Air Thread Connections

This case intends to analyze and evaluate the Air Thread Connection (ATC) Company and determine whether the acquisition by the American Cable is acceptable.

First and foremost, ACC and AirThread could help each other compete in an industry that is moving more and more toward bundled service offerings. ACC can obtain wireless access while AirThread can derive access to landline and internet service at the same time.

In the second place, the acquisition could help both sides expand into the business market for they both had customer bases that were heavily reliant on retail/residential customers.

Thirdly, ACC was in a unique position to add value to AirThread’s operations because AirThread can change its cost disadvantage relative to its main wireless competitors.

However, the real situation and the anticipated benefits will only be ascertained by insight analysis. 

MAIN METHODOLOGY OF VALUATION

For the First 5 years Ms. Zhang should use the APV method because the debt/equity ratio changes year by year, it is not convenient to use WACC method.

For Terminal Value, WACC method should be used because after 5 years, the company repays all the new debts and the debt/equity ratio remains at the industry level, so we can calculate WACC and estimate the long-term growth rate (g) to generate the terminal value.

Free Cash Flows (FCF) for 2008-2012 have been projected on a base case per the 2008-2012 projections provided by Ms. Zhang and an upside case based on potential synergies resulting from American Cable Communications’ acquisition of Air Thread.

Calculation of Changes in Net Working Capital

First, in order to derive the present value of FCFs per the APV method, a pre-tax WACC was calculated in order to discount the FCFs for years 2008-2012. We assumed a debt level of $0 and calculated the average unlevered beta of comparable companies, which resulted in a βA = 0.72. With the given risk free rate of 4.25% and risk premium of 5.0%, we then plugged...