David Levi – 209 242 694

AT&T + McCaw

McCaw Negotiation Strategy

David Levi

209 242 694

SGMT 6050

November 10, 2015

David Levi – 209 242 694

Introduction

Craig McCaw of McCaw Cellular believes that synergies exist between AT&T and his company. If his company were to be acquired by AT&T, it would allow them to achieve market and technical dominance. Craig would be willing to sell McCaw, but only if the price is right. Craig has always sought out control through acquisitions, and this would be the first time he gave up control. McCaw Cellular has mastered the technology side, with their massive cellular network infrastructure and ownership of POP’s. On the other hand, AT&T has mastered the customer acquisition side, focusing on maximizing subscribers, and having a strong, recognizable brand.

AT&T is looking to broaden its service offerings, especially cellular and requires McCaw’s advanced national cellular network. Moving into cellular will achieve top line growth opportunities and an avenue to grow internationally – appeasing the board’s mandate of. By integrating McCaw’s cellular network, AT&T will be able to avoid costly local access fees and offer the service to its large customer base. A merger between AT&T and McCaw is a logical one, as local phone companies are entering the cellular market with PCS and increasing the likelihood of competition.

Valuation

Comparable Transaction Analysis

Between 1989 and 1991, 11 M&A transactions occurred in the cellular industry. Three were large, while others were relatively small. To achieve a realistic valuation for McCaw, the three major POP deals have been analyzed for the comparable transactions analysis. The average value per POP of these three transactions is $235. As of Sept 30, 1992 McCaw Cellular had 58,500,000 POPs which leads to a valuation of 13.7 billion (see Appendix 1).

Synergies

According to the data, U.S. population growth rate was steady at approximately 1 per cent annually. McCaw believed that the number of subscribers would grow at about 25 per cent annually from 1993 to 2003. This positions McCaw and AT&T for very valuable synergies.

For McCaw, the well-recognized AT&T brand name and its great capability for signing up customers would significantly contribute to revenue increase. In addition, cost saving through SG&A consolidation, access to new technology from Bell Labs, vertical integration with AT&T’s switching equipment further sweeten the deal. Lastly, after merging with AT&T, McCaw would realize a much higher debt rating at AA compared to its current CCC+, resulting in reduced cost of debt in its long-term borrowings

AT&T would receive local-access fee reductions and instant access to state-of-the-art technology without directly confronting the RBOCs or having to infuse capital to build an independent cellular network. AT&T would also gain access to McCaw’s customer base and potential subscribers.

The total value of these synergies is by $1.8 billion (see Appendix 2).

David Levi – 209 242 694

Potential improvements

Additional and improved cellular phone services combined with operational efficiency would help attract more customers, increase the penetration rate, improving McCaw’s profitability and bottom line. The merger could eliminate duplicate operational facilities or employees and thus achieve significant cost reduction. McCaw will be able to utilize its potential customer base quickly through AT&T’s expertise.

Negotiation

If AT&T is not able to achieve a negotiated agreement with McCaw, their alternative would be to purchase smaller firms or build their own national network. This would cost an estimated $8 billion for the licenses alone. Therefore, successfully reaching a deal with McCaw is in AT&T’s best interest.

McCaw should make the opening offer based on the comparable transactions analysis, $13.7 billion. Incorporating the outstanding long term debt (~5 billion), the equity value of the company becomes ~8 billion. McCaw can thus price at $50/share, a 50% premium above the current share price.

The walk-away price must be greater than the price paid by BT when they purchased 20% of McCaw at $41.50, which equals $7.6 Billion equity value. Therefore, the walk-away price should be the average of the opening offer and floor price, which is $10.6 billion.

David Levi – 209 242 694

APPENDIX 1 – Comparable Transactions Analysis

Purchaser Purchasee Value POP’s Price/POPBell Atlantic Corp. Metro Mobiles CTS $2450 11.5 213.04McCaw Cellular Crowley Cellular $105 0.61 $$172.13Comcast Corp. Metromedia $675 4.9 $137.76BellSouth Corp. McCaw Cellular ( southern) $360 2.7 $133.33GTE Corp. Providence Journal $710 3.5 $202.86McCaw Cellular Metromedia (NY) $1900 6.8 $279.41Time Warner Inc. Pricellular Corp. $13 0.43 $30.23Price Communications Utica/Rome MSA Wireless $35 0.22 $159.09Contel Corp. McCaw Cellular (southern) $1300 6.1 $213.11

Vanguard CellularPalmer Communications(ME) NA NA $148.00

Vanguard CellularPalmer Communications(NH) NA NA $145.00

Average $235.19

Proportionate POPs- McCaw $58,500,000.00Enterprise Value $13,758,614,942.77

APPENDIX 2 – Synergy Analysis

Synergy Description Financial Gain

Bundle Long distance and cellular plans

AT&T receives access to McCaw's 60mil potential customers and 1.3mil subscribers $30,000,000

Selling, General, and Administration Expenses

AT&T's SG&A made up 25% of sales. Merging the two companies will definitely reduce this cost through layoffs. $500,000,000

Marketing

Marketing expenses will be severely reduced as there is only one brand to advertise, and AT&T's strong brand equity further reduces the expense $800,000,000

Depreciation Expense Assets will be consolidated $500,000,000 $1,830,000,000