AIRTHREAD ACQUISITION

Revenue Projections:
Service Revenue
Service Revenue Growth

Operating Assumptions

2008
4,194.3
14.0%

2009
4,781.5
14.0%

2010
5,379.2
12.5%

2011
5,917.2
10.0%

2012
6,331.4
7.0%

Equipment Revenue
Equipment Revenue/Service Revenue (1)

314.8
7.5%

358.8
7.5%

403.7
7.5%

444.1
7.5%

475.2
7.5%

Operating Expenses:
System Operating Expenses
System Operating Exp./Service Revenue

838.9
20.0%

956.3
20.0%

1,075.8
20.0%

1,183.4
20.0%

1,266.3
20.0%

Cost of Equipment Sold

Equipment COGS

755.5
240.0%

861.2
240.0%

968.9
240.0%

1,065.8
240.0%

1,140.4
240.0%

Selling, General & Administrative

SG&A/Total Revenue

1,803.6
40.0%

2,056.2
40.0%

2,313.2
40.0%

2,544.5
40.0%

2,722.6
40.0%

Depreciation & Amortization

705.2

804.0

867.4

922.4

952.9

Tax Rate

40.0%

40.0%

40.0%

40.0%

40.0%

41.67x
154.36x
1.38%
35.54x
14.01x
6.85x

41.67x
154.36x
1.38%
35.54x
14.01x
6.85x

41.67x
154.36x
1.38%
35.54x
14.01x
6.85x

41.67x
154.36x
1.38%
35.54x
14.01x
6.85x

41.67x
154.36x
1.38%
35.54x
14.01x
6.85x

631.3
14.0%

719.7
14.0%

867.4
15.0%

970.1
15.3%

1,055.0
15.5%

Working Capital Assumptions (1):

Accounts Receivable
Days Sales Equip. Rev.
Prepaid Expenses
Accounts Payable
Deferred Serv. Revenue
Accrued Liabilities
Capital Expenditures (2):
Capital Expenditures
Cap-x/Total Revenue

(1) Based on a 360-day year. Days Payable, Deferred Service Revenue, and Days Accrued Liabilities are
based on total cash operating expenses.
(2) Includes investments in property, plant & equipment, as well as licenses and customer lists.

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AIRTHREAD ACQUISITION

Licensing Agreemts

Total Consolidated Markets:

Region Population Customers Penetration
Central US
65,096
3,846
5.9%
Mid-Atlantic
11,677
1,180
10.1%
New England
2,830
518
18.3%
Northwest
2,287
431
18.8%
New York
481
147
30.6%
Total
82,371
6,122
7.4%
Total Operating Markets:
Region Population Customers Penetration
Central US
32,497
3,846
11.8%
Mid-Atlantic
7,346
1,180
16.1%
New England
2,344
518
22.1%
Northwest
2,287
431
18.8%
New York
481
147
30.6%
Total
44,955
6,122
13.6%

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AIRTHREAD ACQUISITION

Customer Data:
Net Customer Additions
Cost Per Customer Addition
Cost of New Customer Additions
Cost of Equipment Sold/Equipment Revenue

Monthly Churn Rate

Revenue Per Minute

Monthly ARPU
Customer Minutes Per Month
Revenue Per Minute

Customer Operating Data

2005
301
372
111,972

2006
310
385
119,350

2007
477
487
232,299

251.3%

219.9%

239.8%

2.1%

2.1%

1.7%

2005
45.24
625
0.0724

2006
47.23
704
0.0671

2007
51.13
859
0.0595

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AIRTHREAD ACQUISITION

Income Statement

Historical Operating Results

Operating Results:
Service Revenue
Plus: Equipment Sales
Total Revenue
Less: System Operating Expenses
Less: Cost of Equipment Sold
Less: Selling, General & Administrative
EBITDA
Less: Depreciation & Amortization
EBIT
Less: Interest Expense
Plus: Equity in Earnings of Affiliates
Plus: Gains (Losses) on Investments
Plus: Other Income
EBT
Less: Taxes
Income Before Minority Interest
Less: Minority Interest
Net Income

2005
2,827.0
203.7
3,030.8
604.1
511.9
1,217.7
697.0
490.1
206.9
84.9
66.7
18.1
54.5
261.3
95.9
165.5
10.5
155.0

2006
3,214.4
258.7
3,473.2
639.7
568.9
1,399.6
865.0
555.5
309.5
93.7
93.1
50.8
(46.6)
313.1
120.6
192.5
13.0
179.5

2007
3,679.2
267.0
3,946.3
717.1
640.2
1,555.6
1,033.3
582.3
451.1
84.7
90.0
83.1
7.0
546.5
216.7
329.8
15.1
314.7

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AIRTHREAD ACQUISITION

Assets:
Cash & Cash Equivalents
Marketable Securities
Accounts Receivable
Inventory
Prepaid Expenses
Deferred Taxes
Other Current Assets
Total Current Assets
Property, Plan & Equipment
Licenses
Customer Lists
Marketable Equity Securities
Investments in Affiliated Entities
Long Term Note Receivable
Goodwill
Other Long Term Assets
Total Assets
Liabilities & Owners' Equity:
Accounts Payable
Deferred Revenue & Deposits
Accrued Liabilities
Taxes Payable
Deferred Taxes
Note Payable
Forward Contract
Derivative Liability
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Forward Contracts
Derivative Liability
Deferred Tax Liability
Asset Retirement Obligation
Other Deferred Liabilities
Minority Interest
Common Stock & Paid-In Capital
Retained Earnings
Total Liabilities & Owners' Equity

Balance Sheet

2005
29.0
0.0
362.4
92.7
32.1
8.2
15.5
539.9

2006
32.9
249.0
407.4
117.2
35.0
0.0
13.4
854.9

2007
204.5
16.4
435.5
101.0
41.6
18.6
16.2
833.8

2,553.0
1,362.3
47.6
225.4
172.1
4.7
481.2
30.0
5,416.2

2,628.8
1,494.3
26.2
4.9
150.3
4.5
485.5
31.1
5,680.6

2,595.1
1,482.4
15.4
0.0
157.7
4.4
491.3
31.8
5,611.9

254.1
111.4
42.9
36.7
0.0
135.0
0.0
0.0
82.6
662.7

254.9
123.3
47.8
26.9
26.3
35.0
159.9
88.8
93.7
856.7

260.8
143.4
59.2
43.1
0.0
0.0
0.0
0.0
97.7
604.2

1,001.4
159.9
25.8
647.1
90.2
46.2

1,001.8
0.0
0.0
601.5
127.6
62.9

1,002.3
0.0
0.0
554.4
126.8
84.5

41.9

36.7

43.4

1,375.0
1,366.0
5,416.2

1,378.9
1,614.4
5,680.6

1,404.1
1,792.1
5,611.9

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AIRTHREAD ACQUISITION

Amortization Schedule

Term Loan Amortization

Date:
1/31/2008
2/28/2008
3/31/2008
4/30/2008
5/31/2008
6/30/2008
7/31/2008
8/31/2008
9/30/2008
10/31/2008
11/30/2008
12/31/2008
1/31/2009
2/28/2009
3/31/2009
4/30/2009
5/31/2009
6/30/2009
7/31/2009
8/31/2009
9/30/2009
10/31/2009
11/30/2009
12/31/2009
1/31/2010
2/28/2010
3/31/2010
4/30/2010
5/31/2010
6/30/2010
7/31/2010
8/31/2010
9/30/2010
10/31/2010
11/30/2010
12/31/2010
1/31/2011
2/28/2011
3/31/2011
4/30/2011
5/31/2011

Payment
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41

Annual
Interest
5.50%
17
17
17
17
17
17
17
16
16
16
16
16
16
16
16
16
15
15
15
15
15
15
15
15
14
14
14
14
14
14
14
14
14
13
13
13
13
13
13
13
12

Principal
24
24
24
24
24
24
24
24
24
25
25
25
25
25
25
25
25
25
26
26
26
26
26
26
26
26
27
27
27
27
27
27
27
27
28
28
28
28
28
28
28

Amortization
Balance
Period
3,758
120
3,734
1
3,710
2
3,687
3
3,663
4
3,639
5
3,615
6
3,590
7
3,566
8
3,542
9
3,517
10
3,492
11
3,468
12
3,443
13
3,418
14
3,393
15
3,367
16
3,342
17
3,317
18
3,291
19
3,265
20
3,239
21
3,214
22
3,188
23
3,161
24
3,135
25
3,109
26
3,082
27
3,055
28
3,029
29
3,002
30
2,975
31
2,948
32
2,920
33
2,893
34
2,865
35
2,838
36
2,810
37
2,782
38
2,754
39
2,726
40
2,698
41

Date:
6/30/2011
7/31/2011
8/31/2011
9/30/2011
10/31/2011
11/30/2011
12/31/2011
1/31/2012
2/28/2012
3/31/2012
4/30/2012
5/31/2012
6/30/2012
7/31/2012
8/31/2012
9/30/2012
10/31/2012
11/30/2012
12/31/2012

Payment
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
41
2,176

Annual
Interest
5.50%
12
12
12
12
12
12
12
11
11
11
11
11
11
11
10
10
10
10
10

Principal
28
29
29
29
29
29
29
29
29
30
30
30
30
30
30
30
31
31
2,166

Amortization
Balance
Period
2,698
84
2,669
42
2,641
43
2,612
44
2,583
45
2,554
46
2,525
47
2,496
48
2,467
49
2,437
50
2,408
51
2,378
52
2,348
53
2,318
54
2,288
55
2,257
56
2,227
57
2,196
58
2,166
59
0
60

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Harvard Business Publishing

AIRTHREAD ACQUISITION

Wireless Comparables

Tax rate

Equity
Comparable Companies:
Market Value
Universal Mobile
118,497
Neuberger Wireless
189,470
Agile Connections
21,079
Big Country Communications
26,285
Rocky Mountain Wireless
7,360
Average

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
Beta1
0.86
0.89
1.17
0.97
1.13
1.00

Revenue
43,882
42,684
34,698
38,896
4,064

EBIT EBITDA
11,795
16,949
7,020
14,099
1,631
9,914
6,702
12,614
510
1,028

Net
Income
3,794
4,103
(30)
3,384
240

Unlevered beta
0.64
0.71
1.02
0.81
0.89
0.81

1) Equity betas were estimated on a weekly based on weekly stock returns over a three year period.
Note: The current industry and competitor leverage ratios reflect the historical averages that existed over the past three years.

Harvard Business Publishing

mparables

40%

s Publishing

Service Revenue
Equipment Revenue
Total Revenue
Operating Expenses:
System Operating Expenses
Cost of Equipment Sold
Selling, General & Administrative
Total cash expenses
Depreciation & Amortization
EBIT
Tax
PAT
Capital Expenditures
Change in NWC
FCFF

2008
2009
2010
2011
2012
1
2
3
4
5
4194.33 4781.536 5379.228 5917.151 6331.352
314.7732 358.8414 403.6966 444.0662 475.1509
4509.103 5140.378 5782.925 6361.218 6806.503
838.866 956.3073 1075.846 1183.43 1266.27
755.4556 861.2193 968.8718 1065.759 1140.362
1,803.6
2,056.2
2,313.2
2,544.5
2,722.6
3,398.0
3,873.7
4,357.9
4,793.7
5,129.2
705.2
804.0
867.4
922.4
952.9
405.9
462.7
557.6
645.2
724.4
162.3644 185.0955 223.0395 258.0659 289.7435
243.5466 277.6432 334.5593 387.0989 434.6153
631.2745 719.6529 867.4388 970.0857 1055.008
25.39
19.67
20.02
18.02
13.87
292.11
342.28
314.54
321.37
318.64

Tax Rate

40.0%

Working Capital Assumptions (1):

Accounts Receivable
Days Sales Equip. Rev.
Prepaid Expenses
Accounts Payable
Deferred Serv. Revenue
Accrued Liabilities
NWC

2007

2008

2009

2010

2011

2012

ng Capital Assumptions (1):

Sales Equip. Rev.

red Serv. Revenue

436
101
42.00
261
143
59
115.10

521.90x 594.96x 669.33x 736.26x 787.80x

134.97x 153.86x 173.10x 190.41x 203.73x
46.91
53.48
60.17
66.19
70.82
335.42
382.38
430.18
473.20
506.32
163.2542 186.1098 209.3736 230.3109 246.4327
64.61x
73.65x
82.86x
91.15x
97.53x
140.49
160.16
180.18
198.20
212.07

Balance Sheet
2005

2006

2007

29.003
0
362.359
92.748
32.068
8.218
15.489
539.885

32.912
249.039
407.438
117.189
34.955
0
13.385
854.918

204.533
16.352
435.497
100.99
41.588
18.566
16.227
833.753

87.06
16.35
521.90
134.97
46.91
18.57
16.23
841.98

13.22
16.35
594.96
153.86
53.48
18.57
16.23
866.68

16.35
669.33
173.10
60.17
18.57
16.23
953.74

16.35
736.26
190.41
66.19
18.57
16.23
1,044.00

16.35
787.80
203.73
70.82
18.57
16.23
1,113.50

2553.029 2628.848 2595.096

1362.263 1494.327 1482.446
47.649
26.196
15.375
225.387
4.873
0
172.093 150.325 157.693
4.707
4.541
4.422
481.235 485.452 491.316
29.985
31.136
31.773
5416.233 5680.616 5611.874

2521.14
1482.446
15.375
0
157.693
4.422
491.316
31.773
5546.15

2436.83
1482.446
15.375
0
157.693
4.422
491.316
31.773
5486.53

2436.83
1482.446
15.375
0
157.693
4.422
491.316
31.773
5573.60

2484.54
1482.446
15.375
0
157.693
4.422
491.316
31.773
5711.57

2586.64
1482.446
15.375
0
157.693
4.422
491.316
31.773
5883.16

260.791
143.445
59.224
43.105
0
0
0
0
97.678
604.243

335.42
163.25
64.61
43.105
0
0
0
0
97.678
704.07

382.38
186.11
73.65
0
0
0
0
0
0
642.14

430.18
209.37
82.86
0
0
0
0
0
0
722.41

473.20
230.31
91.15
0
0
0
0
0
0
794.65

506.32
246.43
97.53
0
0
0
0
0
0
850.28

Long Term Debt

Forward Contracts
Derivative Liability
Deferred Tax Liability
Asset Retirement Obligation
Other Deferred Liabilities

1001.385 1001.839 1002.293

159.856
0
0
25.818
0
0
647.086 601.535 554.412
90.224 127.639 126.844
46.234
62.914
84.53

3,468
0
0
554.412
126.844
84.53

3,161
0
0
554.412
126.844
84.53

2,933
0
0
554.412
126.844
84.53

2,700
0
0
554.412
126.844
84.53

2,458.54
0
0
554.412
126.844
84.53

Minority Interest
Total Liabilities
Common Stock & Paid-In Capital
Retained Earnings
Total Liabilities & Owners' Equity
Debt+Equity

41.871
2675.195
1375.016
1366.022
5416.233

FCFF
ob cash
Principal
Interest
Interest tax shield
Net cash balance
Assets:
Cash & Cash Equivalents
Marketable Securities
Accounts Receivable
Inventory
Prepaid Expenses
Deferred Taxes
Other Current Assets
Total Current Assets
Property, Plan & Equipment
Licenses
Customer Lists
Marketable Equity Securities
Investments in Affiliated Entities
Long Term Note Receivable
Goodwill
Other Long Term Assets
Total Assets
Liabilities & Owners' Equity:
Accounts Payable
Deferred Revenue & Deposits
Accrued Liabilities
Taxes Payable
Deferred Taxes
Note Payable
Forward Contract
Derivative Liability
Other Current Liabilities
Total Current Liabilities

Growth Rate

254.116
111.407
42.865
36.748
0
135
0
0
82.585
662.721

2.75%

254.871
123.344
47.842
26.913
26.326
35
159.856
88.84
93.718
856.71

36.7
2687.337
1378.881
1614.398
5680.616

2008
2009
2010
2011
2012
292.11
342.28
314.54
321.37
318.64
204.533
87.06
13.22
(95.27)
(204.23)
290
306
324
342
2,496
199
183
166
148
128
79.77158335 73.230033 66.319487 59.019132 51.30698
87.06
13.22
(95.27) (204.23) (2,458.54)

43.396
43.40
43.40
43.40
43.40
43.40
2415.718 4980.873112 4612.6741 4464.6587 4304.0572 4117.9997
1404.094
565.28
873.86
1108.94
1407.51
1765.16
1792.062
5611.874
5546.15
5486.53
5573.60
5711.57
5883.16
4,032.90 4,035.21 4,042.00 4,107.73
4,223.70

Tax rate

40%

P/E ratio

19.1

FCFF
PV(FCFF)
TV
PV(TV)
Base Case value of the firm

2008
2009
2010
2011
2012
1
2
3
4
5
292.1082 342.2827 314.539 321.3715 318.6437
269.7296 291.8464 247.6446 233.6396 213.909
6756.732
4535.869
5792.638

Interest tax shield

PV (tax shield)
PV (tax shield)

79.77158 73.23003 66.31949 59.01913 51.30698

75.61288 65.7937 56.47858 47.64123 39.25673
284.7831

PV(Firm)
Value of Inoperative assets
TOTAL VALUE

6077.421
1940.515
8017.937

In Case of Synergies

FCFF
PV(FCFF)
TV
PV(TV)
Base Case value of the firm

2008
2009
2010
2011
2012
1
2
3
4
5
292.1082 342.2827 314.539 321.3715 318.6437
268.7005 289.6238 244.8209 230.0943 209.8595
6388.272
4207.331
5450.43

Interest tax shield

PV (tax shield)
PV (tax shield)

79.77158 73.23003 66.31949 59.01913 51.30698

75.61288 65.7937 56.47858 47.64123 39.25673
284.7831

PV(Firm)
Value of Inoperative assets
TOTAL VALUE

5735.213
1940.515
7675.728

Q1

In the initial years, neither the debt to equity ratio nor the debt is constant and WACC cannot be used. Hence it is advisable to use the APV met
However, after 2012 the D/E ratio becomes constant and hence WACC method can be used to calculate the termainal value of the firm in 2012.
The free cash flows and terminal value can then be discounted at the unlevered cost of equity 8.30% to obtain the base case value of the firm.
Present values of interest tax shields which are discounted at cost of debt are then added to the base value along with the value of Inoperative a

Q2

The unlevered cost of equity of 8.30% should be used to discount the unlevered FCF as neither the nor the D/E ratio are constant in the initial y
However in the long run, the D/E ratio will become constant and hence WACC method taking into account the growth rate is used to calculate t

Q3

The long term growth rate comes out to be 2.75%. Using this rate, the terminal value of the firm is $6756.73 million and the present value of the

Q4

The Total value of AirThread before considering any synergies is $8017.94 million.
The synergies can be achieved due to:
a) Increase in revenue due to increased service offerings
b) Reduced operating expenses
Assuming Zhang's estimates of synergies are accurate, the total value of AirThread is $7675.73 million

Tax rate
Growth rate

40%
2.75%

Using average values of 2012

Equity market risk premium
Risk free rate
Unlevered beta
Cost of equity(unlevered)

5%
4.25%
0.81
8.30%

D/E ratio
Cost of debt
Levered beta
Cost of equiy (levered)
WACC

Using values of Rocky Mountain Wireless 2012

Equity market risk premium
Risk free rate
Unlevered beta
Cost of equity(unlevered)
D/E ratio
Cost of debt
Levered beta
Cost of equiy (levered)
WACC

40.09%
5.50%
1.004
9.27%
7.59%

5%
4.25%
0.89
8.71%
44.40%
5.50%
1.130
9.90%
7.87%

t is advisable to use the APV method upto 2012.

mainal value of the firm in 2012.
he base case value of the firm.
g with the value of Inoperative assets to obtain the total value.

ratio are constant in the initial years .

growth rate is used to calculate the terminal value.

llion and the present value of the going concern is $4535.87 million