Financial strategy for value creation in AirThread Connections

Valuation of AirThread Connection

Fundamental objective of this report is to present valuation of AirThread Connection. "American Cable Communication (ACC) was one the largest cable operators in the United States"(Stafford & Heilprin 2011P 36). In December, 2007, ACC cable systems reached approximately 48.5 millions homes with approximately 24.1 millions video subscribers. The company also enjoyed patronage of 4.6 million landline telephone subscribers and 13.2 millions high speed internet subscribers. The company consolidated revenue in 2007 was $30.9 billion and the net income was $2.6 billions. Presently, ACC offered internet, video and landline telephony, however, the company did not provide wireless offering making the competitors to exploit the gap in the product offering. With the looming competitive threats that ACC was facing because the company did not offer wireless offering, ACC decides to acquire AirThread Connection (ATC) because ACC believed it could achieve a competitive advantage with acquisition of AirThread Connection.

"AirThread Connection (ATC) was one of the regional largest wireless companies in the United States providing service in more than 200 markets in five geographical regions." (Stafford & Heilprin 2011 P. 37). The company revenue was approximately $3.9 billions and the company operating income reached by $400 millions in 2007. However, AirThread had a cost disadvantages because of the stiff competition that the company was facing primarily by the incumbent local exchange carriers (ILEC's). Moreover, AirThread was experiencing slower growth and higher retention costs. Since American Cable Communication was not offering wireless network offering and AirThread was offering wireless service, acquisition of AirThread could assist both companies to grow and expand market base. With acquisition, both companies would enjoy cost advantages and expand markets. Expand into other line of business would assist American Cable Communication to increase cost efficiency as well as increasing network utilization. Typically, there are following potential advantages that both companies could derive from acquisition: (Luenberger, 1998).

Both companies would have ability to bundle service with acquisition.

Ability to expand the market potentials

American Cable Communication would have ability to increase AirThread Connection's operations.

With the valuation of AirThread Connection, the report segregates the potential synergies into various categories.

Potential Synergies

The potential synergies in the valuation of AirThread are as follows:

First, there would be reduction of AirThread backhaul cost, and this is estimated at 20% of the AirThread operation expenses. The AirThread backhaul costs would still require the use of microwave transmission and lease lines in many areas.

Additionally, there would be gradual cost saving and there would be 6% savings in operating costs that has been realized over four years starting from 2009. A more difficult set of synergies were to evaluate the increase in revenue that result from bundling and cross selling with American Cable Communication service. This will make both companies to attract business customers since both companies could now offer wireless service internet service and wire line to customers.

Valuation

The report employs Discounted Cash Flows (DCF) and NPV for the evaluation of AirThread Connection.( Ross, Westerfield, et al., 2003).

The Exhibit 1 is used for the AirThread projection, and the projection will allow the report to understand the AirThread Total Revenue, EBIT, EBITDA and the Unlevered Net Income. The information would assist the report to compute Discounted Cash Flows from 2008 fiscal year to 2012 fiscal year. Additionally, the report uses Depreciation & Amortization, Capital Expenditures as well as assumption that have been established in AirThread Connections Exhibit 1.

AirThread Projection (Millions)

Revenue Projections

2008

2009

2010

2011

2012

Service Revenue

$4, 194.34

$4,781.51

$5,379.23

$5,917.22

$6,331.43

Sales Equipment

$314.78

$358.83

$403.71

$444.09

$475.18

Total Revenue

$4,509.12

$5,140. 34

$5,782.94

System Operating Expenses

$838.88

$956.32

$1,075.86

$1,183.42

$1,266.26

Costs of Equipment Sold

$755.47

$861.21

$968.86

$1,065.77

$1,140.37

General, Selling & Administrative

$1,803.63

2,056.16

2,313.18

2,544.47

2,722.62

EBITDA

$1,111.13

$1,266.71

$1,425.03

$1,567.53

$1,677.28

Depreciation & Amortization

EBIT

$405.90

$462.73

$557.61

$645.17

$724.37

Tax Rate

$162.35

$185.11

$223.03

$258.08

$289.73

Net Operating Profit After Tax

$243.556

$334.57

$387.11

$434.63

Before considering total value AirThread, it is essential to estimate the synergies. The exhibit 5 is used to estimate the synergies of AirThread connection, and the difference in values of total assets, Liabilities & Owner's Equity between 2005 and 2006 and 2007. The calculation is used to implement AirThread valuation using APV and DCF.

Assets

2005

Difference

2006

Difference

2007

Cash & Cash Equivalents

29,0

3,9

32,9

171,6

204,5

Marketable Securitiies

0,0

249,0

249,0

(232,6)

16,4

Accounts Recievable

362,4

45,0

407,4

28,1

435,5

Inventory

92,7

24,5

117,2

(16,2)

101,0

Prepaid Expenses

32,1

2,9

35,0

6,6

41,6

Deferred Taxes

8,2

(8,2)

0,0

18,6

18,6

Other Current Assets

15,5

(2,1)

13,4

2,8

16,2

Total Current Assets

539,9

315,0

854,9

(21,1)

833,8

PPE

2553,0

75,8

2628,8

(33,7)

2595,1

Licenses

1362,3

132,0

1494,3

(11,9)

1482,4

Customer Lists

47,6

(21,4)

26,2

(10,8)

15,4

Marketable Equity Securities

225,4

(220,5)

4,9

(4,9)

0,0

Investments in Affiliated Entities

172,1

(21,8)

150,3

7,4

157,7

Long-Term Note Recievable

4,7

(0,2)

4,5

(0,1)

4,4

Goodwill

481,2

4,3

485,5

5,8

491,3

Other Long-Term Assets

30,0

1,1

31,1

0,7

31,8

Total Assets

5416,2

264,3

5680,5

(68,6)

5611,9

Liabilities & Owner's Equity

Accounts Payable

254,1

0,8

254,9

5,9

260,8

Deferred Revenue & Deposits

111,4

11,9

123,3

20,1

143,4

Accrued Liabilities

42,9

4,9

47,8

11,4

59,2

Taxes Payable

36,7

(9,8)

26,9

16,2

43,1

Deferred Taxes

0,0

26,3

26,3

(26,3)

0,0

Note Payable

135,0

(100,0)

35,0

(35,0)

0,0

Forward Contract

0,0

159,9

159,9

(159,9)

0,0

Derivative Liability

0,0

88,8

88,8

(88,8)

0,0

Other Current Liabilities

82,6

11,1

93,7

4,0

97,7

Total Current Liabilities

662,7

193,9

856,6

(252,4)

604,2

Long-Term Debt

1001,4

0,4

1001,8

0,5

1002,3

Forward Contracts

159,9

(159,9)

0,0

0,0

0,0

Derivative Liability

25,8

(25,8)

0,0

0,0

0,0

Deferred Tax Liability

647,1

(45,6)

601,5

(47,1)

554,4

Asset Retirement Obligation

90,2

37,4

127,6

(0,8)

126,8

Other Deferred Liabilities

46,2

16,7

62,9

21,6

84,5

Minority Interest

41,9

(5,2)

36,7

6,7

43,4

Common Stock & Paid in Capital

1375,0

3,9

1378,9

25,2

1404,1

Retained Earnings

1366,0

248,4

1614,4

177,7

1792,1

Total Liabilities & Owners Equity

5416,2

264,2

5680,4

(68,6)

5611,8

Net Income

179,5

314,7

Discounted Cash Flows (DCF

DCF Valuation

2007

2008

2009

2010

2011

2012

Sales

3946,21

4509,10

5140,30

5782,90

6361,30

6806,60

EBIT

404,90

462,60

557,60

645,20

724,40

EBIT (With Synergies)

560,90

744,9882

970,41920

1267,74296

1504,378

PPE

2595,10

3226,40

3946,10

4813,50

5783,60

6838,60

Capital Expenditures

548,60

631,30

719,70

867,40

970,10

Depreciation

582,30

705,20

867,40

922,40

952,90

Working Capital (without Synergies)

229,60

262,35096

299,075789

336,463899

370,116689

396,025381

Change in Working Capital (without Synergies)

231,31

32,7509604

36,7248289

37,3881101

33,65279

25,9086919

Working Capital with Synergies

229,60

271,427439

314,726897

358,980548

403,280746

436,9859

Change in Working Capital with Synergies

231,30

41,8274391

43,2994577

44,2536516

44,3001977

33,7051543

Before Synergies

2007

2008

2009

2010

2011

2012

EBIT

404,90

462,60

557,60

645,20

724,4

Less: Taxes

180,40

161,96

185,04

223,04

258,08

289,76

NOPAT

270,60

242,94

277,56

334,56

387,12

434,64

Plus: Deprectiation & Amortization

582,30

705,2

867,4

922,4

952,9

Less: Capital Expenditures

548,60

631,3

719,7

867,4

970,1

Less: Change in Working Capital

231,30

32,7509604

36,7248289

37,3881101

33,65279

25,9086919

Free Cash Flow

73.0

284,08904

325,135171

297,17189

305,76721

306,631308

PV's

265,5534

284,0918

242,7169

233,4428

218,8283

NPV

$7 733,61

$1 244,63

After Synergies

2007

2008

2009

2010

2011

2012

EBIT (With Synergies)

560,90

744,9883

970,4193

1267,74295

1504,377

Less: Taxes

180,40

224,36

297,99528

388,16768

507,097184

601,7512

NOPAT

270,6

336,54

446,99292

582,25152

760,645776

902,6268

Plus: Deprectiation & Amortization

582,3

705,2

867,4

922,4

952,9

Less: Capital Expenditures

548,6

631,3

719,7

867,4

970,1

Less: Change in Working Capital

231,3

41,8274391

43,2994577

44,2536516

44,3001977

33,7051543

Free Cash Flow

73

368,612561

487,993462

537,997868

668,645578

766,821646

PV's

344,5621

426,3918

439,4129

510,4881

547,2445

NPV

####### $2 268,10

Increase in ATC Value after buyout

$6 115,36

Enterprise Value

WACC

6,98%

Terminal Growth Rate

3,49%

Terminal Value= sum (PV CF's)/(wacc-g)

Terminal Value

$9 092,63

$6 488,98

0,56939394

48,59%

34,36%

Terminal Value

$16-227,60

$11-580,88

APV VALUATION

APV Valuation

2007

2008

2009

2010

2011

2012

Sales

3946,2

4509,1

5140,3

5782,9

6361,3

6806,6

EBIT

404,9

462,6

557,6

645,2

724,4

EBIT (With Synergies)