David Levi 209 242 694

AT&T + McCaw
McCaw Negotiation Strategy
David Levi
209 242 694
SGMT 6050
November 10, 2015

Introduction

David Levi 209 242 694

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 POPs. 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
McCaws advanced national cellular network. Moving into cellular will achieve top
line growth opportunities and an avenue to grow internationally appeasing the
boards mandate of. By integrating McCaws 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&Ts 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-theart technology without directly confronting the RBOCs or having to infuse capital to
build an independent cellular network. AT&T would also gain access to McCaws
customer base and potential subscribers.

David Levi 209 242 694

The total value of these synergies is by $1.8 billion (see Appendix 2).
Potential improvements
Additional and improved cellular phone services combined with operational
efficiency would help attract more customers, increase the penetration rate,
improving McCaws 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&Ts 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&Ts 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.

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APPENDIX 1 Comparable Transactions Analysis

Purchaser

Purchasee

Bell Atlantic Corp.

McCaw Cellular
Comcast Corp.

Metro Mobiles CTS

Crowley Cellular
Metromedia
McCaw Cellular
( southern)
Providence Journal

BellSouth Corp.
GTE Corp.
McCaw Cellular
Time Warner Inc.
Price Communications
Contel Corp.
Vanguard Cellular
Vanguard Cellular

Metromedia (NY)
Pricellular Corp.
Utica/Rome MSA
Wireless
McCaw Cellular
(southern)
Palmer
Communications(ME)
Palmer
Communications(NH)

Value
POPs
Price/POP
$245
0
11.5
213.04
$105
0.61 $$172.13
$675
4.9
$137.76
$360
$710
$190
0
$13

2.7
3.5

$133.33
$202.86

6.8
0.43

$279.41
$30.23

$35
$130
0

0.22

$159.09

6.1

$213.11

NA

NA

$148.00

NA

NA

$145.00

Avera
ge
Proportionate POPsMcCaw
Enterprise Value

$235.19

$58,500,000.00
$13,758,614,942.77

APPENDIX 2 Synergy Analysis

Synergy

Description

Bundle Long distance and

cellular plans

AT&T receives access

to McCaw's 60mil
potential customers
and 1.3mil
subscribers

Financial Gain

$30,000,000

David Levi 209 242 694

Selling, General, and

Administration Expenses

Marketing
Depreciation Expense

AT&T's SG&A made

up 25% of sales.
Merging the two
companies will
definitely reduce this
cost through layoffs.
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
Assets will be
consolidated

$500,000,000

$800,000,000
$500,000,000
$1,830,000,000