Airthread Case Study

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A third scenario for terminal value calculation would be the exit multiple method - we basically apply the comparable firms’ EV/EBITDA multiple to Air Thread’s 2012 EBITDA to derive the terminal value. However, not all 5 five firms are entirely comparable to Air Thread even if they are in the same industry. Through observing the market cap, we can tell that both Universal Mobile and Neuberger Wireless are large national players, while the remaining three are much smaller in scale. In addition, the two national players’ EBIT(DA) and net income margin are better than the other three (most likely due to large economy of scale), so we exclude them when we use the exit multiple approach - after all, Air Thread is a regional player with margins not as great as the largest players in the industry. For the 3 selected firms, the average multiple is 5.24:

Comparable firms

EV/EBITDA Multiple

Agile Connections

2.639

Big Country Communications

2.745

Rocky Mountain Wireless

10.333

Average

5.24

Applying this multiple to Air Thread’s 2012 projected EBITDA (1.677 billion) gives us the terminal value under Exit multiple method. All three scenarios for terminal value calculation as well as their respective final valuation results are summarized below:

Perpetual Growth 3%

Perpetual Growth 1.88%

Exit Multiple (EV/EBITDA)

Terminal Value

7,182

5,721

8,787

PV of TV

4,976

3,964

6,088

PV of FCF

1,368

1,368

1,368

Enterprise Value

6,344

5,332

7,456

Plus: PV of Equity Income in affiliates

1,720

1,720

1,720

Plus: Cash & Cash Equivalents

205

205

205

Plus: Marketable Securities

16

16

16

Plus: Affiliate Investment

158

158

158

Minus: Minority Interest

43

43

43

Minus: Debt (industry avg: 28% of EV)

1,784

1,499

2,097

Equal: Implied Equity Value

6,615

5,887

7,414

Minus: Illiquidity Discount

992

883

1,112

Equal: Final Equity Value

5,623

5,004

6,302

Note: For Equity Income in Affiliates, it’s valued separately (i.e. not included in FCF) as mentioned in the case. We basically multiply the 2007 Equity earnings in affiliates by the P/E ratio 19.1 (given in the case) to derive the value of such non-controlling investments in other firms, and add this onto the previously calculated enterprise value.

To back solve equity value from EV: Cash, marketable securities, and affiliate investments are added back, while minority interest and debt are subtracted. Finally we apply the illiquidity discount of 15% (using the info from graph) to reflect the fact that Air Thread is a private firm. One may argue that Air Thread is profitable and large enough to have the option to go public; however, given the case’s time frame (2007-2008), we do not deem the market condition at the time to be ideal for an IPO; in addition, as a regional player facing tough competition from national firms, investors’ appetite for a firm IPO might be insufficient. Hence an illiquidity discount seems reasonable.

From the table above, we see that the exit multiple method results in a higher terminal value than a perpetual growth model using 3% as the terminal growth rate – meaning that the exit multiple method implies that the firm would grow faster than the economy in the long run, which is impractical. Hence we dismiss the exit multiple model, and prefer a perpetual growth model with 1.88% as the long term growth rate for reasons specified previously.

The above analysis values Air Thread on a stand-alone basis. Now if ACC intends to acquire Air Thread, it will load Air Thread with huge amounts of debt in 2008 and then amortize the debt gradually, and by the end of 2012 the company pays a large bullet payment to get Air Thread back to the industry average D/V ratio of 28.1%. Apparently, for years 2008-2012, using the APV approach to value those cash flow and adding back the tax benefits would be most appropriate as the debt amount does not change much (slow principal repayment). Once the bullet payment is paid in Dec 2012, however, Air Thread will get back to a fixed D/V ratio, and grow at the terminal growth rate