Valuation of Airthread Connections

Valuation of AirThread Connections

Introduction

This report contains the valuation of AirThread Connections (ATC) based on the HBS case. The valuation of ATC is based on calculations of the present value of their cash flows to be derived in the future. We will use a combination of the APV and the WACC methodology. In addition, in the valuation of non-operating assets we will apply the multiple-method.

Methodological Approach

In terms of a methodological approach the APV and the WACC both derive the valuation from future cash flows and generally these two methods tend to produce the same result. The acquisition in this case is a leveraged buyout of ATC. They increase their debt significantly their first years 5 years and then pay back their debt. Knowing their unequal capital structure in their company between 2008 and 2012 the wacc will not be a suitable approach. Alternatively, the APV method seems to be a better option since we determine the levered value of an investment by calculating its unlevered value and then adding the interest tax shield from the debt.

In the case Ms. Jannifer Zhang wants to focus on the ongoing-operations and the value of non-operating assets and liabilities separately. This also favorites the APV method for this unbundling incentive.

Based on our discussion above, the APV method will be applied to compute the intermediate value of the cash flow between 2008 to 2012.

The APV formula (without considering market imperfections cost):

[pic 1]

[pic 2]

The calculation of free cash flow (FCFs) can be stated after tax EBIT (NOPAT):

Unlevered net income (NOPAT)

+ Depreciation & Amortization

- CAPEX

- Increasing net working capital

= Free Cash Flow

Terminal value represents the market value as of the last forecast period of the free cash flow from the project at all future dates. In this case the terminal value is likely to be the single largest component of the valuation. When analyzing investments with long lives, it is common to explicitly calculate free cash flow over a short horizon, and then assume that cash flows grow at some constant rate beyond the forecast horizon. Thus, all perpetual future cash flows beyond this horizon are discounted through the formula below:

[pic 3]

For the terminal value the after-tax WACC will be used. Assuming ATC leverage will follow the average of the industry and remain constant after 2012.

Since the company’s share of the net income is unlikely to be equal to any cash dividend, it would be impossible to project the free cash flows for those minority interest equity investments, without thorough due diligence. As for the valuation of equity in earnings in affiliates of ATC, it therefore seems appropriate to use the historic P/E multiple for the industry which was approximately 19.1x.