The IPO of MaxiSat Since SpaceX commercially operates its highly efficient Falcon 9 rocket, sending satellites to space has become cheap and easy. But, less than a decade ago, satellite service provision used to be a business with high barriers to entry. Rocket launching companies were state owned, so government connections were a necessity. Sending a satellite into space was very expensive. High barriers to entry, very large capital expenditures - the satellite sector was, in essence, a utility industry. Imagine we are in the end of year 2005. MaxiSat is a global leader in this industry. It has a global market share of 13 %. This year MaxiSat generated revenues of $750m and an EBITDA of $579m. Half of the revenues are generated in Western Europe; the other half in North America. MaxiSat operates a fleet of 23 geostationary satellites located at 17 orbital positions. MaxiSat has developed a premium location at 74 W, above New York City and New England. Its other premium location is at 13 E, right above Western Europe this is the number one broadcasting platform in Europe. MaxiSats third main location is at 28.5 E, positioned to serve the UK and Ireland. MaxiSats revenues are mainly derived from video services. They include direct broadcasting of TV and radio programs to satellite-dish equipped houteholds, TV and radio distribution to cable network head-ends, professional video networks and point-to-point real-time links. Other revenues include data and value added services to corporate customers. Back in the 1980s, MaxiSat was an international joint venture of the worlds largest telecom operators. MaxiSat owned the satellites and could only sell capacity its owner-members. In 2001, MaxiSats was authorized to develop commercial relationships with other parties and started to operate like a truly independent firm. Since then, most of MaxiSats original owners have sold their stakes to private equity investors. The current ownership structure consists mainly of financial investors: KKR & Co. (38.4% of shares), Texas Pacific Group (23.8%), PAI partners (17.3%), and Goldman Sachs (10.7%). The total number of shares outstanding is 148.5 million. The Initial Public Offering The investor group wants to take MaxiSat public. This involves selling shares to public markets in an Initial Public Offering (IPO), since the firm is not publicly listed. Because MaxiSat has substantial debt outstanding, proceeds from the primary issuance will be used to reduce MaxiSats leverage. This increase in leverage occurred in 2005 due to a large dividend ($3.096 billion) MaxiSat paid to its owners. Over the long-run, MaxiSats CFO plans to finance the firm at the similar debt-to-value ratio to its competitors in North America and Western Europe. MaxiSats interest rate in 2004 was 4.5%. However, the recent deal struck with banks, after the sharp increase in leverage in 2005, was priced at 9.8%. After leverage gets reduced in the IPO, MaxiSat expects to be able to borrow at 4.5% again. The current yield on the short-term Treasury bill is 2.5% and the current yield on the long-term Treasury bond is 4%. The historical average yields were 4.2% (short-term bills) and 5.1% (long-term bonds). The investor group expects the market risk premium to be 7%. 5 The investor group is looking for an investment bank to organize the IPO. However, the investor group wants to obtain their own valuation of MaxiSats equity before listening to the bankers ideas. You are working as an analyst for one of these investors, and your job is to generate your own estimate of the fundamental value of MaxiSats operations, equity, and the share price. Exhibit 1 presents the income statement and the balance sheet of MaxiSat for 2004-2005. The balance sheet already subtracts excess cash from debt, listing the difference as net debt. Exhibit 2 gives financial projections for MaxiSat for 2006-2008. Finally, Exhibit 3 gives a list of publicly traded companies in the satellite industry.

QUESTION 1. Compute the Weighted Average Cost of Capital (WACC) appropriate for your valuation of MaxiSat. Please outline in detail all the steps of your calculations. (a) Choose appropriate comparable firm(s) for MaxiSat and briefly explain your choice. (b) Compute the asset beta for MaxiSat, using comparable firm(s) you selected. (c) Choose the appropriate capital structure for your discounting of MaxiSats future cash flows and briefly explain your choice. (d) Estimate the WACC for your valuation of MaxiSat.

QUESTION 2. Compute the Value of MaxiSats Operations (Firm Value), Equity, and Share To make grading easier, use a 10% WACC for the rest of the question. (a) Estimate carefully MaxiSats expected cash flows for years 2006, 2007, and 2008. (b) Assuming that the cash flows of MaxiSat will grow at 4% in perpetuity (including 2009, i.e., the free cash flow in 2009 is 4% higher than in 2008), estimate the terminal value for MaxiSat. (c) Calculate the value of MaxiSats operations. (d) Compute your value of MaxiSats equity per share. (e) Answer questions c and d estimating the terminal value via the Firm Value (EV) / EBITDA multiple of comparable firms. Assume that you expect these multiple to be similar in 2008 and 2005.

QUESTION 3. Suppose that MaxiSat can expand the number of satellites in 3 years. Depending on economic conditions in 2008, MaxiSat could decide to expand the number of satellites. In this case, MaxiSat would need to invest an additional $600 million in CAPEX and net working capital in late 2008. MaxiSat expects that after this investment is made, it will generate an expected $60 million in additional free cash flow every year starting from 2009. This amount will not grow. There is considerable uncertainty about the projected profitability, and the realized free cash flow could be 50% lower than expected at $30 million each year, or 50% higher at $90 million. Both outcomes are equally likely. MaxiSat expects to know which of the two scenarios will occur by the time the investment decision has to be made in 2008. No additional investments in working capital or additional capital expenditure will be needed beyond 2008. (a) How much value does the expansion project add to the value of MaxiSats operations in late 2005, assuming that MaxiSat has to commit in 2005 whether to undertake the expansion? (b) How much value does the expansion project add to the value of MaxiSats operations in late 2005, assuming that MaxiSat can delay the decision of undertaking the expansion until 2008?

Exhibit 1: Income Statement and Balance Sheet of MaxiSat Income statement 2004 760 73 91 2005 750 69 101 596 580 In $m Sales COGS SG&A = EBITDA - depreciation = EBIT - interest expense = Pretax income - Corporate income tax = Net income 255 346 341 234 39 47 187 302 36 267 50 137 Balance Sheet 2004 In Sm Intangible assets + Tangible assets + Financial assets = Fixed assets (1) Inventories +account receivables + other current assets - account payables - other current liabilities = Working capital (2) Net assets = (1) + (2) Shareholder's equity (3) Net debt (4) Net assets = (3) + (4) 2,315 119 2,434 2 219 70 36 2005 1,710 2,064 113 3,887 1 212 103 44 507 114 -235 111 2,545 1,614 931 2,545 3,652 373 3,279 3,652 Exhibit 2: Financial Projections for MaxiSat (in $ millions) 2005 2006 2007 772 794 2008 833 194 639 Sales COGS & SG&A EBITDA Depreciation Earnings before Interest and Taxes (EBIT) Tax rate 200 572 265 307 40% 186 608 265 343 40% 265 374 40% -235 Net Working Capital Capital Expenditure -234 320 -233 150 -230 210 Exhibit 3: Selected Financial Information for Public Firms in Satellite Industry Firm Name Area Stock price (close) Shares outstand ing (mil.) Debt, book (in $m) Equity, book (in $m) Equity Beta PIE ratio D/ (D+E), book (%) Firm (Enterpris e) Value / EBITDA SES Global Panamsat Inmarsat $52.2 $70.0 $37.6 Europe North America Indian & Pacific oceans Asia Asia 70 14 58 1,244 323 259 3,111 496 517 28.57 39.39 33.33 1.61 1.06 1.45 13.05 8.97 35.14 8.6 6.0 11.2 JSAT Asiasat Average $90.8 $40.1 $58.14 43 21 41.2 82 175 416.55 274 583 996.32 23.08 23.08 29.48 0.51 0.94 1.11 129.71 16.04 40.58 6.5 8.1 8.08 Exhibit 1: Income Statement and Balance Sheet of MaxiSat Income statement 2004 760 73 91 2005 750 69 101 596 580 In $m Sales COGS SG&A = EBITDA - depreciation = EBIT - interest expense = Pretax income - Corporate income tax = Net income 255 346 341 234 39 47 187 302 36 267 50 137 Balance Sheet 2004 In Sm Intangible assets + Tangible assets + Financial assets = Fixed assets (1) Inventories +account receivables + other current assets - account payables - other current liabilities = Working capital (2) Net assets = (1) + (2) Shareholder's equity (3) Net debt (4) Net assets = (3) + (4) 2,315 119 2,434 2 219 70 36 2005 1,710 2,064 113 3,887 1 212 103 44 507 114 -235 111 2,545 1,614 931 2,545 3,652 373 3,279 3,652 Exhibit 2: Financial Projections for MaxiSat (in $ millions) 2005 2006 2007 772 794 2008 833 194 639 Sales COGS & SG&A EBITDA Depreciation Earnings before Interest and Taxes (EBIT) Tax rate 200 572 265 307 40% 186 608 265 343 40% 265 374 40% -235 Net Working Capital Capital Expenditure -234 320 -233 150 -230 210 Exhibit 3: Selected Financial Information for Public Firms in Satellite Industry Firm Name Area Stock price (close) Shares outstand ing (mil.) Debt, book (in $m) Equity, book (in $m) Equity Beta PIE ratio D/ (D+E), book (%) Firm (Enterpris e) Value / EBITDA SES Global Panamsat Inmarsat $52.2 $70.0 $37.6 Europe North America Indian & Pacific oceans Asia Asia 70 14 58 1,244 323 259 3,111 496 517 28.57 39.39 33.33 1.61 1.06 1.45 13.05 8.97 35.14 8.6 6.0 11.2 JSAT Asiasat Average $90.8 $40.1 $58.14 43 21 41.2 82 175 416.55 274 583 996.32 23.08 23.08 29.48 0.51 0.94 1.11 129.71 16.04 40.58 6.5 8.1 8.08