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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.
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
26 285
8 335
24,1%
31,7%
0,97
0,81
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
0,0
0,0
0,0
0,0
0,0
755,5
861,2
968,9
1 065,8
1 140,4
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
25,9
19,7
20,0
18,0
13,9
631,3
719,7
867,4
970,1
1 055,0
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
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
25,9
19,7
20,0
18,0
13,9
631,3
719,7
867,4
970,1
1 055,0
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
284,8
1.4.
1 540,1
2,9%
4 286,4
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
1 540,1
2,9%
4 286,4
5 826,5
1 717,7
7 544,1
2. Question 2
2.1.
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.
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 =
The present value of the value of Airthread going concern value should include the following
1.
2.
3.
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.
3.