AT&T/McCaw Merger Negotiation.
1. What do you believe McCaw is worth? Prepare a careful DCF using the financial forecast of FCFs given in the case and in the associated spreadsheet. What key assumptions determine the range of high and low values in your valuation analysis? Also draw on any other valuation approaches and information that you can. For the sake of consistency, all groups should use a (low, "Darden") risk premium of 5.5%.
We performed a DCF Analysis for two scenarios: 1) assuming the purchase of the residual equity of LIN Broadcasting; and 2) assuming the sale of the residual equity of LIN Broadcasting (See Exhibits 1 & 2). The most critical assumptions impacting value were: 1) discount rate and 2) terminal growth rate. We relied on discount rates between 10.0% and 11.0% based on our analysis of the stand alone AT&T WACC (10.4%), the stand alone McCaw WACC (12.3%), and a blended calculation (11.1%). We chose growth rates between 3.0% and 4.0% as an estimate of the perpetual growth of FCF (implied Value/POP was approximately $300, high by industry standards) (See Exhibit 1). In addition to a DCF Analysis, we performed analyses of recent comparable transactions (See Exhibit 3) and recent premiums paid for publicly traded companies (See Exhibit 4). Results revealed that comparable transactions were executed at approximately $171 / POP and that recent deals were consummated on average at approximately 50% above twelve month average stock prices. In our opinion, the analysis of recent premiums paid is not reliable; as we are not able to evaluate the comparability of the included transactions (i.e. the contemplated transaction is large).
2. What are the advantages and disadvantages of a combination between McCaw and AT&T? What is your best alternative to a negotiated agreement with your counterparty?
Advantages of a combination between McCaw and AT&T:
* The combined company would realize significant synergies through cost savings, increased advertising power, and potential reductions
We performed a DCF Analysis for two scenarios: 1) assuming the purchase of the residual equity of LIN Broadcasting; and 2) assuming the sale of the residual equity of LIN Broadcasting (See Exhibits 1 & 2). The most critical assumptions impacting value were: 1) discount rate and 2) terminal growth rate. We relied on discount rates between 10.0% and 11.0% based on our analysis of the stand alone AT&T WACC (10.4%), the stand alone McCaw WACC (12.3%), and a blended calculation (11.1%). We chose growth rates between 3.0% and 4.0% as an estimate of the perpetual growth of FCF (implied Value/POP was approximately $300, high by industry standards) (See Exhibit 1). In addition to a DCF Analysis, we performed analyses of recent comparable transactions (See Exhibit 3) and recent premiums paid for publicly traded companies (See Exhibit 4). Results revealed that comparable transactions were executed at approximately $171 / POP and that recent deals were consummated on average at approximately 50% above twelve month average stock prices. In our opinion, the analysis of recent premiums paid is not reliable; as we are not able to evaluate the comparability of the included transactions (i.e. the contemplated transaction is large).
2. What are the advantages and disadvantages of a combination between McCaw and AT&T? What is your best alternative to a negotiated agreement with your counterparty?
Advantages of a combination between McCaw and AT&T:
* The combined company would realize significant synergies through cost savings, increased advertising power, and potential reductions