Apraisal Report – Business Valuation
Business Valuation Report: AirThread Connections Prepared for: Mr. Robert Zimmerman Prepared by: Jennifer Zhang Introduction This appraisal report is aim to evaluate the benefit of American Cable Communications (ACC) taking over AirThread Connections (ATC). First part is to briefly introduce the basic information and possible benefits of this acquisition.
Secondly, different valuation approaches are adopted to project the quantified value of AirThread Connections. Lastly, the summary of valuation result and recommendations will be given.
AirThread is one of the largest regional cellulous providers in US with more than 200 markets covering 5 geographic regions and servicing approximately 80 million people. This acquisition can bring some major benefit to both companies, including enhance the ability to provide bundle services, expanding into the business market, adding exclusive value to AirThread’s operations and last but not least, financing with significant leverage due to this buy out. However, more precious valuation should be taken in order to have a closer and insight look of this acquisition value.
Valuation Approaches Explained AirThread Connections valuation procedure adopted and compared two primary approaches: • Discounted Cash Flow Approach (DCF) • Adjusted Present Value (APV) Approach Both methods are rely on the net present value (NPV) of forecast future cash flow the project the value of ATC and they both assume that company will go on operating in the foreseeable future.
Discounted Cash Flow Approach (DCF) is a commonly used and trust worthy measure of company value (Harper, 2012).
Firstly, the future free cash flow need to be determined and then use weighted average cost of capital (WACC) as discount rate to determine the NPV of these cash flows. This approach is adopted not only because it is the closest thing to a intrinsic stock value, but more importantly, it relies on free cash flows which is a highly reliable measure avoid significant amount of the arbitrariness and guesstimates could be involved in report earning. On the other hand, disadvantages of DCF approach include the requirement of high degree of confidence about future cash flow and it demand a constant capital structure.
Adjusted Present Value Approach (APV) in some extent is similar to DCF approach, since they both adopt the same concept about valuing company by future cash flows on a on going concern. It value the free cash flow without any leverage first and then determine the present value of the tax shield.
The company value would be the sum of these two figures. It is more reliable when the leverage conditions of a company change significantly. Potential Synergies Apart from the direct benefit generate from ACC buying out ATC, there are some intangible assets contribute to the business afterword.
The potential gain from share of resources and utilities in all aspects is called synergies. In AirThread case, synergies come from the saving of backhaul expense and anticipate increase in revenue. In both DCF and APV method, synergies are quantified and add into AirThread’s value by using the PV of anticipant increase in clients and projected backhaul saving.
Cooperation of company value with and without synergies is one of the convincing reasons to show AirThread that ACC is a friendly acquirer and this is a win-win strategy. Terminal Value Terminal value is the value of entire company at a specified future time.
In valuation procedure, we assume that company will keep going on; therefore, a perpetuity growth model is used here to estimate the terminal value of ACC in 5 years time after acquisition. It is calculated by formula ! “. ! “.&’%( ! “#$ ! “#$ ! “! ” ? (!!! “.
&'( ! “#$ ! “#$ ! “.& ! “#$) Terminal Vaule = . !”.&'( ! “#$!! “.&'( ! “#$ ! “#$ ! “.
& ! “#$ Terminal value is a benchmark in business merge and acquisition; it is useful in evaluating the potential gain of an investment over a specified time period. (MaCure.
B, 2012) The Growth Rate and Discount Rate Both DCF and APV are using NPV of FCF, which determines that the discount rate could be meaningfully important. Long-term growth rate is calculated as the reinvestment rate and return on capital for year 2012. And the WACC discount rate for levered and unlevered are calculate by the formula When under APV, D is equal to 0.
Summary of Valuation Result This part of the appraisal report summaries the outcome of both valuation methodologies according to the date given by Rubinstein & Ross, a boutique investment bank with strong reputation.
This is very important since the outcome is very sensitive to the growth rate and discount rate. A very little change of the data will lead to a possible loss to both companies. Under DCF approach, the terminal value without synergies at the end of 2012 is $4400. 5B while % 11633. 5B with synergies.
Corresponding operating-resultgenerated NPV of free cash flow are $1211. 4B and $2199. 9B respectively. Future cash flow increases can be observed under the data with synergies while relatively stable under those without synergies. And the growth rate obtained for the future perpetuity cash flows are 3. 3% (without synergies) and 3.
38% (with synergies). In this case, the difference between value of company with and without synergies could be as large as $8221. 5B! This is a strong evidence to support the acquisition of AirThread. It simply gives out the conclusion that synergies of sharing resources between two companies will bring huge benefit to either party, definitely a win-win strategy. On the other hand, under APV approach, the unlevered discount rate is 8. 29% and the long-term growth rate is 3.
13%. In this case, value with synergies is $11469B and without synergies is $5600. 6B.
Since we are going to finance the capital by taking $3. 758B loan, and paying back before at the end of 2012, the capital structure will change during this period, therefore, APV approach here will be more accurate.
To conclude, the recommend value of AirThread Connections is about $11469B to $13833. 4B. Since the outcome of APV in this case is better, the price will closer to $11469B. Reference: Ben McClure, DFC Analysis: Coming Up With A Fair Value, accessed 02 November 2012, . http://www.
investopedia. com/university/dcf/dcf4. asp#axzz2BG7Uno3s Ben McClure, DFC Analysis: Introduction, accessed 02 November 2012, http://www. nvestopedia. com/university/dcf/default.
asp#axzz2BG7Uno3s Ben McClure, DCF Analysis: Coming Up With A Fair Value, accessed 02 November 2012 http://www. investopedia. com/university/dcf/dcf4. asp#axzz2BG7Uno3s http://www. investopedia.
com/university/eva/eva3. asp#axzz2BG7Uno3s Harper, D EVA: Calculating Invested Capital, accessed 02 November 2012 Plumbing M Business Valuation Report, 2007 BizByOwner. com, accessed 04, November 2012 Heilprin, J, L Valuation of AirThread Connection, 2012 Harvard Brief Cases 4263, Rev. at April 27 2012