Operating Assets

1 717,7

Total Enterprise Value

7 544,1

2. Question 2
2.1.

Estimation of long-term growth

For estimating the long term growth rate of Airthread, we compute the function of return on capital and the
reinvested capital for estimation with anticipated synergy (revenue growth and cost reduction) and estimation
without synergy for 2012.
Return of Capital was computed as Net Operating profit after tax divided by invested capital (calculated as
estimated total equity plus long term debt minus minority interest) which gives ROC of (16.4% with synergy
and 10.8% without).
Reinvestment rate was computed as Net investment (CAPEX plus change in networking capital minus
depreciation) divided by NOPAT resulting in (20.6% with synergy and 26.7% without).
Hence, long term growth rate for both scenarios are 3.4% with synergy and 2.9% without synergy (see table
below).

To estimate Airthread Terminal value we first forecasted the Free Cash flow and also estimate Present value to
obtain unlevered enterprise value.

Un-Levered Free Cash Flows:

2008

2009

2010

2011

2012

NOPAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow

243.5
705.2
25.9
631.3
291.6

277.6
804.0
19.7
719.7
342.3

334.6
867.4
20.0
867.4
314.5

387.1
922.4
18.0
970.1
321.4

434.6
952.9
13.9
1,055.0
318.6

269.2

291.7

247.4

233.4

213.6

PV of FCF

8.33%

1,255.3

We then determine the interest tax shield and the present value of the tax shield

Estimated the terminal value without the synergy, we computed the perpetuity growth of un-levered FCF from
period 2012 (318.6) using the estimated growth of 2.9% using WACC of 8.06%.
Terminal value =

318.6*(1+2.9%)/(8.06-2.9)= $6315.9 m

PV Terminal
value =

6315.9 /(1-8.06)^5 =$4,286.4

The present value of the value of Airthread going concern value should include the following
1.

Baseline business value 2008-2012 $ 1,255.3

2.

Present value of terminal value as calculated above $ 4,286.4

3.

Present value of interest tax shield $ 284.8

4. Estimation of value of non-operating assets using market multiple average P/E ratio 19.09*& 90 to arrive
at $ 1717.7
PV of Airthread going concern is
$ 7,544.1

3. Question 3
The essential synergies anticipated are backhaul savings and increase in business revenue. The total value of
airthread excluding the synergy is given shown below on left.
Taking into account the aforementioned synergies calculated in our NOPAT, the the total value of Airthread
including synegies is shown below

Sensitivity Analysis
1.

Private company discount which is basically discount rate due to liquidity of private company

2.

Growth rate used for terminal value calculation

3.

Potential synergies effect