Airthread Valuation

Felix de Sayve

Corporate Finance Sec 02

03/31/2015

AirThread valuation

        American Cable Company ACC is one of the largest cable operators in the United States that offers videos, Internet and landline telephony subscribers. Oppositely, Airthread is one of the largest wireless companies but does not offer any video, Internet of landline telephony services.

This acquisition can be very profitable to ACC as it will let them offer wireless, landline telephony, video and Internet, they will also be able to expand they market share by acquiring Airthread customers. Moreover because of ACC infrastructure, the cable’s fiber lines, it can save AirThread more than 20% in backhaul cost.

In order to evaluate Airthread, I analyzed AirThread projection in order to find the future cash flows. In order to find the Future cash flows, I had to do an estimation of the Net Working capital. This estimation was made by taking the average increase in net working capital between 2005 and 2006 ,and 2006 and 2007 which gave me a change of $176.2 MM. Then in order to calculate the Net present value of the future cash flows, we needed to find the WACC.

Lets calculate WACC:

Cost of debt = Rd = 5.5% (annual interest rate)

Weight of debt = Wd = 33033/105571 = 31.3% (industry average of AirThread’s competitors)

Cost of Equity = Re = Rf + (Rm - Rf)Beta = 2.4 + (7.4-2.4)*1= 7.4% (Rm = 7.4%, online industry average; and Rf = 2.4% because the rate of a 10 year Treasure bond is 2.4%)

Weight of Equity = We= 1 – Wd = 68.7% (industry average)

WACC = Rd*(1-T)*Wd + We*Re

WACC = 5.5%*(1-0.4)*31.3% + 68.7%*7.4% = 6.2%

The WACC is 6.2% which gave me a Net Present Value of all the future cash flows of $4,071.9MM.

On the valuation, I do not agree with Ms. Zhang method that takes into consideration the potential synergies. The potential synergies will happen with the merger of those two companies and how ACC will decide to use AirThread. However, I believe that the value of AirThread should be done without the synergies because AirThread should be valued on how it will do in the future if it does not merge.