Duff&Phelps
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Transcript of Duff&Phelps
Table of Contents Strategic Buyer Option1: Sprint Nextel
Strategic Buyer Option2: Cricket
Private Equity Buyer Option
Conclusion
Unknown Legal Matters
Takeaway
Sprint Nextel and Cricket would be the best companies to buy Teldar. Sprint Nextel would buy Teldar between ~ mean of ~ with the
control premium of ~.
Cricket would buy Teldar between ~ mean of ~ with the control premium of ~.
Private equity firm is willing to buy between ~ mean of ~; however, private equity firm won’t pay higher price than two strategic buyers because it is not expecting any synergy,
Knowing the unknown legal matter ahead of times would not affect the decisions of strategic buyers significantly because the current spectrum capacity of Teldar is only 2% of Sprint’s current capacity. However, if Teldar is still independent, this legal issue can be significantly impacting the value of Teldar.
Strategic Buyer Option1: Sprint Nextel Sprint Nextel is a third
largest service in Big 4.
Sprint Nextel would be interested in buying Teldar because The market capitalization is
similar to Teldar compared to other Big 4, so the high growth of Teldar will impact significantly (see figure1).
Sprint has been aggressively expanding its business into pre-paid services.
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Growth and Market Cap Matrix
Sprint
Teldar
Verizon
AT&T
The Price that Sprint Nextel would pay The enterprise value of Teldar in Sprint Nex-tels view
Is $713.2 million, which is 30% premium over the current price of $5.21 of Teldar.
We used WACC of 9.9% with the exit multiple of x4.3.
WACC includes 12.5% CAPM using 5.1% market risk premium
Assumptions for DCF model We want to be conservative our analysis due to the slow recovery of economy and the matured industry.
Revenue growth
Since Teldar is a growing company penetrating the pre-paid market, we believe that the management’s expected growth rates of 2011, 2012, and 2013 are reasonable assumptions compared to its historical growth rate of 23.3%(2009) and 16.7%(2010). In 2014, and 2015, we used two assumptions and the second assumption has a negative growth rate because by five years, like the post-paid services, the pre-paid market can be matured.
Year 2011 2012 2013 2014 2015
Growth Rate 6.5% 4.5% 3.7% 1. 3% 2%
2. 2% -1.5%
Assumptions continued COGS’s percentage of sales
We believe that the acquisition with Sprint Nextel will decrease the percentage of COGS because both Sprint’s COGS has been less than 50% of its sale. We believe that the learning curve and the strategic buyer’s experience will help Talder to reduce its rate close to 63%. However, the first year would have the higher COGS than what the management expect due to the process of acquisition.
Year 2011 2012 2013 2014 2015
Management’s expected
rate 72.4% 70.8% 69.9%
Expected rate
73.0% 70.0% 67.0% 65.0% 63.0%
To calculate WACC, we used 5.1% of market risk premium. The number is from the market risk premium used in 2010 by analysts and companies of 2,400 answers. US’s 5.1% is in between 5.0% of Europe and 5.2% of UK..
We used 3.4% of 10-year treasury rate as our risk free rate. We believe that 10 years would be sufficient to our analysis.
We used the EBITA multiple for the terminal value. We have sensitivity analysis using different EBITDA multiples but, median is x 4.3 because what the telecommunication companies have been paying for the acquisition historically from 2007~2010.
The lowest multiple was x3.04 targeting Rural Cellular Corporation acquired by Verizon (August 7, 2008) and the highest multiple was x4.34 targeting Virgin by Sprint Nextel. Sprint also paid x4.33 for iPCS in 2009.
Since, Teldar is a fast growing pre-paid company, which is attractive to Sprint, we believe that x4.3 would be a good assumption.
New customers growth: we used the same assumptions with the revenue growth for the new customers growth in 2014 and 2015
Synergies:
CCPU cost reductions ($0.25 ) and improving Churn rate (Sprint Nextel’s churn rate is 7%)
ARPU increase: expected to increase in
CAPEX because both Sprint and Cricket have a good infrastructure established, which can be shared.
Sensitivity Analysis of Sprint Nextel
Enterprise Value
EBITDA Exit Multiple
WACC 3.8x 4.3x 4.8x
9.8% (5.0% market
premium) 659 716 772
9.9%(5.1% market
premium) 657 $713 769
10.0% (5.2% market
premium) 654 710 766
• With the assumption 1 growth rate
• With the assumption 2 growth rate
Enterprise Value
EBITDA Exit Multiple
WACC 3.8x 4.3x 4.8x
9.8% (5.0% market
premium) 639 693 747
9.9%(5.1% market
premium) 636 $690 744
10.0% (5.2% market
premium) 634 687 741
The Price that Cricket would pay The enterprise value of Teldar in Cricket’s view is
$699.4million, which is 26% premium over the current price of $5.21 of Teldar.
We used WACC of 9.9% with the exit multiple of x4.3.
WACC includes 12.5% CAPM using 5.1% market risk premium.
Cricket’s assumptions are the same with Sprint’s except the churn rate of 4%.
• With the assumption 1 growth rate
• With the assumption 2 growth rate
Sensitivity Analysis of CricketEnterprise Value
EBITDA Exit Multiple
WACC 3.8x 4.3x 4.8x
9.8% (5.0% market
premium) 645 702 758
9.9%(5.1% market
premium) 643 $699 755
10.0% (5.2% market
premium) 641 696 752
Enterprise Value
EBITDA Exit Multiple
WACC 3.8x 4.3x 4.8x
9.8% (5.0% market
premium) 625 679 733
9.9%(5.1% market
premium) 623 $676 730
10.0% (5.2% market
premium) 620 674 727
The Price that a private equity firm would pay The enterprise value of Teldar in a private equity firm’s
view is $617.5 million, which is 5% premium over the current price of $5.21 of Teldar.
We used WACC of 9.9% with the exit multiple of x4 because of no synergy can be created from this acquisition.
WACC includes 12.5% CAPM using 5.1% market risk premium.
There is no synergy to reduce COGS except the learning curve from the company. Therefore, the future COGS are calculated from the learning curve equation.
Assumptions Less growth rate (no
synergy is expected)
COGS percentages are calculated from the learning curve of Teldar from 2006 to 2013 that the management expects.
y = -0.11ln(x) + 2.330R² = 0.989
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Learning Curve
average cost
Log. (average cost)
Year 2011 2012 2013 2014 2015
Expected rate
72.4% 70.8% 69.9%
66.6% 65.1%
Unknown Legal Matter
If Teldar looses in the trial, there is a possibility of owning only 10 MHz of PCS spectrum instead of 20 MHz, which Teldar currently owns.
There is a cost associate with a trial and some marketing, which would affect the percentage of COGS.
Trial in two years
Win
Lose
Maintaining 100% of the
current licenses
Losing 50% of the current
licenses
1- α
α
If the buyer knows about this issue before… However, the effect of this issue varies depending on
the characteristics of buyers.
Strategic buyers such as the Big 4 wouldn’t be affected by losing 50% of licenses because it is losing less than 1.5% of its total capacity.
Financial buyers will be affected by this issue because a private equity firm doesn’t have any capacity besides what Teldar currently owns. If 10 MHz cannot fully cover the demand of voice and data services, the additional costs will occur.
In this case, consumer behaviors can be affected by the less capacity, and the revenue growth can be affected.
Additional costs regarding to marketing and trials
Considerable Factors The percentage of winning and losing (α) for the case
will matter for the future cost of good sold.
Effects of losing 50% of 20 MHz spectrum licenses for the financial buyer. In this case, this trial can affect the stock price of Teldar.
Sensitivity Analysis of Alpha Revenue Increases
For post-paid carriers:
Depends on the capacity of the acquired company
Auction price
Independent verse acquisition environment
Only supports
Sensitivity analysis of alpha