1. Valuation Technique Used
Two valuation approaches are utilized for analysis,
a. Base Case “As-Is” valuation of ATC’s cashflows and
b. After acquisition valuation of the ATC’s cashflows
This provides a before and after picture of ATC thus making the crafting of ATC’s valuation easier. These valuation techniques is recommended by EF Moody (2012) for conducting investment appraisals, specifically the procedure of comparing the value of a company’s operations with the value of the company after enjoying the benefits and improvements due to a merger or acquisition. The discounted cash flow approach leading to the calculation of the company’s net present value is used to determine the value of the company through the cash it generates from its operations (Stockopedia.com, 2012).
2. Valuation Methodologies
a. Cash flows from 2008 to 2012 - the Adjusted Present Value of the company’s free cash flows (FCF) was used. In this approach debt financing is removed from the calculations as a base case scenario (all equity case). Macabacus (2012) provides a guideline for the calculations.
b. The company will have perpetual cashflows after 2012. If the company were terminated, these annual flows will have to be valued. The discount factor used is the company’s WACC, computed to be 7.19%.
c. ATC made substantial investments in other companies. The value of these investments was calculated by multiplying the book value of ATC’s investments with the Price to Earnings ratio of the different companies to approximate the market value of these investments. A definition of the price to earnings ratio calculations is explained in the About-Finance (2012) website. The value of ATC’s non-operating assets is US$ 1.730 billion.
3. Choice of Rates
a. For unlevered FCF, the discount rate is the company’s ROA which estimates the company’s efficiency. The principle is that the company must have the same performance whether it uses debt or full equity for operations.
b. For terminal value, the discount rate is the company’s WACC which takes into account the cost of debt and equity and the company’s tax rate. This also makes the valuation comparable with operations of other companies in the same industry.
c. Growth rate was determined using the percentage growth of US GDP using 30-year GDP data (upper and lower limit) and determining the median of the two.
4. Calculating the company as a going concern
a. The first five years were calculated using the APV approach at a discount factor of 7.82% giving an adjusted NPV of US$ 1.272 billion.
b. The NPV of the company’s perpetual cashflows or its terminal value is US$ 6.32 billion.
5. The total value of the company
a. The value of the company without the synergy is US$ 7.965 billion.
b. The second round of valuation essentially recalculates the same components of the base case valuation, but includes the effect of synergies of ACC buying ATC. This is calculated by phasing in the cost savings, as explained in the case data. The backhaul savings cost is approximately 20% of ATC’s operating expenditures. Doing so increases the net income of the company. Recalculating the Adjusted Present Value of the company gives us an Adjusted NPV of FCF of US$ 1.921 billion. Using the same techniques mentioned earlier, the terminal value of ATC’s operations is also recalculated, given the higher quality of free cash flows enjoyed by the company. The recalculated terminal value of ATC’s operations is US$ 11.91 billion! Non-operating assets are the same for this round of calculations since they are not affected by the cost savings coming from ACC’s purchase of ATC. The recalculated value of ATC is now US$13.176 billion.
