Transcript SAT

HUGO SATELLITE
NETWORKS
March 1, 2001
Professor Campbell R.
Harvey
BA 456 Emerging Market
Corporate Finance
Shravan Chopra
Tanya Dorhout
Yashmin Fernandes
Angela Ho
Ben Lyons
Agenda
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Background
Case Introduction
VSAT Technology & Market
Project Details & Risks
Country Risks & Discount Rates
Case Solution
Summary
Background
• Modeled after an
actual strategic
decision at a satellite
network company
• Reconstructed story
– Fictional project
details
– Fictional scenario
• Lack of company
disclosure
Case Introduction
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Strategic planning decision in 1995
Evaluate project and market factors
Analyze and mitigate risks
Use appropriate discount rate
Identify and quantify real options
VSAT Technology
VSAT Market
• Market size:
– Globally: 135,000 units currently installed
– Growing local market
• Oligopoly: Hugo and Gomex
• Customers:
– Corporate networks declining
– Growth in rural telephony segment
• Alternative technologies
Project Details & Risks
• New VSAT manufacturing facility to be
constructed in an emerging market
– Low cost structure objective
– Capitalize on large, unfulfilled local demand
– Establish relationship with local telecommunications
agencies
– Governmental financial incentives
• Build capacity to serve local and global markets
Project Details & Risks
• Construction risk
• Operational risks
– Labor
– Production costs and delays
• VSAT price risk
• Threat of alternative technologies
Country Risks & Discount Rates
• Brazil, China and India site candidates
• Qualitative and quantitative analysis
• Risks: political, expropriation, economic, legal,
war/violence, infrastructure
Risk
Beta adjusted Cost of Capital (US)
Country risk premium (ICCRC)
Cost of capital
Brazil
10.38%
13.55%
23.93%
China
10.38%
6.25%
16.63%
India
10.38%
9.94%
20.32%
Case Solution
Assumptions across all three scenarios
– Local government participation and incentives
(amount of subsidy varies across countries)
– Currency and inflation risk mitigated by
working in U.S. dollars
– Revenue and cost assumptions given
– Total VSAT market growth rates given
Case Solution
Frequency Chart: China
Mean NPV and Standard Deviation
Forecast: Discounted Cash Flow
Brazil
China
India
Mean NPV
(20.00)
9.70
(27.00)
SD
14.20
11.80
9.90
5,000 Trials
Frequency Chart
12 Outliers
.023
117
.018
87.75
.012
58.5
.006
29.25
.000
0
-19.7
-4.4
11.0
Certainty is 76.92% from 0.0 to +Infinity
26.3
41.7
Case Solution
Build manufacturing facility in China
– Largest local market demand and population
– Most favorable governmental incentives
– Best opportunity to mitigate project and country
risks
– Fewest competitors
– Lowest discount rate and highest NPV
– Most valuable real options
Real Options
– Intensity & expansion option
– Shutdown option
– Export option
• If local demand declines, the company can ship
VSAT units abroad. It may be possible to export at
a higher price and take advantage of the low cost
manufacturing facility.
– Portfolio option
• Build three smaller plants in each location.
• Reduce overall portfolio risk.
Summary
• What really happened to Hugo?
• What really happened to the VSAT
industry?
• Questions and Answers