Valuation of AirThread Connections

In early December 2007, Robert Zimmerman, senior vice president of business development for American Cable Communications (ACC), was in his office sifting through a number of investment banking proposals related to potential acquisition targets when he paused to consider the recent presentation made by Rubinstein & Ross (R&R).

Rubinstein & Ross was a boutique investment bank with a strong reputation for doing deals in the media and telecommunications sector. During that meeting, Elliot Bianco pitched the idea of American Cable buying out AirThread Connections, a large regional cellular provider. The basic premise of the AirThread acquisition was threefold.

First, American Cable and AirThread could help each other compete in an industry that was moving more and more toward bundled service offerings. American Cable currently offered video, internet, and landline telephony, but did not have any kind of wireless offerings. This gap in product offerings had so far been exploited only modestly by competitorsprimarily incumbent local exchange carriers (ILEC's) with wireless networksbut as those firms grow their video offerings the problem was expected to become more acute. Additionally, American Cable saw a looming competitive threat from advanced wireless networks based on the 802.16n standard for mobile WiMAX. Those networks are expected to be able to deliver not only wireless telephony but also internet service with throughput similar to that which is currently offered by cable providers. AirThread, for its part, faced similar pressures with respect to the same set of competitors because it didn't offer landline or internet service. However, unlike ACC, AirThread was feeling the pressure more immediately in the form of higher customer acquisition and retention costs, plus slower growth.

Second, the acquisition could help both companies expand into the business market. Both firms had customer bases that were heavily reliant on retail/residential customers. In the case of American Cable, this had resulted in a lack of long-term service contracts, which could have increased the stability and reliability of the company's revenues. In turn, this would also have had the beneficial effect of reducing the risk associated with ACC's operations. Furthermore, expanding into the business segment would help each firm increase its network utilization and, as a result, increase its cost efficiency.

1. Please describe the methodological approach that should be used to value Airtread. For example, should Ms. Zhang use APV, WACC, or some combination thereof.

2. How should the cash flows be valued for 2008 through 2012?

3. What discount rate should Ms. Zhang use for un-levered cash flow for 2008 through 2012?

4. Calculate the total value of AirTread.