Airthread Connections Valuation

Valuation of AirThread Connections

Situation At Hand

American Cable Communications (ACC), a large cable, internet, and wire line telecommunications company, has an opportunity to purchase AirThread Connections (ATC), a regional wireless provider. Doing so would be a congeneric merger as both companies are in a related industry but have differing product and service offerings. There are many facets to the merger, but most notably are the synergies that could be achieved between the two, that alone, would be unattainable. These synergies include the ability to offer bundled services (TV, Internet, Landline Phone, and Wireless Phone), expansion to the business market, and cost reductions of services. To determine whether ACC should purchase ATC, a company valuation needs to be done for ATC using both ATC forecasts (Base Case) and ATC value with synergy improvements resulting from the Merger. The process will involve evaluating Free Cash Flows for projected revenues and costs as a standalone company; determine terminal value of the company; evaluate non-operating asset holdings; and determine a private firm/illiquidity discount (if any). From these base values we will know the added value from synergies, growth of ATC, and riskiness of the firm to make an informed recommendation.

Background

The telecom industry is a transforming market which requires companies to continually change and adapt. With ever advancing technology, regulation changes, and shifting competitive dynamics, larger companies have been able weather the storm compared to the smaller, higher cost competitors who cannot attain economies of scale.

American Cable Communications is one of the largest cable operators in the United States. Passing 48.5M homes, including 24.1M video subscribers, 13.2M internet subscribers, and 4.6M land line subscribers, have enabled ACC to generate $30.9B in revenues with $2.6B of net income. Its overall strategy is to be an aggressive purchaser of smaller companies to obtain more customers and increase network utilization. Given the high penetration rates they have achieved and high cost of obtaining new customers, growth through acquisitions was felt to be the necessary course of action. The main hindrance to ACC is its' inability to offer "the complete package" of services to its customers, including wireless services. As a result, ACC has very few business customers. As such, it does not have many long term contracts to increase the stability and reliability of its revenues.

AirThread Communications is one of the largest regional wireless companies in the US. They cover 200 markets in 5 regions with total population coverage of 80M. ATC attains $3.9B in revenues with $400M in operating income. They too have been attempting to expand into neighboring markets through FCC spectrum auctions and investment in affiliate