Anatolia National Telekom Harvard Case Solution & Analysis

How are these factors integrated into different enterprise valuation approaches?

To value the given asset of an enterprise, DCF is the most applicable method. But for emerging market companies there are additionalaspects that must to be considered at the time of  valuing a privatizing enterprise. There is often lack of reliable data that used to value the asset of company and complicated capital market in most of the emerging market countries. For example there is lack of past data and reliable source of past data  for the projection of future cash flow of particular organization. It does not mean that valuation is impossible, but it may be difficult. For measurement of risk and projection of cash flows; the data of similar industries from other countries may be used.

Asset betas

Asset betas of publicly incorporated telecoms companies may be used in valuation of enterprise located in emerging market countries, but there is a serious issue with this scenario as we adopt the asset beta of US telecom sector that is around 0.7. However, environment and business condition of US is totally different form Turkey’s business environment, especially regulatory framework as the business risk or asset beta is the function of regulatory framework. It is required to adjust asset beta in current suspicious regulatory structure of the emerging market. It is again a role of subjective assessment of the stability of future regulatory structure of the emerging market country. Thus, it is more appropriate to assume the asset beta of closely comparable emerging market telecom companies.

Political risk

Adjustment of asset beta is related to regulatory structure. But there are chances of high degree of political risk in emerging market countries that is an essential part to consider political risk during  enterprise valuation of such country. According to some viewers, it is a threat for investors, that government may change rules or break the promise after investment is done. In mainly of the South Asian countries this threat is clearly observed. Recent studies cleared that expropriation is no such problem for mangers. But political risk is still a big deal, such as restrictions on the payment of dividend and interfere in the management issues and firms operation.

There are two methods to calculate the political risk when valuing the enterprise.

First way is to adjust the cash flow descending to report for an insurance premium, which will be compensated against political risk to insurance agencies. As insurance premium is accounted as expense in the income statement reduce the cash flows; therefore, it ultimately reduces the enterprise’s value. Decrease in value communicates the investors a message of “discount” that will need taking on political risks. Second method to evaluate the political risk is to adjust the discount rate that increase the discount rate to reflect a premium. Such increase in discount rate will reduce the enterprise’s value.Major credit rating agencies decides country ratings on the basis of such rating the market premium is decided as a proxy of political risk.

Golden shares

State retains the golden share in some structured privatization to hold the special rights ahead of ordinary shares, in some scenario these golden shares may be time bounded after some time they will lose the special rights. The right associated with golden shares may be related to the constraint  of foreign ownership. For example, state may have special rights to veto the decision of investor. In enterprise valuation process, golden shares reduce the value of enterprise’s value. From an investor’s outlook, the golden share mostly results in an increase in the required return on equity, which in the end increases the cost of equity to the privatized enterprise. As the golden shares in definite situations cause limited control over enterprise’s functionality; hence, adjustment is made in cost of equity to counter the result of golden shares on valuation of enterprise. Real option is another way to adjust the impact of golden shares.

What is Anatolia National Telekom’s most likely enterprise value in spring 1998?

For comparable analysis to compute the enterprise value of ANT, several ratios have been used, such as price/earnings ratio, price/cash ratio, value per line. If we look at the price /earnings ratio of emerging market companies for the year 1996, then those companies were valued at approximately 19.5 times. As ANT had earnings of $378 million in 1996, hence, the implied value for ANT should be 19.5*$378=$7368. According to given table in the case on the..........................................

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