AirThread Connections
Presentation
Discussion Materials
For Additional Coverage of the Topics
Please See Me
Or
E-mail me at jheilprin@fas.harvard.edu
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections




Overview:
Let’s begin by considering both American Cable and
AirThread
Then we can summarize the industry and competitive
environment
Decide if there might be a fit between American Cable
and AirThread
Finally conduct a valuation exercise on AirThread
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Overview of American Cable:
 American Cable is a large national provider of cable,
high-speed internet, and VoIP
 They compete with most/all of the large national
communications providers
 Customers are primarily retail consumers and home offices
‫ ־‬Systems pass ≈ 48.5 million homes
 Company has a large cable-fiber network, but does not have
wireless telephony capabilities
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Overview of AirThread:
 One of the largest regional cellular providers in the nation
 Operates in 200 markets in 5 distinct regions covering approximately
80 million people
 Customers are predominantly retail
 Has an operating cost disadvantage relative to its main rivals
 In order to maintain its market share the company has had to offer large
handset incentives, and has spent more on customer acquisition
‫־‬
‫־‬
Average revenue per minute has declined from ¢6.71/minute to
¢5.95/minute
Cost of acquiring a customer has gone from $372 to $487
 However, the company does have valuable spectrum rights and an
established market position
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Industry Dynamics:
 Broadly speaking, both companies are communications
network providers subject to many of the same market and
technological forces
 Industry is evolving toward bundled services offerings as a means
of attracting and maintaining customers
 Technological convergence of voice, data, and video is further
blurring the lines among industry sectors
 Building and maintaining a communications network requires
significant investment in fixed assets, and is driven by network
utilization rates
‫־‬
This is one of the reasons behind industry consolidation
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Acquisition Rationale:
 For ACC, most of the rationale is based on cross-selling
bundled services
Benefits
American Cable
Cellular telephony
Mobile Internet in the future
Access to spectrum
Broader appeal with bundled
offerings
Reach business customers
Only if cellular offerings
translates into cable
subscribers
Benefits
AirThread
Fixed-line Telephony
High-Speed Internet
Wire into the home
Broader appeal with bundled
offerings
Reach business customers
Only if cable offerings
translates into cellular
subscribers
Other Operating Cost Savings
None
Backhaul savings from cell
towers to central offices
Customer Acquisition Costs
Predicated on appeal of
bundled services
Predicated on appeal of
bundled services
Potential Synergies
Expand Product Offerings
Customer Reach
Network Utilization
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Acquisition Rationale:
 For ACC, the biggest worry is getting sucked into
paying to solve someone else’s problem
Potential Problems
Expanded Product Offerings
Operating Cost Savings
Customer Reach
Customer Service
American Cable
Changing wireless standards
and volatility in value of
spectrum
Could end up spending money
to solve someone else’s
problem
Benefit of offering bundled
services may be competed
away quickly
Business clients have more
demanding customer service
requirements
Harvard University Extension School
AirThread
Advances in mobile
technology may make wires
obsolete among core
customers
Mobile WiMAX may
ultimately provide a cheaper
backhaul solution
Benefit of offering bundled
services may be competed
away quickly
Business clients have more
demanding customer service
requirements
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
AirThread Perspective:
 Does AirThread need American Cable or some other
suitor?
 What are their options?
 If they put themselves up for sale, are they likely to
demand a high price?
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
AirThread Perspective:
 Need for American Cable or some other suitor
 The most immediate need is to address their operating cost
disadvantage
‫־‬
Remember, in a commodity industry, the low cost producer always
wins
 However, AirThread does have the option to delay
‫־‬
‫־‬
The same WiMAX technology that can deliver 4G to customers, can
also be used to move traffic from towers to central switching offices
This, of course, does not address the problem of acquiring and
retaining customers due to a lack of bundled services
 In an industry characterized by rapidly moving technology, large
fixed investments, and dominated by much larger competitors,
waiting carries a huge risk
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
AirThread Perspective:
 Company options
 As previously stated, they can wait for a technological
solution to their backhaul problems
‫ ־‬If they can implement a technical solution, it could also solve
their need to offer internet service
 They could look for a company to acquire
‫ ־‬A regional provider that could give them national presence
‫ ־‬A regional ISP with overlapping geographies
 They could put themselves up for sale
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
AirThread Perspective:
 Attractiveness of AirThread as an acquisition target
 If AirThread offers a value proposition to ACC, they likely
can offer the same value to other national cable network
operators
 Similarly, they could also offer value to another wireless
carrier in the form of higher network capacity utilization
‫ ־‬Not to mention, control over valuable spectrum
 Thus, if an auction were held, a number of bidders would
likely emerge
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuation Overview:
 As a starting point, lets assemble the facts:
 American Cable uses an LBO style approach
‫־‬
‫־‬
Purchase with significant debt limiting the initial equity
Then paying down the debt over time to some sustainable long-term
level
 Investment bankers are suggesting that AirThread could support
an interest coverage ratio of 5.0x EBITDA
 In addition to wireless assets, AirThread has significant nonoperating assets
‫־‬
‫־‬
Investments in affiliates by there very nature are not financial assets
No information about the cash they generate
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuation Approach:
 Focusing on operations, value can be defined as:
𝑉𝑎𝑙𝑢𝑒 =
𝐸(𝐹𝐶𝐹1 ) 𝐸(𝐹𝐶𝐹2 )
𝐸(𝐹𝐶𝐹𝑛 )
+
+
⋯
+
+
(1 + 𝑟)1
(1 + 𝑟)2
(1 + 𝑟)𝑛
Explicitly forecast period where the
debt balances are highly predictable
𝐸(𝐹𝐶𝐹𝑛 (1 + 𝑔)
(𝑟 − 𝑔)
(1 + 𝑟)𝑛
Terminal value, or
going concern, where
debt is targeted as a
ratio of firm value
 Given American Cable’s intentions, the explicitly forecast period
seems conform to the APV approach
 Likewise, TV seems to fit well with the WACC approach
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuation Approach:
 Given the aforementioned facts and assumptions, the
operations appear to be well suited to a bifurcated
approach
𝑉𝑎𝑙𝑢𝑒 =
𝐸(𝐹𝐶𝐹𝑛 )
+
(1 + 𝑟𝑎 )𝑛
𝐸(𝐹𝐶𝐹𝑛 )(1 + 𝑔)
(𝑟𝑊𝐴𝐶𝐶 − 𝑔)
(1 + 𝑟𝑊𝐴𝐶𝐶 )𝑛
+
𝑇𝑎𝑥𝑆ℎ𝑖𝑒𝑙𝑑𝑛
(1 + 𝑟𝑑 )𝑛
 Using APV for the intermediate period and WACC for the
terminal value
 This methodology is valuing operation and financing effect,
but is ignoring the non-operating assets
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuation Approach:
 Taking into account non-operating assets and minority
interest
 With respect to the equity investments, we have no way of
knowing the cash they generate, or whether they could be easily
sold
‫־‬
The case, therefore, suggests using a market multiple approach
 As for the minority interest, at this point, we are only interested in
the enterprise value, so we don’t need to know which
shareholders are claiming what
‫־‬
The underlying consideration is that the minority interest likely relates
to specific assets, not the firm as a whole
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuation Approach:
 Summarizing the constituent parts
Un-levered intermediate term cash flow
+ Intermediate term tax shields
+ TV CF representing going concern
+ Value of non-operating assets
Value of the enterprise
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuing Operations:
 Since most of the heavy lifting related to determining FCF
was part of the case facts, this is an easy place to begin
 Putting the issue of synergies aside for the moment, we can see
that there are no “tricky” adjustments to be made (i.e. operating
leases, non-cash compensation, etc.)
 Thus, we can use our basic FCF recipe
EBIAT
Plus: Depreciation
Less: ∆Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
Harvard University Extension School
EBIT(1-t) - ∆NOA = FCF
Joel L. Heilprin
∆Operating Assets
Less: ∆Operating Liabilities
∆Net Operating Assets
© 59th Street Partners LLC
AirThread Connections
Valuing Operations:
 Operating income before synergies:
Operating Results:
Service Revenue
Plus: Equipment Sales
Plus: Synergy Related Revenue
Total Revenue
Less: System Operating Expenses
Plus: Backhaul Synergy Savings
Less: Cost of Equipment Sold
Less: Selling, General & Administrative
EBITDA
Less: Depreciation & Amortization
EBIT
Harvard University Extension School
2008
4,194.3
314.8
0.0
4,509.1
838.9
0.0
755.5
1,803.6
1,111.1
705.2
405.9
2009
4,781.5
358.8
0.0
5,140.4
956.3
0.0
861.2
2,056.2
1,266.7
804.0
462.7
2010
5,379.2
403.7
0.0
5,782.9
1,075.8
0.0
968.9
2,313.2
1,425.0
867.4
557.6
Joel L. Heilprin
2011
5,917.2
444.1
0.0
6,361.2
1,183.4
0.0
1,065.8
2,544.5
1,567.5
922.4
645.2
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
These are nothing more than
Jennifer’s assumptions
presented as an operating
statement
© 59th Street Partners LLC
AirThread Connections
Valuing Operations:
 Moving from EBIT to FCF (pre-synergies)
 Unlike Apollo, the case takes a straight forward approach to
net reinvestment
‫ ־‬There are no changes in net operating assets and liabilities other
than cap-x, depreciation, and working capital
 Since Zhang provided estimates of cap-x and depreciation,
the only thing to compute are the working capital balances
based on the ratios she provided
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuing Operations:
 Determining pre-synergy net working capital:
Net Working Capital:
Accounts Receivable
Plus: Inventory
Plus: Prepaid Expenses
Less: Deferred Revenue
Less: Accounts Payable
Less: Accrued Liabilities
Net Working Capital
2007
435.5
101.0
41.6
143.4
260.8
59.2
114.6
Working Capital Assumptions (1):
Accounts Receivable
Days Sales Equip. Rev.
Prepaid Expenses
Accounts Payable
Deferred Serv. Revenue
Accrued Liabilities
2008
521.9
135.0
46.9
163.3
335.4
64.6
140.5
2009
595.0
153.9
53.5
186.1
382.4
73.7
160.2
2010
669.3
173.1
60.2
209.4
430.2
82.9
180.2
2011
736.3
190.4
66.2
230.3
473.2
91.1
198.2
2012
787.8
203.7
70.8
246.4
506.3
97.5
212.1
41.7x
154.4x
1.38%
35.5x
14.0x
6.8x
41.7x
154.4x
1.38%
35.5x
14.0x
6.8x
41.7x
154.4x
1.38%
35.5x
14.0x
6.8x
41.7x
154.4x
1.38%
35.5x
14.0x
6.8x
41.7x
154.4x
1.38%
35.5x
14.0x
6.8x
Note that working capital ratios are a
function of revenues and operating
expenses; therefore, synergies that
affect revenue or operating expense
will also affect working capital
1) Ratios are based on a 360-day year.
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Valuing Operations:
 Putting it all together to derive pre-synergy FCF
Un-Levered Free Cash Flows:
EBIAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
2008
243.5
705.2
25.9
631.3
291.6
2009
277.6
804.0
19.7
719.7
342.3
2010
334.6
867.4
20.0
867.4
314.5
2011
387.1
922.4
18.0
970.1
321.4
2012
434.6
952.9
13.9
1,055.0
318.6
 Will this cover the proposed debt burden?
 Hmmm….
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Initial Debt Capacity:
 Since we know the 2007 EBITDA, the required interest
coverage ratio, and the interest rate, we can work
backward to determine the initial debt
Pre-Synergy Est. 2007 EBIT DA
Interest Coverage Ratio
Maximum Interest Expense
Interest Rate
Est. Debt Capacity
AirThread Debt Capacity:
1,033.3
T otal Borrowing
5.00x
Amortization Period
206.7
Payments Per Year
5.50%
Monthly Payment
3,757.5
3,757.5
10 Years
12
40.8
Note: This equates to ≈ $490 million of debt service annually (before considering the benefit of the tax
shields); so, AirThread would need to throw off a lot more cash than the pre-synergy forecast
Assuming American Cable was intent on $3.75 Bn of initial debt, what could they do to help ameliorate this
problem?
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Debt Servicing:
 Obviously, the synergies will have to go a long way
toward plugging the gap
Pre-Synergy
Un-Levered Free Cash Flows:
EBIAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
2008
243.5
705.2
25.9
631.3
291.6
2009
277.6
804.0
19.7
719.7
342.3
Un-Levered Free Cash Flows:
EBIAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
2008
285.2
729.7
37.5
653.2
324.2
2009
357.2
846.0
29.4
757.3
416.5
2010
334.6
867.4
20.0
867.4
314.5
2011
387.1
922.4
18.0
970.1
321.4
2012
434.6
952.9
13.9
1,055.0
318.6
2011
574.2
1,005.0
34.3
1,057.0
487.9
2012
674.6
1,051.5
26.3
1,164.2
535.7
Post-Synergy
Harvard University Extension School
2010
454.6
925.5
30.1
925.5
424.5
Joel L. Heilprin
As it turns out, AirThread’s
balance sheet had ≈ $205 million
of initial cash, and the initial
payments contain more interest
than principal. As a result, the
after-tax debt burden in 2008 is ≈
$410 million and never goes
beyond $430 million
See the accompanying spreadsheet
© 59th Street Partners LLC
AirThread Connections
Cost of Capital:
 As a starting point, let’s consider our end goal(s) in light of
our preferred methodology
 Since the outstanding debt will be paid down based on a
predetermined schedule over the intermediate term, the APV
method is well suited over this period
‫־‬
As a result, the intermediate FCF will be discounted at ra
 However, for the long-term, the intention is to employ a target
D/V based on the industry average
‫־‬
This type of constant capital structure scenario is ideally suited for
rWACC
 Thus, we need two discount rates for two distinct settings
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Cost of Capital:
 Un-levering the equity beta
 If you assume the comparable companies are employing a
target capital structure
𝛽𝑎 = 𝛽𝑒
𝐸
𝐷
+ 𝛽𝑑
𝑉
𝑉
 Conversely, if you assume the comparable companies use a
fixed debt schedule
𝛽𝑎 =
𝐷
𝛽𝑒 + 𝛽𝑑 𝐸
1+
Harvard University Extension School
𝐷
𝐸
Joel L. Heilprin
1−𝜏
1−𝜏
© 59th Street Partners LLC
AirThread Connections
Cost of Capital:
 Un-levered βa based on constant D/V
Comparable Companies:
Universal Mobile
Neuberger Wireless
Agile Connections
Big Country Communications
Rocky Mountain Wireless
Average
Equity
Value
118,497
189,470
21,079
26,285
7,360
Net
Debt
69,130
79,351
5,080
8,335
3,268
Debt/
Value
36.8%
29.5%
19.4%
24.1%
30.7%
28.1%
Debt/
Equity
58.3%
41.9%
24.1%
31.7%
44.4%
40.1%
Equity
Beta
0.86
0.89
1.17
0.97
1.13
1.00
Asset
Beta
0.60
0.67
0.97
0.77
0.83
0.77
 Un-levered βa with a known debt schedule
Comparable Companies:
Universal Mobile
Neuberger Wireless
Agile Connections
Big Country Communications
Rocky Mountain Wireless
Average
Equity
Value
118,497
189,470
21,079
26,285
7,360
Harvard University Extension School
Net
Debt
69,130
79,351
5,080
8,335
3,268
Debt/
Value
36.8%
29.5%
19.4%
24.1%
30.7%
28.1%
Debt/
Equity
58.3%
41.9%
24.1%
31.7%
44.4%
40.1%
Joel L. Heilprin
Equity
Beta
0.86
0.89
1.17
0.97
1.13
1.00
Asset
Beta
0.68
0.74
1.04
0.84
0.92
0.84
© 59th Street Partners LLC
AirThread Connections
Cost of Capital:
 Using CAPM, the required return on assets will be
𝑟𝑎 = 𝑟𝑓 + 𝛽𝑎 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 → .0425 + .77 . 05 = 8.09%
Or
𝑟𝑎 = 𝑟𝑓 + 𝛽𝑎 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 → .0425 + .84 . 05 = 8.47%
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Cost of Capital:
 Now that we have a discount rate for the intermediate
term, attention can be turned to the long-term WACC
 Given the industry average D/V of ≈ 28%, the asset beta can
be re-levered using this target
 Since WACC is being employed; and hence a constant
capital structure is assumed, the equity beta will be
determined as follows:
𝛽𝑒 = 𝛽𝑎
Harvard University Extension School
𝑉
𝐷
− 𝛽𝑑
𝐸
𝐸
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Cost of Capital:
Non-Constant Capital Structure
Debt/
Value
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
28.1%
35.0%
40.0%
45.0%
47.0%
50.0%
Debt/
Equity
0.0%
5.3%
11.1%
17.6%
25.0%
33.3%
39.1%
53.8%
66.7%
81.8%
88.7%
100.0%
Asset
Beta
0.84
0.84
0.84
0.84
0.84
0.84
0.84
0.84
0.84
0.84
0.84
0.84
Equity
Beta
0.84
0.88
0.92
0.97
1.02
1.08
1.12
1.22
1.31
1.41
1.46
1.54
Cost of
Equity
8.47%
8.65%
8.86%
9.08%
9.34%
9.63%
9.83%
10.34%
10.79%
11.31%
11.55%
11.94%
Constant Capital Structure
Cost of
Debt
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
𝑊𝐴𝐶𝐶 =
Harvard University Extension School
WACC
8.47%
8.39%
8.30%
8.22%
8.13%
8.05%
7.99%
7.88%
7.79%
7.71%
7.67%
7.62%
Debt/
Value
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
28.1%
35.0%
40.0%
45.0%
47.0%
50.0%
Debt/
Equity
0.0%
5.3%
11.1%
17.6%
25.0%
33.3%
39.1%
53.8%
66.7%
81.8%
88.7%
100.0%
Asset
Beta
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
0.77
Equity
Beta
0.77
0.80
0.84
0.88
0.92
0.97
1.01
1.10
1.18
1.27
1.32
1.39
Cost of
Equity
8.09%
8.26%
8.44%
8.64%
8.87%
9.12%
9.30%
9.76%
10.16%
10.62%
10.84%
11.19%
Cost of
Debt
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
5.50%
WACC
8.09%
8.01%
7.92%
7.84%
7.75%
7.67%
7.62%
7.50%
7.41%
7.33%
7.29%
7.24%
𝐸
𝐷
𝑟𝑒 +
𝑟 1−𝜏
𝑉
𝑉 𝑑
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Interest Tax Shields:
 Since the terminal value is being determined based on
WACC, the TV tax shield is imputed
 Thus, our main concern is with the intermediate interest tax
shields
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑇𝑎𝑥 𝑆ℎ𝑖𝑒𝑙𝑑 = 𝐷 𝑟𝑑 𝜏
 To determine the debt balance and interest expense, we need
to create a debt pay-down schedule
 Fortunately, this is just a simple mortgage schedule
‫ ־‬See the accompanying spreadsheet for the schedule
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Long-Term Growth Rates:
 To begin, let’s establish the notion of a floor and ceiling for long-term growth

The floor should be zero
‫־‬



A long-term growth rate < 0, would implied a long-term liquidation, not a going concern
Also, it should be noted that a growth rate equal to zero implies negative real growth if
inflation is positive
Turning to the ceiling, long-term growth should never be greater than the long-term
growth rate of the macro economy – Why…
The answer requires us to think about what we learned in estimating required rates of
return
‫־‬
Recall that virtually every methodology for estimating discount rates is based on investors
requiring the risk-free rate plus some premium for taking on additional risk (consider the
CAPM below)
𝐸 𝑟𝑖 = 𝑟𝑓 + 𝛽𝑖 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
‫־‬
Further, since risk-free rates are based on macroeconomic expectations of growth and
inflation, and since the discount rate of a risky asset must be greater than the risk-free rate, it
stands to reason that sustainable growth rates cannot exceed discount rates
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Long-Term Growth Rates:
 With a potential range established, a more refined estimate
can be made by considering the company’s fundamentals
 As a starting point, any going concern must reinvest in its
operations in order to continue its existence
 From a fundamental standpoint, growth in operating income will
be a function of the amount reinvested in the business and the
profitability of the business
𝐺𝑟𝑜𝑤𝑡ℎ 𝑖𝑛 𝐸𝐵𝐼𝑇 = 𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 𝑥 𝑅𝑂𝐶
‫־‬
Reinvestment rate is
𝑅𝑒𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 =
‫־‬
Return on capital is
𝑅𝑂𝐶 =
Harvard University Extension School
Joel L. Heilprin
∆𝑁𝑂𝐴
𝐸𝐵𝐼𝐴𝑇
𝐸𝐵𝐼𝐴𝑇
𝑁𝑂𝐴
Looking at this
collectively, long-term
growth is amount of
reinvestment relative to the
existing capital base
© 59th Street Partners LLC
AirThread Connections
Long-Term Growth Rates:
 Turning our attention back to AirThread
With Synergies
Long-Term Growth Rate:
EBIAT
Invested Capital
RO C
Net Reinvestment
EBIAT
Re inve stme nt Rate
Est. EBIAT Growth Rate
Net Operating Assets 2012:
T otal Operating Assets
Less: T otal Operating Liabilities
Ne t O pe rating Asse ts
Without Synergies
2012
674.6
3,976.9
17.0%
139.0
674.6
20.6%
3.5%
5,801.4
1,824.5
3,976.9
Harvard University Extension School
Long-Term Growth Rate:
EBIAT
Invested Capital
RO C
Net Reinvestment
EBIAT
Re inve stme nt Rate
Est. EBIAT Growth Rate
Net Operating Assets 2012:
T otal Operating Assets
Less: T otal Operating Liabilities
Ne t O pe rating Asse ts
Joel L. Heilprin
2012
434.6
3,908.9
11.1%
116.0
434.6
26.7%
3.0%
5,709.1
1,800.2
3,908.9
Note: in order to estimate
NOA and long-term
growth, a reconciling
balance sheet needed to be
constructed
© 59th Street Partners LLC
AirThread Connections
Assembling the Pieces:
 We now have everything we need for a complete valuation
 Un-levered free cash flows
 Initial debt estimate and a debt schedule providing intermediate
interest expense and tax shields
 Un-levered cost of capital and a WACC for calculating the
terminal value
 Long-term growth rate
 Earnings multiple and earnings of affiliates to estimate the value
of the non-operating assets
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC
AirThread Connections
Un-Levered Free Cash Flows:
EBIAT
Plus: Depreciation & Amortization
Less: Changes in Working Capital
Less: Capital Expenditures
Un-Levered Free Cash Flow
Interest T ax Shields
Un-Levered Cost of Capital
Cost of Debt
Long-T erm WACC
Long-T erm Growth Rate
PV of Intermediate FCF
PV of Intermediate T ax Shields
Total Intermediate Value
T erminal Value
Total Value of O perations
Earnings of Affilates 2007
Average P/E Multiple
Value of Non-O perating Assets
Total Value
2008
285.2
729.7
37.5
653.2
324.2
2009
357.2
846.0
29.4
757.3
416.5
2010
454.6
925.5
30.1
925.5
424.5
2011
574.2
1,005.0
34.3
1,057.0
487.9
2012
674.6
1,051.5
26.3
1,164.2
535.7
79.8
73.2
66.3
59.0
51.3
300.0
75.6
356.5
65.8
336.1
56.5
357.4
47.6
363.0
39.3
8.09%
5.50%
7.62%
3.49%
1,712.9
284.8
1,997.7
9,320.5
11,318.2
13,453
90.0
19.0x
1,710.6
13,028.9
Harvard University Extension School
Joel L. Heilprin
© 59th Street Partners LLC