64926842 Airthread Connections Case Work Sheet

Valuation methodology ACC is using LBO approach for its acquisitions and desires to maintain this acquisition policy for its latest target AirThread Connections (AC). According to this approach, AC will be financed significantly by debt which will obviously breach leverage ratios maintained by Air Thread/ACC. ACCs plans to bring down the leverage ratio to industry standards steadily to sustainable levels between the years 2008-2012. Owing to the uneven capital structures between 2008 and 2012, it will be prudent not to deploy WACC to value the target but value the target using APV. Additionally, WACC computation might be difficult to use since an adjustment discount rate each year the capital structures change. Assuming that the project will de-lever after 2012, WACC valuation will be applied to determine the terminal value. factors the interest tax shields in its calculation and in the case of this acquisition, the Interest tax shield will be inconsistent because of year on year disbursement of the debt. Terminal value will be estimated by : After 5-years, a bullet payment to discharge the debt will be made, and hence the terminal value can be estimated using WACC

AIRTHREAD ACQUISITION

Equity Net Debt/ Debt/ Equity AssetComparable Companies: Market Value Debt Value Equity Beta BetaUniversal Mobile 118,497 69,130 37% 58% 0.86 0.64 Neuberger Wireless 189,470 79,351 30% 42% 0.89 0.71 Agile Connections 21,079 5,080 19% 24% 1.17 1.02 Big Country Communications 26,285 8,335 24% 32% 0.97 0.81 Rocky Mountain Wireless 7,360 3,268 31% 44% 1.13 0.89 Average 28.1% 40.1% 1.00 0.82

H60

unlevered asset beta Ba= Be/1+(D/E)(1-t)

Debt/ Debt/ Asset Equity Cost of Cost ofValue Equity Beta Beta Equity Debt WACC0.0% 0.0% 0.82 0.82 8.33% 5.50% 8.33%5.0% 5.3% 0.82 0.86 8.54% 5.50% 8.28%

10.0% 11.1% 0.82 0.91 8.78% 5.50% 8.23%15.0% 17.6% 0.82 0.96 9.05% 5.50% 8.19%20.0% 25.0% 0.82 1.02 9.35% 5.50% 8.14%25.0% 33.3% 0.82 1.09 9.69% 5.50% 8.09%28.1% 39.1% 0.82 1.13 9.92% 5.50% 8.06%35.0% 53.8% 0.82 1.25 10.52% 5.50% 8.00%40.0% 66.7% 0.82 1.36 11.05% 5.50% 7.95%45.0% 81.8% 0.82 1.48 11.66% 5.50% 7.90%47.0% 88.7% 0.82 1.54 11.94% 5.50% 7.88%50.0% 100.0% 0.82 1.63 12.41% 5.50% 7.85%

H69

WACC = Ke(E/V)+Kd(D/V)(1-t)

E70

Equity Beta = Asset Beta (V/E) => Be = Ba (1/1-(D/V))

E77

R K Jain: Equity Beta = Asset Beta (V/E) => Be = Ba (1/1-(D/V))

E78


E79


E80


E81


Assumptions:Marginal Tax Rate 40.0%Debt Beta 0.00

Market Risk Premium 5.00%Risk-Free Rate 4.25%

Average industry EBIT 5,532 Cost of Debt 5.50% Average Industry P/E 0

Cost of Capital

AIRTHREAD ACQUISITION Intermediate Operating Cash Flows

Operating Results: 2008 2009 2010 2011 Service Revenue 4,194.3 4,781.5 5,379.2 5,917.2 Plus: Equipment Sales 314.8 358.8 403.7 444.1 Plus: Synergy Related Business Revenue 0.0 0.0 0.0 0.0 Total Revenue 4,509.1 5,140.4 5,782.9 6,361.2 Less: System Operating Expenses 838.9 956.3 1,075.8 1,183.4 Plus: Backhaul Synergy Savings 0.0 0.0 0.0 0.0 Less: Cost of Equipment Sold 755.5 861.2 968.9 1,065.8 Less: Selling, General & Administrative 1,803.6 2,056.2 2,313.2 2,544.5 EBITDA 1,111.1 1,266.7 1,425.0 1,567.5 Less: Depreciation & Amortization 705.2 804.0 867.4 922.4

EBIT 405.9 462.7 557.6 645.2 Tax @40% 162.4 185.1 223.0 258.1 Un-Levered Free Cash Flow:NOPAT 243.5 277.6 334.6 387.1 Plus: Depreciation & Amortization 705.2 804.0 867.4 922.4 Less: Changes in Working Capital 25.9 19.7 20.0 18.0 Less: Capital Expenditures 631.3 719.7 867.4 970.1 Un-Levered Free Cash Flow 291.6 342.3 314.5 321.4

PV Intermediate FCF 8.33% 1,255.3 269.2 291.7 247.4 233.4

Operating Margins:

Service Revenue Growth 14.0% 14.0% 12.5% 10.0%Equipment Sales/Service Revenue 7.5% 7.5% 7.5% 7.5%Total Revenue Growth 14.3% 14.0% 12.5% 10.0%Wireless Service Gross Profit Margin 80.0% 80.0% 80.0% 80.0%Equipment Sales Gross Profit -140.0% -140.0% -140.0% -140.0%Selling, General & Administrative 40.0% 40.0% 40.0% 40.0%EBITDA 24.6% 24.6% 24.6% 24.6%Depreciation & Amortization 15.6% 15.6% 15.0% 14.5%EBIT 9.0% 9.0% 9.6% 10.1%Effective Tax Rate 40.0% 40.0% 40.0% 40.0%Cap-x/Revenue 14.0% 14.0% 15.0% 15.3%

2012 6,331.4

475.2 0.0

6,806.5 1,266.3

0.0 1,140.4 2,722.6 1,677.3

952.9

724.4 289.7

434.6 952.9

13.9 1,055.0

318.6

213.6

Operating Margins: Based on projected cashflows excluding the benefits of Synergy 7.0% Changes in Working Capital:7.5% Accounts Receivable7.0% Plus: Inventory

80.0% Plus: Prepaid Expenses-140.0% Less: Deferred Revenue

40.0% Less: Accounts Payable24.6% Less: Accrued Liabilities14.0% Net Working Capital10.6% Increase in NWC40.0%15.5%

Based on projected cashflows excluding the benefits of Synergy

2007 2008 2009 2010 2011 2012

435.5 521.9 595.0 669.4 736.3 787.9 101.0 135.0 153.9 173.1 190.4 203.7

41.6 46.9 53.5 60.1 66.2 70.8 143.4 163.2 186.1 209.3 230.3 246.4 260.8 335.5 382.4 430.2 473.2 506.4

59.2 64.7 73.7 82.9 91.2 97.6 114.6 140.4 160.1 180.1 198.1 212.0

0 25.8 19.7 20.0 18.0 13.9

R83

based on total revenue

R84

based on equipment revenue and not Cost of goods sold

R85

is based on total cash operating expenses

R86

is based on service revenue and not on total cash operating expenses

R87


R88



Interest Tax Shields: 2008 2009 2010 2011 2012 Interest Expense 199.5 183.1 165.8 147.6 128.3 Tax Rate 40.0% 40.0% 40.0% 40.0% 40.0%

Tax Shield 79.8 73.2 66.3 59.0 51.3 Interest Rate 5.50%PV of Intermediate Tax Shields 284.8 75.6 65.8 56.5 47.7 39.3

Intermediate Tax Shields


Terminal Value With Lon-Term D/V of 28.1%

Un-Levered Free Cash Flows: 2008 2009 2010 2011 NOPAT 243.5 277.6 334.6 387.1 Plus: Depreciation & Amortization 705.2 804.0 867.4 922.4 Less: Changes in Working Capital 25.9 19.7 20.0 18.0 Less: Capital Expenditures 631.3 719.7 867.4 970.1 Un-Levered Free Cash Flow 291.6 342.3 314.5 321.4

PV of FCF 8.33% 1,255.3 269.2 291.7 247.4 233.4

Interest Tax Shields 79.8 73.2 66.3 59.0 PV of Interest Tax Shields 284.8 75.6 65.8 56.5 47.7

Total Intermediate Term Value 1,540.1

TV Growth Rate 2.9%TV WACC Cash Flow 4,286.7

Value of Operating Assets 5,826.8 Value of Non-Operating Assets 0.0 Total Enterprise Value 5,826.8

D75

R K Jain: Use market multiple method. Industry average P/E using data from exhibit 7, is 13.19 (ref. sheet 'Cost of capital' for calc cell p65). Taking 'equity in earnings of affiliates' for the year 2007 (exhibit:4) as proxy the value of non-operating asset is arrived at. 90*13.19

Adjusted Present Value

Excludes Synergy

2012 434.6 952.9

13.9 1,055.0

318.6

213.6

51.3 39.3

6,316.3

Adjusted Present Value

Excludes Synergy


estmd from without synergy CFLong-Term Growth Rate: 2012 NOPAT 434.6 Invested Capital 4,039.5 ROC 10.8%

Net Reinvestment 116.0 NOPAT 434.6 Reinvestment Rate 26.7%

Est. EBIT Growth Rate 2.9%

D60

This value should be based on projected balance sheet without synergy (not presented here) ROC = NOPAT/(E+D)

Growth Rate


Annual AmortizationPayment Interest Principal Balance Period

Date: 41 5.5% 3,758 120 1/31/2008 41 17 24 3,734 1 2/28/2008 41 17 24 3,711 2 3/31/2008 41 17 24 3,687 3 4/30/2008 41 17 24 3,663 4 5/31/2008 41 17 24 3,639 5 6/30/2008 41 17 24 3,615 6

7/31/2008 41 17 24 3,591 7 8/31/2008 41 16 24 3,567 8 9/30/2008 41 16 24 3,542 9

10/31/2008 41 16 25 3,518 10 11/30/2008 41 16 25 3,493 11 12/31/2008 41 16 25 3,468 12

1/31/2009 41 16 25 3,443 13 2/28/2009 41 16 25 3,418 14 3/31/2009 41 16 25 3,393 15 4/30/2009 41 16 25 3,368 16 5/31/2009 41 15 25 3,343 17 6/30/2009 41 15 25 3,317 18 7/31/2009 41 15 26 3,292 19 8/31/2009 41 15 26 3,266 20 9/30/2009 41 15 26 3,240 21

10/31/2009 41 15 26 3,214 22 11/30/2009 41 15 26 3,188 23 12/31/2009 41 15 26 3,162 24

1/31/2010 41 14 26 3,136 25 2/28/2010 41 14 26 3,109 26 3/31/2010 41 14 27 3,083 27 4/30/2010 41 14 27 3,056 28 5/31/2010 41 14 27 3,029 29 6/30/2010 41 14 27 3,002 30 7/31/2010 41 14 27 2,975 31 8/31/2010 41 14 27 2,948 32 9/30/2010 41 14 27 2,921 33

10/31/2010 41 13 27 2,893 34 11/30/2010 41 13 28 2,866 35 12/31/2010 41 13 28 2,838 36

1/31/2011 41 13 28 2,811 37 2/28/2011 41 13 28 2,783 38 3/31/2011 41 13 28 2,755 39 4/30/2011 41 13 28 2,726 40 5/31/2011 41 12 28 2,698 41

AnnualPayment Interest Principal Balance

Date: 41 5.50% 2,698 6/30/2011 40.78 12.37 28.41 2,669.79 7/31/2011 40.78 12.24 28.54 2,641.25 8/31/2011 40.78 12.11 28.67 2,612.57 9/30/2011 40.78 11.97 28.80 2,583.77

10/31/2011 40.78 11.84 28.94 2,554.83 11/30/2011 40.78 11.71 29.07 2,525.76

12/31/2011 40.78 11.58 29.20 2,496.56 1/31/2012 40.78 11.44 29.34 2,467.22 2/28/2012 40.78 11.31 29.47 2,437.75 3/31/2012 40.78 11.17 29.61 2,408.14 4/30/2012 40.78 11.04 29.74 2,378.40 5/31/2012 40.78 10.90 29.88 2,348.52 6/30/2012 40.78 10.76 30.02 2,318.51 7/31/2012 40.78 10.63 30.15 2,288.36 8/31/2012 40.78 10.49 30.29 2,258.07 9/30/2012 40.78 10.35 30.43 2,227.64

10/31/2012 40.78 10.21 30.57 2,197.07 11/30/2012 40.78 10.07 30.71 2,166.36 12/31/2012 2,176.29 9.93 2,166.36 0.00

Amortization Schedule

AmortizationPeriod Interest Expense per Annum ($mn)

84 2008 2009 2010 2011 201242 199.45 183.10 165.83 147.58 128.30 43 44 Principal payment per Annum45 289.90 306.25 323.52 341.77 2,496.56 46 After-Tax Interest Expense per Annum47 119.7 109.9 99.5 88.5 77.0

48 49 50 51 52 53 54 55 56 57 58 59 60

Amortization Schedule

Documents

64926842 Airthread Connections Case Work Sheet