8/2/2019 Case 2 AT&T

1/13

Case 2:

AT&T: The AT&T/McCaw Merger Negotiation

Sean Moore211 836 509

March 3 2012

8/2/2019 Case 2 AT&T

2/13

IntroductionMcCaw Cellular is a high-growth American cellular firm with a strong national presence. Itrepresents the perfect opportunity for Allen to achieve his Anytime, Anywhere vision, and toleverage AT&Ts 65% market share (Case page 4) of long-distance communications to achieveexplosive growth in the cellular communications industry.

Key Stakeholders AnalysisCareful analysis of each of the key stakeholders in the potential merger is required in order tofurther analyze this merger, and provide a suggested strategy. The following is a list of selectedstakeholders:

Robert Allen

AT&T CEO

As mentioned, Robert Allen is eager to pursue the McCaw acquisition inorder to achieve his Anytime, Anywhere vision for AT&T. Moreimportantly, this opportunity presents more apparent synergies between thetwo companies than did past acquisitions, such as NCR. Undoubtedly,analysts would look favourably upon the merger. Allens past acquisitionshave yielded an ambiguous reaction (Case page 4). For instance, Value Line

summarized AT&Ts return potential as unexciting (Case page 4).According to the case, on page 16, Allen is less concerned about thepurchase price than the opportunity to enter the cellular market.

Craig McCaw

McCaw CEO

Mr. McCaw is McCaw Cellulars founder. He has pursued an aggressive,high-leverage (Appendix B) growth strategy in order to purchase as manycellular licences as possible. His shrewd acquisitions at low Value/POPsshow that he understands the value of cellular, not only to the broaderindustry, but likely to AT&T. Thus, he undoubtedly has a particular numberin his head, as far as McCaws valuation is concerned. Moreover, Mr.McCaw and his family hold 63% of the companys voting control (Case,

Exhibit 16). If a merger were to take place, he would likely require aposition within the newly merged company and some level of control overits operations (Case page 17).

British Telecom

(BT)BT has held a 20% stake in 1989 in order to participate in the growth of theNorth American telecommunications market (Case page 17). BT would likecontrol of McCaw, however US law prohibits foreign firms from owningmore than 20% of radio licenses (case page 17). BTs investment basis wasat $41.50 a share, meaning that its investment currently stands at a roughly40% loss (Case page 17).

US Government Throughout the case it is implied that AT&T can use McCaws cellularnetwork to circumvent local access fees it is forced to pay to local telephonecompanies. It is unlikely that the Department of Justice would allow suchactivity. It is clearly stated in the case that Judge Greene, who oversaw thedivestiture of AT&Ts monopoly, would have intended to prohibit thisactivity had cellular technology existed when he established the currentregulation.

ValuationThree valuation methods were employed in order to determine a base valuation for McCawCellular. The comparable transaction valuation, in Appendix A uses information from Exhibit 14

8/2/2019 Case 2 AT&T

3/13

to determine a multiple, based on the Value/POP of past transactions in the cellular sector. Thismultiple is then applied to McCaws POPs, resulting in a valuation of $12,753 million, or $61.71per share. Note that the option to purchase LIN Broadcasting cannot be incorporated into thisvaluation, as it has been assumed that a stand-alone McCaw cannot raise the capital required topurchase the company until the end of 1995. This assumption is based on McCaws industry highDebt-to-Equity ratio (Exhibit 15), and that the case directly implied that the companys highleverage has severely limited its financial flexibility. As with each of the three valuation methods,key assumptions are explained in the Appendix.

Next, the lengthy Discounted Cash Flow (DCF) valuation, in Appendix F, yields a valuation of$11,388 million. Appendices B to E, and G all explain the assumptions that went into the DCFmodel. Note that the DCF valuation allows us to consider the cases where McCaw purchases LIN,and divests it, separately. The valuation of LIN is conducted in Appendix E. As noted in AppendixF, McCaws valuation is much higher when it purchases LIN. Thus the rest of this analysisassumes that McCaw will purchase LIN Broadcasting. Presumably, McCaw will have the financialstrength to purchase LIN by year-end 1995, given that its operating cash flows are healthy in thefinancial forecast in Appendix D.

Finally, comparable analysis is conducted in Appendix K, based on information in Exhibit 15. Asis explained in Appendix K, due to the poor quality of information in Exhibit 15, this valuationwill not be used in the post-merger valuation. Instead, an average of the comparable transactionand DCF valuations will be used as the base value of McCaw.

Figure 1 below summarizes the results of the three valuation methods. This table shows clearlythat only the DCF and Comparable Transaction valuations are appropriate, and that either involvesa considerable premium to McCaws current share price. This should not alarm the reader, asMcCaw likely trades at a considerable discount due to the dual-class share capital structure.

Figure 1: Summary of Valuation Results

Valuation (US$M) Share Price Value/POP Premium to Current

Comparable Transaction 12,753 68.71 217.15 182%DCF 11,388 61.36 193.90 152%

Adjusted Comparable 2,210 11.91 37.63 -51%

Post-Merger ValuationAppendix H summarizes the sensitivity analysis conducted after the valuation. This sensitivityanalysis was used to guide estimates for possible post-merger synergistic and strategic benefits. Ithas been assumed that AT&T has no opportunity to make operational improvements to McCaw.This is because there was no indication in the case that McCaw requires operationalimprovements. The only negative statement made about the company is its high leverage, which isaddressed as a synergistic benefit.

A summary of the value of post-merger synergies and strategic opportunities is provided inAppendix J. Synergies used in the valuation include a faster decline in direct and marketing costs,as a share of revenue. This is reasonable because there are likely a number of redundanciesbetween McCaw and AT&T that will become clear to management over time. In the financialmodel, this translates into a larger increment for direct and marketing costs. An additionalsynergistic benefit is McCaws ability to use AT&Ts brand name and reach. This translates intoan 18% penetration growth rate, rather than the 16% rate in the base case. Finally, it is assumedthat AT&T can consolidate McCaws debt with its own. Using AT&Ts cost of debt, calculated in

8/2/2019 Case 2 AT&T

4/13

8/2/2019 Case 2 AT&T

5/13

Appendix A: Comparable Transaction

Figure A1: Comparable Transactions (Exhibit 14)

Purchaser Target Date Value POPs Value/POP

Bell Atlantic Metro Mobils Sep-91 $ 2,450 11.50 $ 213.04

McCaw Cellular Crowley Cellular Jun-91 $ 105 0.61 $ 172.91

Comcast Metromedia May-91 $ 675 4.90 $ 137.76BellSouth McCaw Cellular Apr-91 $ 360 2.70 $ 133.33

BTE Providence Journal Oct-90 $ 710 3.50 $ 202.86

McCaw Cellular Metromedia Aug-90 $ 1,900 6.80 $ 279.41

Time Warner Pricellular Mar-90 $ 13 0.43 $ 30.93

Price Communications Utica Mar-90 $ 35 0.22 $ 159.82

Contel McCaw Cellular (SE) Jan-90 $ 1,300 6.10 $ 213.11

Weighted Mean $ 217.15

With a correlation of60.5%, it is clear that there is a relationship between the Targets POPs and

the Value/Pop of the acquisition. As such, a weighted average provides a better approximation ofthe applicable Value/POP.

Comparable Transaction Valuation

Weighted Mean Value/POPs $ 217.15

McCaw POPs 58.73

McCaw Value (Mil.) $ 12,753

Shares Outstanding, FD (Mil.) 185.6

Share Price $61.71

Comparable transaction analysis yields a valuation $12,753 million. The resultant share price of$61.71 represents a 177% premium to McCaws share price of $24.38 as at September 30 1992.

Appendix B: McCaw Weighted Average Cost of Capital (WACC)

Figure A2: McCaw Long-term Debt Structure (Exhibit 9)

Type Rate Outstanding Cost of Debt

Revolver 7.76% $ 3,000.00 3.51%

LIN Broadcasting Facilities 7.11% $ 2,100.00 2.25%

Senior Notes, 1994 12.75% $ 123.40 0.24%

Senior SubNotes, 1996 13.00% $ 146.40 0.29%

Senior SubDebentures, 1999 12.95% $ 528.10 1.03%Senior SubDebentures, 1998 14.00% $ 396.10 0.84%

Convertible SubDebentures, 2008 8.00% $ 114.20 0.14%

Other Convertible, 2008 11.50% $ 272.40 0.47%

Other - $ 74.90 0.00%

Current Portion - -$ 48.10 0.00%

Total Debt $ 6,707.40 8.76%

8/2/2019 Case 2 AT&T

6/13

The above analysis yields an average cost of debt of 8.76%. Normally, only long-term interest-bearing debt is used to determine the average cost of debt. However, McCaws current assets areonly $607 million (Exhibit7), meaning that its outstanding $1,790 million revolver (Exhibit 9)must be used to finance long-term assets. Given that McCaw has been approved for a revolver$3,000 million (Exhibit 9), using the total approved revolver more accurately captures McCawscost of debt. Similarly, LIN Broadcasting has $2,100 million available.

The above data is dated December 31 1991, whereas this analysis is conducted as of September 301992. As such, it is assumed that McCaws WACC does not change over this period.

Figure A3: S&P 500 Returns, 1983-92

Figure A3 shows the annual returns from

September 30 of each year, starting in 1983.The arithmetic average return is used tocalculate the market risk premium in theCAPM equation.

Using the 5-year beta of 1.75, obtained from Exhibit 15, we can now calculate the required returnon McCaws equity, using CAPM. The beta of 3.16 in Exhibit 8 was not used as it is calculated

over a two-year period. This is too short of a time period, and likely yields a biased estimate forbeta. The CAPM equation is as follows:

( )

,where the risk-free rate of 6.47% is the yield to maturity on the ten-year T-Bill, obtained fromExhibit 18.

In order to calculate McCaws WACC, we now need its market capitalization as of September 301992. Its share price is $24.38, and is obtained from Exhibit 8. The number of shares outstandingis estimated from the weighted average number of shares outstanding in McMcaws incomestatements in Exhibit 6, and the total outstanding shares in Exhibit 16. The outstanding options inExhibit 16 are used to calculate McCaws total fully diluted outstanding shares. It is assumed thatno new options are issued from year-end 1991 to September 30 1992. These calculations result inan estimated 185.6 million Class A and B shares outstanding, fully diluted.

According to these assumptions, McCaws market capitalization of equity is calculated at $4,525million as of September 30 1992.

Figure A4: McCaws WACC

Date Close Annual Return

30/09/1983 166.07 36.16%

28/09/1984 166.1 0.02%

30/09/1985 182.08 9.62%

30/09/1986 231.32 27.04%

30/09/1987 321.83 39.13%

30/09/1988 271.91 -15.51%

29/09/1989 349.15 28.41%

28/09/1990 306.05 -12.34%

30/09/1991 387.86 26.73%

30/09/1992 417.8 7.72%

Arithmetic Average 14.70%

8/2/2019 Case 2 AT&T

7/13

Debt Equity Totals

Cost 5.61% 20.87% -

Value $6,707 $4,525 11,232

Weight 60% 40% 1.00

Weighted Cost of Capital 3.35% 8.41% 11.76%

Figure A4 shows that McCaws WACC is 11.76%. Note that the cost of debt quoted in Figure A4is the after-tax cost.

Appendix C: AT&T Assumptions for Financial ForecastPopulation Growth Rate 1.00%

Penetration Growth 16.00%

Purchase LIN in 1996 NO

Actual

Q3 1992 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

As % of revenue

Direct costs 33.19% 33.0% 32.2% 31.4% 30.6% 29.8% 29.1% 28.3% 27.6% 26.9% 26.3% 25.6%

Increment -2.500%

Marketing 26.43% 25.6% 22.6% 19.9% 17.5% 15.4% 13.5% 11.9% 10.5% 9.2% 8.1% 7.1%

Increment -12.00%

D&A 35.24% 34.8% 33.1% 31.4% 29.8% 28.3% 26.9% 25.6% 24.3% 23.1% 21.9% 20.8%

Increment -5.00%

CapEx, New Subscriber 1,190$ 1020 870 785 745 700 650 600 550 500 450 450

NWC, Subscriber 198$ 150.0 75.0 38.0 19.0 9.0 5.0 2.5 2.5 2.5 2.5 2.5

Tax Rate 36%

Forecasted

The above shows AT&Ts assumptions for its financial forecast. Where possible, the forecast andassumptions were soft-coded so as to yield a dynamic model. Blue numbers show hard-codedvalues, whereas black numbers are from formulas.

Appendix D: McCaw Financial Forecast

The following page shows the soft-coded version of AT&Ts financial forecast for McCawcellular. Once again, blue numbers are hard-coded values and black numbers are soft-coded (i.e.from formulas). The forecast is fully dynamic so that users can change any assumption to testvarious scenarios. The highlighted cell changes when McCaw acquires LIN Broadcasting.

Note that some values are slightly different from those in Exhibit 17. This is not due tocomputational errors in this model. Possible explanations include rounding errors, or mistakes inthe model found in Exhibit 17.

Note also that this is the base case, where McCaw purchases the remaining shares of LIN.

8/2/2019 Case 2 AT&T

8/13

YE 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200

McCaw POPs 45.11 45.56 46.02 46.48 46.94 47.41 47.89 48.37 48.85 49.34 49.83

Penetration 2.20% 2.55% 2.96% 3.43% 3.98% 4.62% 5.36% 6.22% 7.21% 8.37% 9.71%

McCaw Subscribers 0.99 1.16 1.36 1.60 1.87 2.19 2.57 3.01 3.52 4.13 4.84

LIN POPs 26.47 26.73 27.00 27.27 27.54 27.82 28.09 28.37 28.66 28.95 29.23

LIN Penetration 2.47% 2.87% 3.32% 3.86% 4.47% 5.19% 6.02% 6.98% 8.10% 9.39% 10.90%

LIN Subscribers 0.65 0.77 0.90 1.05 1.23 1.44 1.69 1.98 2.32 2.72 3.19

McCaw Share of LIN Subscrib 0.34 0.40 0.47 0.55 1.23 1.44 1.69 1.98 2.32 2.72 3.19

McC aw Share of LIN POPs 13.87 13.90 14.04 14.18 27.54 27.82 28.09 28.37 28.66 28.95 29.23

Proportionate McCaw POPs 58.98 59.46 60.06 60.66 74.48 75.23 75.98 76.74 77.51 78.28 79.07

Proportionate McCaw Subscribers

Beginning Subscribers (mil 1.27 1.34 1.56 1.83 2.14 3.10 3.63 4.26 4.99 5.84 6.85

Subscribers Added 0.07 0.23 0.27 0.31 0.96 0.53 0.62 0.73 0.86 1.00 1.17

Ending Subscribers 1.34 1.56 1.83 2.14 3.10 3.63 4.26 4.99 5.84 6.85 8.02

Period Average Subscriber 1.30 1.45 1.70 1.99 2.62 3.37 3.95 4.62 5.42 6.35 7.43

Avg. Net Rev/Sub/Month 76.89 72.78 68.70 65.18 62.06 59.70 57.53 55.62 53.33 51.10 49.21

Total Net Service Revenue 300 1,265 1,397 1,553 1,953 2,413 2,724 3,086 3,466 3,891 4,390

% Growth Net Service Revenue 10% 11% 26% 24% 13% 13% 12% 12% 13%

Direct Costs & Expenses 99- 407- 438- 475- 582- 701- 772- 852- 934- 1,022- 1,124-

Marketing 77- 285- 277- 271- 300- 326- 324- 323- 320- 316- 313-

Operating Cash Flow 124 573 682 807 1,071 1,385 1,628 1,910 2,213 2,554 2,953

Depreciation & Amortization 104- 418- 439- 463- 554- 650- 697- 750- 800- 853- 915-

Cellular Operating Income 20 155 243 344 517 735 931 1,160 1,413 1,700 2,038

After-Tax Cellular Operating I 13 99 155 220 331 471 596 742 904 1,088 1,304

Sale (purchase) of LIN owners - - - - - - - - - - -

Depreciation & Amortization 104 418 439 463 554 650 697 750 800 853 915

CapEx 70- 197- 210- 234- 671- 346- 374- 402- 428- 451- 529-

Change, NWC - 83 48 29 13 10 8 2- 2- 3- 3-

Free Cash Flow 47 404 432 478 226 784 926 1,089 1,274 1,488 1,687

Forecasted

8/2/2019 Case 2 AT&T

9/13

Appendix E: Purchase of LIN Broadcasting

Figure A5: Summary of LIN Broadcasting Valuation, 1996

Value Justification

Shares Owned 27,000,000 Case page 8

Current Price 67.70 Exhibit 8

% Owned 52% Page 8

Current Market Cap 3,808,125,000 Calculated

Shares Outstanding 56,250,000 Calculated

Capital Gains Tax 20% Estimated

Purchase Price

Per Share Basis 6,046,875,000 Middle of $95-$120 range on page 8

Value/POP 5,508,073,934 $200/POP on Page 18 of Case

Average 5,777,474,467

Purchase Value (Millions) $ 2,773

Sale Proceeds (Millions) $ 2,403 Factors-in Capital Gains Tax

The above table shows the assumptions involved in calculating the value if LIN at the beginningof 1996, when McCaw is expected to either purchase or divest the company. The valuation usesthe $95-$120 share price range estimated by analysts on page 8 of the case, and the average$200/POP valuation estimate for all cellular providers on page 18 of the case. Neither metric isparticularly appealing, however the estimate is fairly insensitive to mis-estimation given that thepurchase is discounted back by 3.25 years. Notably, that the purchase of the remaining portion ofLIN is subject to negotiation, and need not occur at the $154.11/share price noted in the case.

In addition, the purchase value is not used anywhere in the DCF valuation, but is there for the

readers knowledge.

Appendix F: DCF ValuationTable A6: Base-Case DCF Valuation

Q3 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Terminal Value

Disc't Pds 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 10.25

FCF (mil) 47 404 432 478 226 784 926 1,089 1,274 1,488 1,687 22,534

Disc't Factor 0.97 0.87 0.78 0.70 0.62 0.56 0.50 0.45 0.40 0.36 0.32 0.32

DCF 45 351 336 333 141 437 462 486 509 532 540 7,213 11,388

Table A6 shows the valuation for McCaw under the base assumptions, and assuming that itpurchases LIN Broadcasting.

Table A7: Base Case, LIN SoldQ3 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Terminal Value

Disc't Pds 0.25 1.25 2.25 3.25 4.25 5.25 6.25 7.25 8.25 9.25 10.25 10.25

FCF (mil) 47 404 432 478 3,295 473 558 656 768 897 1,017 13,586

Disc't Factor 0.97 0.87 0.78 0.70 0.62 0.56 0.50 0.45 0.40 0.36 0.32 0.32

DCF (mil) 45 351 336 333 2055 264 279 293 307 321 326 4,349 9,259

Table A7 shows the valuation for McCaw under the base assumptions, and assuming that itdivests LIN Broadcasting.

8/2/2019 Case 2 AT&T

10/13

Clearly, it is in McCaws best interest to purchase LIN. By January 1 1996, McCaw will begenerating healthy cash flows, and can presumably raise the debt and equity required to purchasethe remaining 48% of LIN Broadcasting.

Appendix G: Terminal Value Estimation

For the terminal cash flows, I estimated that population and penetration growth continue at 1%per annum. The penetration growth of 1% is equivalent to assuming that it grows at 4% perannum until McCaw achieves 25% penetration, some time in 2026. This yields a revenue growthrate of (1+Population Growth)x(1+ Penetration Growth), or roughly 2%. In addition, I assumethat the tax rate remains constant at 36%, and that all costs grow at the same rate as revenue. Allof these assumptions yield the following:

2002 2003 Notes

Avg. Net Rev/Sub/Month 49.21 49

Average Subscribers 7.43 8

Total Net Service Revenue 4,390 4,478

Direct Costs & Expenses 1,124- 1,147- Grows at same rate as revenues

Marketing 313- 320- Grows at same rate as revenues

Operating Cash Flow 2,953 3,012

Depreciation & Amortization 915- 933- Grows at same rate as revenues

Cellular Operating Income 2,038 2,079

After-Tax Cellular Operating Income 1,304 1,330

Depreciation & Amortization 915 933

CapEx 529- 67- Grows at same rate as revenues

Change, NWC 2.9- 0.37- Grows at same rate as revenues

Free Cash Flow 1,687 2,196

The large change in FCF is due to the fact that McCaw spends much less on CapEx, due to thefact it adds much fewer subscriptions per year.

The terminal value is then calculated as a perpetual annuity growing at 1% per annum. Thisyields a terminal value of $22,534 million, which is this discounted back to September 1992,yielding a present value of $7,213 million.

Appendix H: Sensitivity Analysis

Figure A8: Sensitivity AnalysisWACC & Penetration

9.76% 10.76% 11.76% 12.76% 13.76%

12% 9,130$ 10,214$ 8,879$ 7,801$ 6,928$

14% 13,629$ 11,611$ 10,045$ 8,784$ 7,724$

16% 15,591$ 13,222$ 11,388$ 9,913$ 8,723$

18% 17,850$ 15,075$ 12,930$ 11,209$ 9,823$

20% 20,449$ 17,204$ 14,699$ 12,963$ 11,082$

WACC

Penetration

Rate

8/2/2019 Case 2 AT&T

11/13

Figure A8 shows sensitivity analysis when varying WACC and McCaws penetration growthrate. This table will be used later on, when calculating the post-merger valuation of McCaw.

Figure A9: Sensitivity AnalysisDirect Cost, Marketing & D&A Increments

-50% -25% Base +25% +50Direct Costs 10,870$ 11,136$ 11,388$ 11,626$ 11,853$

Marketing Expense 10,297$ 10,912$ 11,388$ 11,754$ 12,036$

Depreciation & Amortization 11,916$ 11,638$ 11,388$ 11,162$ 10,960$

Increment Sensitivity

Figure A9 shows the sensitivity of the valuation to changes in the increments for direct costs,marketing expenses, and depreciation and amortization. The columns show a percentage changein each increment (i.e. the marketing expense decreases by 6% or 9% per annum, rather than thebase of 12%). Once again, this table will be used to calculate the post-merger valuation ofMcCaw.

Figure A10: Sensitivity AnalysisWhen to Purchase LIN

Figure A10 shows sensitivity analysis when the time of

LINs purchase varies. As mentioned in Appendix F, itis clearly in McCaws best interest to purchase LIN.This table shows that not only is the LIN purchase athe best action, purchasing LIN as early as possible issuperior to all other options.

Appendix I: AT&T WACCFigure A11: AT&T Long-term Debt Schedule

Interest Rates

Average

Rate Outstanding

Weighted

Average

Debentures 4 3/8% to 4 3/4% 4.56% $1,300 0.59%

5 1/8% to 7 1/8% 6.13% $1,850 1.13%

7 1/2 to 9% 8.25% $3,181 2.61%

Notes

5% to 7 3/4% 6.38% $1,312 0.83%

7 4/5% to 8 19/20% 8.38% $1,033 0.86%

9% to 12 7/8% 10.94% $1,229 1.34%

Variable Rate $146

$10,051

Long-term lease obligations, net $200

Other $76

Unamortized discount, net $41

Current Portion $1,802

Total Outstanding Debt $ 8,484 7.36%

The above shows AT&Ts long-term debt schedule, used to calculate its cost of debt.

Using the same calculation in Appendix A, and AT&Ts beta of .85 from Exhibit 15, we obtain aWACC for AT&T of 12.69%. Only AT&Ts cost of debt is used in the post-merger valuation.

Year End Purchase Base-Case DCF

1992 $11,609

1993 $11,579

1994 $11,528

1995 $11,458

8/2/2019 Case 2 AT&T

12/13

Appendix J: Post-merger Valuation

Figure A12: Summary of Post-Merger Valuation

Source Justification Contribution

Base ValuationAverage of DCF and Comparable

Transactions valuations$ 12,071

SynergiesIncreased penetration Penetration growth increases to 18% $ 1,542

SG&A costs fall more

quickly

SG&A increment increases by 50% -

now drops by 3.125% per annum$ 277

Marketing costs drop

more quickly

Marketing increment increases by

50% - now drops by 18% per annum$ 744

Refinance debt

Debt Outstanding = $6707.4 million.

AT&T's after-tax cost of debt 4.64%

vs McCaw's 5.61%. Estimated annual

interest savings = $64.70 million

$ 510

Total $ 15,144Strategic Opportunities

Purchase LIN at Year

End 1992

AT&T has very conservative capital

structure. Leverage to purchase LIN.

Assume that resultant change in

capital structure has neutral effect

on valuation.

$ 249

Lower SG&A, Marketing

Costs after sale of non-

core divisions

Sell non-core assets of LIN and

McCaw. Use proceeds to fund LIN

acquisition. Results in lower

overhead costs. SG&A, MarketingCosts assumed to fall by 10% from

1993 on.

$ 674

Grand Total $ 16,067

Note that the above shows the cumulative valuation assuming that each successive source ofvalue is utilized. For instance, the contribution of $249 million to the valuation from the LINpurchase in 1992 is after all of the above sources of value are taken into consideration

Appendix K: Relative ValuationFigure A13: McCaw Comparable Companies

1991 Profits/Share Share Price Estimated P/E Ratio

AirTouch Cellular 0.04 N/A N/ABritish Telecom 5.31 62.60 11.80

LIN Broadcasting - 16.43 72.00 N/A

US Cellular 0.50 19.75 39.50

Vanguard

Cellular - 1.32 27.00 N/A

Contel Cellular - 1.19 23.00 N/A

Average - 2.18 40.87 25.65

8/2/2019 Case 2 AT&T

13/13

Figure A12 is adapted from Exhibit 15 in the case, to yield a P/E ratio for each comparablecompany. Only cellular providers were used as the growth profile of long distance and localtelephone companies does not match that of cellular companies. This only yields two comparablecompanies, given that most cellular companies yielded negative earnings. No other information

was available in the case to conduct other types of comparable analysis. No annual reports couldbe found for any of the above companies.Figure A14: Comparable Valuation

Figure A12 shows an adapted comparablevaluation for McCaw. McCaws 1993 after-taxincome is used because it is the first full-yearperiod in which it earns positive profit. Theresultant valuation is discounted back 1.25years using McCaws WACC.

This valuation is fraught with problems. First,

it is based on only two comparable companies. As was mentioned, no other comparable data wasprovided. Second, the P/E ratio used is presumable from September 1992 (the comparables tablein Exhibit 15 is not date-marked). Using this ratio for 1993 assumes market conditions will bethe same, which is a tenuous assumption.

For these reasons the comparable valuation is not used for the post-merger valuation.

Comparable Valuation, Adapted for McCaw

McCaw After-Tax Income, 1993 (mil) 99

P/E 25.65

1993 Valuation (mil) 2,539

Discount Period 1.25

Discount Factor 0.87

Valuation (mil) 2,210