HUGO SATELLITENETWORKS

Shravan ChopraTanya Dorhout

Yashmin FernandesAngela HoBen Lyons

March 1, 2001Professor Campbell R.

HarveyBA 456 Emerging Market

Corporate Finance

Agenda

• 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

• 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, infrastructureRisk Brazil China India

Beta adjusted Cost of Capital (US) 10.38% 10.38% 10.38%Country risk premium (ICCRC) 13.55% 6.25% 9.94%Cost of capital 23.93% 16.63% 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

Mean NPV SDBrazil (20.00) 14.20China 9.70 11.80India (27.00) 9.90

Frequency Chart: ChinaMean NPV and Standard Deviation

Frequency Chart

Certainty is 76.92% from 0.0 to +Infinity

.000

.006

.012

.018

.023

0

29.25

58.5

87.75

117

-19.7 -4.4 11.0 26.3 41.7

5,000 Trials 12 Outliers

Forecast: Discounted Cash Flow

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