MFIN 5300 Final Valuation Report

AT&T acquisition of DirecTV – Final Write-up

Presented by: Case Study presented to:

Farazi Ahmed - 213827340 Roderick Pamenter, CFA

Calvin Calce – 213849146 [email protected]

Daniel Monroy-210919199 Investment Banking

Mathieu Fortier – 213849039 MFIN 5300

Rami El Baba - 213833835 Schulich

School of Business

April 7th, 2015

Table of Contents Overview of Strategic Acquisition ......................................................................................................................................... 1

Industry Analysis .................................................................................................................................................................... 1

Wireless Telecommunication Carriers in the US ............................................................................................................ 1

Porter 5 Forces Analysis ................................................................................................................................................. 2

Competition ......................................................................................................................................................................... 4

Wireless ........................................................................................................................................................................... 4

Wireline ........................................................................................................................................................................... 4

Satellite TV Providers in the US ..................................................................................................................................... 5

Strategic Alternative Investments ........................................................................................................................................... 8

Geographic Penetration of Mexico Wireless and Wireline Industry .................................................................................. 8

Market ............................................................................................................................................................................. 9

Regulations ..................................................................................................................................................................... 9

Opportunities ................................................................................................................................................................ 10

Strategic Vertical Partnership with DirecTV instead of direct acquisition ...................................................................... 11

Intensive Investment in quality wireline broadband and spectrums ................................................................................. 11

Discounted Cash Flow .................................................................................................................................................... 13

Income Statement Assumptions ..................................................................................................................................... 13

Balance Sheet Assumptions ........................................................................................................................................... 14

Synergy assessments & Improvements .......................................................................................................................... 14

Sensitivity Analysis ........................................................................................................................................................ 15

Comparable Multiple Analysis ...................................................................................................................................... 16

Precedent Transactions .................................................................................................................................................. 18

Pros – DirecTV attributes making it a great acquisition for AT&T .................................................................................. 20

Cons – Reasons why DirecTV is not made for AT&T ..................................................................................................... 20

Action Plan ............................................................................................................................................................................ 21

Alternative #1 –Investment in US quality spectrums ....................................................................................................... 21

Alternative #2 – Investment in H-Block spectrums and DISH for spectrum holdings ..................................................... 22

Alternative #3 – Business operation expansion in Mexico ............................................................................................... 23

AT&T’s competition ......................................................................................................................................................... 25

Verizon Communications ............................................................................................................................................. 25

Sprint Corporation......................................................................................................................................................... 25

Deutsche Telekom AG on T-Mobile US ...................................................................................................................... 25

Industry Review ................................................................................................................................................................ 26

Synopses of Precedent Transactions ..................................................................................................................................... 26

Comparable Tables ........................................................................................................................................................... 28

Appendix: Dish Holding – Monetize Spectrums Holdings ................................................................................................ 29

Dish Holding – Monetize Spectrums Holdings ................................................................................................................ 29

AT&T acquisition of DirecTV

Executive Summary Despite AT&T’s in-house accurate valuation of DirecTV as a possible acquisition target, our consulting

group recommended to not proceed with this acquisition plan. We believe that the future of wireless lies in high

quality services like 4G and LTE. Due to a saturated US market and intense competition, AT&T has to continue

investing in spectrums to retain its competitive position within the industry and increase its market share.

Industry Overview

Wireless telecommunications is in a mature stage with low growth prospects and subscriber saturation.

AT&T is a market leader with 33% of shares. AT&T, due to its capital, financial position, and spectrum

holdings, has generated large barriers to entry but it has no other choice now than to focus on its wireless

service to face intensive competition. Future growth will be made by customer acquisition from competitors.

We identify 4G networks as the dramatic component affecting the revenues of industry in the next 10 years.

Satellite TV, DirecTV’s industry, is also exceptionally saturated and demand is presently decreasing.

Intense competition led companies to increase their marketing advertisement fees. This industry is constantly

threatened by the entry of new technology and alternative product offerings. Industry growth is drastically

shrinking, relying on population growth, and we forecast a 2.9% industry growth for the period of 2014 to 2019.

Valuation

DirecTV was valued at a median of $72 billion. However, even if the valuation seems attractive, we do not

believe it addresses the needs of AT&T over the next 5 years.

Discounted Cash Flow Valuation, using a WACC of 6.25% and assuming synergies, led to a valuation

of $72.4 billion or $103.69 per share value. Sensitivity analysis reveals that firm value is within the

range of $69.6 billion to $80.4 billion, for a price per share in between $98.35 and $119.40.

Comparable Valuation analysis led to a DirecTV valuation between $67.2 billion and $76.9 billion. A

control premium of 15% was assumed and a range from 7.1x to 8.13x of TTM Enterprise

Value/EBITDA was used to value DirecTV.

Precedent transaction valuation; DirecTV was valued using a transaction multiple range from 8.5x to

9x of Terminal Value over TTM EBITDA. This led to a valuation in between $70 billion to $74 billion.

Recommended Action Plan

Following our study of the market, we came to the conclusion that there were more appropriate and

appealing solutions to ensure AT&T growth in its actual Telecommunication market.

1. Investment in US quality spectrums

2. Investment in H-Block spectrums and potential acquisition of DISH or its spectrum holdings.

3. Business operation expansion in Mexico

Executive Summary

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Overview of Strategic Acquisition

Industry Analysis

Wireless Telecommunication Carriers in the US The modern industry of telecommunications leads

a sustainable and strong demand of connectivity along

with persistent security encounters and continuous forms

of innovations in the products and services. This industry

obliges the need to absorb and adapt swiftly to

technologies and implement the best strategies available to

remain competitive. The ongoing demand is influenced by

the level of technological innovation, business activity, and

consumer spending. Although the industry has been

experiencing modest growth in subscriber numbers over the years, price discounts have led to weaker value

growth.

AT&T, as a larger company, benefits from lower average costs per unit in offering a vastly automated

service to large groups of users and in constructing and sustaining networks. Likewise, smaller firms participate

and compete by concentrating on niche markets or by delivering unique facilities. Competition within the US

telecommunications industry has been concentrated, with the 50 biggest corporations producing almost 90% of

the industry’s total revenue. The primary revenue sources are wireline and wireless services. The constant

development of the mobile network and the claim for high-bandwidth applications and abilities are pressuring

the industry to raise the accessibility and features of its’ broadband connectivity. Significant pressure exists in

the present market for wireless carriers to cover the United States in entirety, even for the smaller and less

accessible localities.

The US telecommunications industry is expected to reach $235 billion in revenues at 2014’s year end,

with $194 billion directly linked to wireless carrier providers. As a whole, US telecommunications firms are

expected to grow at a compound annual rate of 3.3% over the next 5 years, but several market data reports

anticipate that the more stagnant market of wireless

communications could lose value in the foreseeable future.

This is presented with an anticipated CAGR of -1.4% in the

next 5 years. AT&T is one of the largest wireless

telecommunications firms in the United States, with revenues

greater than $130 billion. Although it is impossible for the

firm to sustain a 3.3% increase in revenues for the foreseeable

future given its already hefty size, we suggest that due to its

financial situation and reputation, the firm will achieve a

stable growth rate of 1.5% in the future, similar to past years.

The US telecommunications industry is still growing,

however the market is now saturated and it is more difficult

for large players to increase both their market penetration and

subscriber base. Leaders in the industry are able to continue

generating revenues through investments in infrastructure and

Industry Key

success factors

Liquidity and rapid access to capital

spending

High profile and reputation

on the market

Exclusive product

contracts

Quickly adopt new technology

Large Economies

of Scale

Paging

-1%

Other

Services

7%

Text

Messaging

17%

Advanced

PCS services

18%

Cellular

Voices

services

52%

Other data

services

6%

US Telecommunication: Product and

Service Segmentation

Source: IBIS World Industry


US Telecommunications Industry Analysis

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AT&T acquisition of DirecTV US Telecommunications Industry Analysis

by deploying vast amounts of capital on new technology. As of 2013, more than 335 million US connections

were registered. This number will likely not grow by the same compounding rate experienced over the last 5

years due to continued market saturation. Key players will have to increase their focus on data quality services.

The American market is now a data-driven growth market. Quality of wireless services will be the key driver in

the next 5 years, as well as the quality of product offerings. AT&T must profit from the expanding demand in

data services in the near future, seeing as the demand for smartphones is continually increasing. We believe

AT&T is currently well positioned but must continue its spending in infrastructure holdings to retain

competitive advantage. The 4G and LTE market remains open to competition between the biggest market

players.

Future of the Industry

The higher quality and speed of 4G and LTE networks will lead customers to change their services from

landlines to advanced wireless services. IBISWorld projects that households’ demand for wireless services will

increase in the future while wireline services are projected to decline steadily. We identify 4G networks as the

dramatic component affecting the revenues of industry operators in the next 10 years, seeing as many products

are derived from this wireless network. The telecommunications industry is also experiencing subscriber

saturation, and new entrants will fight with existing players for consumers. The FCC will increase spectrum

sales regulation, which could be a serious threat to AT&T’s business if they are banned from bidding on

additional spectrum. Quality of services, new products, and spectrum holdings will become key aspects in order

to retain a subscriber base and expand AT&T’s business.

Porter 5 Forces Analysis

New Entrants – High Barriers to Entry

In this capital-intensive industry, the need for capital is a major barrier to entry to cover the substantial

fixed costs. The immense start-up cost required to cover the targeted geographical area in a country demands a

high level of liquidity for the firm which hinders the entrance of many new firms. The existing firms benefit

from large scale operations, numerous economies of scale, and diversification effects.

Similarly, the possession of a telecom license (acquired through spectrum acquisitions) represents a barrier to

entry as a new telecom operator must apply to the Federal Communications Commission (FCC) to obtain

regulatory approval and licensing. The government regulates rules and guidelines regarding access to

distribution channels as well as on infrastructure and networks.

Power of Suppliers

The number of telecommunications equipment suppliers has increased over the years. These wireless

telecommunications providers run and monitor the infrastructure of the networking equipment and stations. This

leads to a decrease in the bargaining power of suppliers as they face price competition. The US government also

plays a part as the exclusive provider of bandwidth and authorization to consume specific levels of

electromagnetic spectrum. Thus the supplier power is reasonable.

Power of Buyers

Even given the abundance of modern technologies regarding devices, the plain service of

communicating stayed the same for telecommunication products. Thus, the consumers have a wider range of

devices to choose from and most of these consumers prefer looking for cheaper priced products with suitable

services, rather than focusing on brand loyalty with inelastic demand. Therefore, the domestic telecom

customers possess increased bargaining power as the switching costs are low. Consumer buying power is high.

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Availability of Substitutes

There have been substitution threats from some non-traditional telecommunication industries such as the

cable TV and satellite operators. Railways and energy utility companies contain high-volume

telecommunication networks along with track and pipeline assets. Moreover, the internet has also become a

major threat in the form of a possible vehicle for cut-rate voice calls. VoIP delivers the use of easy integration

with other Internet-based.

Competitive Rivalry

The price competition in this industry is severe. The improvements in technology have contributed to a

wide variety of substitute services, driving companies to lower prices and provide additional services and incur

costs to retain market share. Per subscriber profitability has decreased and companies face strong exit barriers

due to the difficulty in selling specialized equipment. The lateral competition derived from the union between

telecommunications, technology, media and the consumer electronics market is spreading towards converging

markets, leading to growth prospects and competitive pressures.

Strenghts

•Large Market share (33%)

•Key dominant player with ample cash flows

•Spectrum holdings and infrastructure holdings

•Highly concentrated industry

Weaknesses

•Mature industry with low growth prospect

•Wireless suscriber's saturation

•Revenues are linked to the economy strenght

•Saturation of internet-enabled devices

Threats

•Demographics

•FCC increased regulations in spectrum auctions

•Competition for 4G network

•Fast technology changes

Opportunities

•Investing in 4G network through acquisition of spectrums

•4G and LTE network

•International market penetration (Latin America)


Page | 4


Competition

Wireless

AT&T is facing substantial competition in the wireless industry, where increasing wireless companies

can bid on different spectrums. More than 98% of the US population lives in areas where at least three

telecommunication providers operate. AT&T covers more than 300 million people with its LTE technology and

provides an extensive 4G coverage. Competition for customers is based on service offerings, price, quality, and

coverage.

AT&T has been able to grow through acquisition, and

market share growth is primarily due to its high dividend yield.

From 2010-2013, market share has grown by 2.4% annually,

and AT&T’s market share is expected to be around 33.1% at

the end of 2014.

Given market saturation, we expect both growth in

subscribers and market share to decrease during the forecasted

period of 2014-2019. Over this period, a compound annual

growth rate in subscribers of 1.5% is forecasted, but it is

believed that total market sales could decrease to $181.2

billion by 2019, representing a yearly decrease of 1.4% over the next 6 forecasted years. It is assumed that

AT&T will be able to grow its revenues at a rate of 1.5% per years until 2019.

Wireline AT&T’s wireline division primarily competes against broadband providers, but also against wireless and

cable companies. Consumers are always looking to improve the quality and speed of the data they have access

to, leading them to terminate traditional contract and seek product offerings from wireless services. In order to

compete in wireline, AT&T must continually update the quality of its offerings and invest in high-quality

broadband services. The major competitions are coming from wireline leaders like Comcast Corporation, Cox

Communications Inc., and Time Warner Cable Inc. for high-speed internet and long-distance calls.


Source: MarketLine Industry Profile

Source: MarketLine Industry Profile Source: MarketLine Industry Profile

Page | 5


Satellite TV Providers in the US The satellite TV industry consists of companies

which distribute TV programs on a subscription or fee

basis. The following data excludes the performance of

TV networks and other satellite telecommunications

providers. The major products and services provided by

this industry are basic programming, DVR Services, HD

Channels and Video on Demand. The satellite industry

is in the mature stage of its growth cycle. Entering into

this type of industry requires significant capital

spending in order to produce the signal that can be acquired by the various providers. The positive aspect of this

industry is the fact that the barriers to entry and regulatory levels are very high, making it an attractive

environment for established companies, such as DirecTV and DISH Network.

Market and Competition Analysis – Strengths and Weaknesses

A new company wanting to break into the satellite industry would have many issues and difficulties that

might deter its desire to follow through with said project. The first issue pertains to the low demand of satellite

TV service. The satellite market is saturated by both DirecTV and Dish Network holding over 96% of the

market share, leaving new players with minimal growth opportunities. The market is saturated and external

players are fighting hard to gain market share. Secondly, industry revenues have remained relatively stable over

the years, but threaten to decrease as new technology enters. The number of cable TV subscriptions has

decreased vastly since 2010 by almost 3 million subscribers, and it is expected to keep decreasing in the near

future. This would seem favorable for satellite TV since they are the substitute for cable TV, but this decrease in

subscriptions cannot be attributed to customers switching over to satellite TV. It is the result of lower cost

alternatives that have recently infiltrated the market. Looking at the relative annual growth of the industry, one

can see that it is drastically shrinking, moving from an annual growth of 7.3% (2009-2014) to a forecasted 2.9%

(2014-2019). This asserts the fact that the customers that left the cable TV field did not join satellite TV as the

perfect substitute.

Even though satellite companies have increased the amount of programming and the quality of services

they provide, it has become harder to maintain their customer base and their ability to transpose their costs onto

customers due to the stiff competition. The growing availability of online content that is not provided by a paid

online TV substitute like Netflix or Hulu has increased drastically in recent years. This gives potential

customers the ability to download or stream any shows or movies that are provided by satellite providers for

virtually no extra cost—apart from the internet cost. Netflix and Hulu do not provide the content that is

observed on live TV as quickly as customers would desire, which is one of the reasons that customers consider

the option of downloading the content or even sticking with their satellite provider. These downloading and

streaming services may even compete with the current alternative TV distributors as they provide a lower

overall cost – since there is no monthly fees – and allow the user to watch the desired entertainment soon after it

airs on TV.

Market and Competition Analysis – Threats

Bundling of Services - Some cable companies offer more than just TV entertainment in the form of bundles

that include internet, telephone, and other services at an altogether affordable price. This proves to be

troublesome for satellite providers as they only specialize in TV entertainment, and have no room to offer

bundled services that could compete with the current deals in the market.

DVR Service

4%

Basic

Programming

40% Video on

Demand

32%

HD Channels

22%

Other

2%

US Satellite TV Providers market


US Satellite TV Industry Analysis

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Cyclicality of business - Satellite TV is considered a consumer discretionary product, which means that the

number of subscribers depends on how much disposable income the average household holds. 2014 and 2015

could prove to be successful years for satellite TV due to the expected increase in per capita income.

Satellite capital expenditures - The effort from satellite companies to try and differentiate themselves from the

cable companies has come at a cost to their operating margins. Satellite companies have increased the amount

of advertising to capture customer’s appetite for new programming. Another aspect that has been a focus is the

quality and quantity of customer service. The satellite industry, therefore, requires substantial capital

expenditure.

Direct Alternative competition - Netflix, Amazon, YouTube, Hulu, Plus and Vudu, Apple TV, Roku, and

Chromecast are all different services that compete to appropriate their selves content that is watched on the

internet and TV screen. These services do have a disadvantage compared to satellite TV; they cannot stream

live sporting events, and the quality and reliability are lower than what is observed for satellite. One of the chief

features which provides DirecTV with a steady

customer base, is its NFL Sunday Ticket (78.8% of

the company’s revenue), which offers customers

access to all NFL games throughout the season. As

time moves forward, streaming and alternative TV

providers could rapidly consume Satellite TV market

share and customer base.

A report by Nielsen in 2012 states that 4.7%

of the population will rely solely on the internet for

their TV needs. This must also be explained by the

demographics of the satellite subscribers. A majority

of their subscription level comes from customers that are 35 and over, who are people that may have a harder

time adjusting to advancing technology or may not want to learn how to utilize a new system. As the population

continues to advance, there will be a shift to other more innovative and cheaper alternatives observed such as

Netflix or simply the free streaming and downloading services.

Future Opportunities – Advantage of DirecTV market position

DirecTV had been adding additional original and exclusive programming or extra programming in general,

which will definitely attract and retain their customers. The problems here would be the costs associated with

creating the new programming and the attractiveness of such programming to the average customer.

The acquisition for AT&T could be potentially profitable because the market is feeling some

competition from cable, but only because they are offering a bundled product; otherwise, no customer

would only be interested in cable TV. This is a great opportunity for this merger, since they will be able

to provide the bundling of satellite with the other perks that AT&T could offer and potentially take cable

TV out of the market. This strategy would definitely come down to the relative pricing between the

bundle that includes cable, and the bundle that includes satellite TV.

Market Niche: The NFL Sunday Ticket and potentially international programming for immigrants that

come to the United States. That is, being able to transmit shows that are originally from an outside

country, live in the U.S.

less than 25

years old

4% 25 to 34 years

old

14%

35 to 44 years

old

17%

45 to 54 years

old

20%

55 to 64 years

old

21%

Over 65 years

old

24%

US Satellite TV Market segmentation



Page | 7


Product and Services – The two

sectors that are growing the most are

the basic programming and HD

content. These are interesting for

customers since they offer some

added value from the expenditure on

satellite TV as it is more difficult to

obtain this content from other

providers. Video-on-demand DVR

services have performed poorly

recently due to their similarity to

other services that are being offered in

the market now, but we see strong

growth in those two niche of satellite

offering.

SWOT Analysis

The following table is a great

resume of DirecTV’s strengths and

weaknesses. Moreover, a diligent

analysis was run to identify the

industry threats and opportunities. It

would apply to AT&T if it was to

acquire DirecTV.

The Key Success Factors

In the Satellite TV industry, it is essential for customers to feel that they are getting some added value by

subscribing to satellite. This means either lowering the prices to compete with the alternatives or offering more

exclusive programming. Whatever the chosen scenario is, a firm has to ensure that its pricing policy is

competitive. Pricing is directly linked to the quality of the service provided. Establishing and maintaining a

good reputation among customers for high quality and reliable services is crucial for the retention of

customers. DirecTV is on track to make this a reality since they have increased their compliance centers in the

last 2 years.

In order to retain its competitive advantage, a company has to have the ability to keep up with the

technological landscape. A satellite TV provider must be able to provide new and highly technological

services in a timely fashion, and preferably ahead of competition.

The population of the United States has been growing, but at a rather slow pace. This industry relies

vastly on the population growth to make its business successful. If the satellite business aspires to increase its

profits, a consideration for entering the developing markets to increase revenues is a must - Refer to Latin

Market Outlook Appendix

Strenghts

•Excellent Customer Service

•Large Market share (53.6%)

•Low marginal costs per new subscription

•International market

Weaknesses

•Industry growth is rapidy decreasing

•Lack of bundling prospects

•Revenues are largely linked to the strength of the economy

Threats

•Alternative TV provision (Netflix, Hulu, Chromecast, and other players)

•Cable TV and bundles

•Free online content

•Demographics

Opportunities

•Niche market (sporting streaming and international programming

•Continued International market penetration (Latin America)


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Strategic Alternative Investments Strategically, there are more options available to AT&T other than a deal involving DirecTV and a

direct presence as a major Satellite TV Provider in USA. Geographically, many opportunities in Mexico are

appealing for AT&T because of its extended operations as a wireless and wireline telecommunications carrier.

A second alternative would be to build a strategic vertical partnership with DirecTV instead of proceeding to an

acquisition. An acquisition, even if it represents a large sum in synergy costs, would require substantial capital

spending from AT&T. The last proposed strategic alternative investment to AT&T would be to use its free cash

flows and to continue building its competitive advantage in the US by investing in higher quality wireline

spectrums.

We don’t think that increasing AT&T’s dividend yield or increasing their share repurchase program

would be adequate alternative investments. AT&T provides an annual dividend of $1.88/share, which

corresponds to a dividend yield of 5.74%. AT&T has the highest dividend yield of the S&P 500 companies, and

we don’t think providing a superior dividend yield can change company’s strategic position. AT&T shares

repurchase program is already strong, with established repurchases yearly.

Geographic Penetration of Mexico Wireless and Wireline Industry

By 2013, the Mexican government decided to reform the country’s telecommunications sector. This

sector is currently highly monopolistic with only one or two major wireless and wireline players. Wireline giant

Telmex and telecommunications behemoth Telcel are the dominant market players, in broad lines (fixed-line)

and wireless telecommunications respectively. Both

companies are owned by telecom giant America Movil.

American Movil is the fourth largest telecommunication

network operator in the world and provides services to

almost 300 million subscribers. Telcel and Telmex will

both have to start divesting their assets in order to reduce

their market share under 50% in the future. Telcel’s market

share represents 70-80% of the Mexican market, and

following the 2013 legislation, the company will have to

reduce its market monopoly by divesting its assets. Telmex

has to do the same.

For a giant telecom company like AT&T, it represents a wonderful opportunity to expand its operations

to Mexico, a Latin American country with whom USA shares a boarder. For 5 years, Mexican

telecommunications industry revenues have continually increased and reached more than $32 billion in 2013.

Growth in the Mexican mobile market is greater than the US market, even if it began to slow down due to a

greater penetration rate. Many operators are greatly positioned in the wireless market in Mexico, such as

Movistar, Nextel, and Lusacell and could represent good acquisition targets for AT&T. Moreover, it has been

rumored that Telcel was looking to divest the majority of its assets from eastern and northern areas; these

geographic territories would be close to USA and favorable to AT&T’s expansion.

Strategic Alternative Investments

Page | 9


Market

The Mexican market has experienced

moderate growth in subscribers over the last couple

of years. Mexican wireless expected total revenues

for 2014 are $18.9 billion. However, total market

value is forecasted to be negative over next few

years and expected to decrease to $17.5 billion by

2019. This would represent an average total decrease

in revenues of 1.5% per year. The amount of

subscribers, which represented 103.6 million

subscribers in 2013, is estimated to grow to a record

amount of 118.6 million subscribers by 2019. This

represents an annual forecasted growth of 2.2% in

the future. We estimate that Mexico’s total market

share and revenues should decrease at a rate

comparable to the American market. However, there

are relatively more opportunities due to a faster

increase in subscribers in Mexico until 2019

compared to the US market. This is understandable

seeing as the US market is already saturated, while

on the other hand it is estimated that Mexico’s

penetration rate is 87% for wireless telecommunications. Despite the dominance of companies like Telcel and

Telmex, new regulations strongly diminished barriers to entry in last months.

Regulations

On June 11 2013, the constitutional reform (IFT; Institutional Federation of Telecommunications) in

telecommunications released a new Federal Telecommunications and Broadcasting Laws with the objective of

increasing the competitive landscape of telecommunications and provide services at lower prices1.

The IFT is now responsible to regulate and is in charge of the radio spectrum, wireless networks, provision

of broadcasting and telecommunication services. The reforms provided major changes that would be attractive

to outsiders, such as:

1. Direct investments from foreign companies are now permitted, up to investments of 100% in

telecommunications and satellites communications. Foreign companies can invest and acquire up to

49% of Mexico broadcasting market share.

2. 700 MHz wireless services will continue to be auctioned and will be open to foreigners bidding. All

spectrum are now granted throughout public bidding.

3. Legally, IFT is in charge of Public Registry Telecommunications and grants authorization to companies

if they want to establish themselves as telecommunication resellers, transmit satellite signals and install

telecommunication equipment.

4. IFT wants to create a competitive market. They control network neutrality, the number of players within

the industry, and the access to services and satellite communications.

1 http://www.lexology.com/library/detail.aspx?g=c883b1e3-d614-468f-ba3d-045b14110fec




http://www.lexology.com/library/detail.aspx?g=c883b1e3-d614-468f-ba3d-045b14110fec

Page | 10


5. IFT identified Telcel and Telmex as preponderant players with national coverage and imposed measures

to decrease their monopoly and the adverse effect they could have on competition. Following the new

law, those two companies, operating under the same telecommunication giant America Movil, will have

to divest some of their core activities and assets in order to reduce their market share under 50%2. It was

estimated Telmex controls 80% of Mexico phone market and Telcel controls 70% of the wireless

market3.

IFT reforms are great opportunities for a foreign company like AT&T. AT&T can now directly invest in

Mexico’s telecommunication industry and can also proceed to the acquisition of some of Telcel and Telmex

assets. As a single buyer, AT&T could rapidly acquire a large part of market share and could intensively invest

in capital expenditure due to its financial situation. The new reforms certainly open up investment opportunities

in Mexico.

Opportunities

Even if the Mexican market growth perspectives

are not as thrilling as the US market, Mexico presents

strong opportunities for AT&T. Geographically, an

expansion in Mexico would be feasible; it is close to the

USA and it would not introduce technical difficulties.

The most attractive feature of this strategy is that AT&T,

by proceeding through acquisitions, could rapidly occupy

a strong market position. Once operating in Mexico,

AT&T could expand its market by proceeding to the

acquisition of other good players such as Nextel and

Lusacell. For example, Nextel holds valuable spectrums

that can be used to develop a 4G and LTE network in

Mexico. Moreover, all market participants are aware that

America Movil has to divest a portion of assets due to its extensive market share and the legislation discussed

above. The valuation could be in AT&T’s favor as they could lower the value of improvements, synergies, and

future strategic options. All indications lead us to believe AT&T would be in a strong position when negotiating

as they understand the obligation to divest.

An expansion in Mexico would not be detrimental to AT&T’s intentions to acquire a satellite TV

provider such as DirecTV. DirecTV already has activities in Mexico and Latin America. Acquiring DirecTV

and wireless businesses in Mexico would allow AT&T to build a vertical product offering in Mexico, and

depending on marketing penetration, acquire a customer base faster and more efficiently. However, we don’t

think AT&T is in a strong enough financial position to proceed with the two projects simultaneously given its

current capital structure. It would leverage the business too quickly and hinder overall flexibility.

2 www.hlmediacomms.com/2014/08/05/mexico-new-telecommunications-and-broadcasting-law-to-enter-into-effect-13-august-2014/

3 http://www.forbes.com/sites/doliaestevez/2014/07/09/in-a-surprising-move-mexican-billionaire-carlos-slim-to-sell-telecom-assets-

in-compliance-with-new-anti-trust-rules/


http://www.hlmediacomms.com/2014/08/05/mexico-new-telecommunications-and-broadcasting-law-to-enter-into-effect-13-august-2014/

http://www.forbes.com/sites/doliaestevez/2014/07/09/in-a-surprising-move-mexican-billionaire-carlos-slim-to-sell-telecom-assets-in-compliance-with-new-anti-trust-rules/


Page | 11


Strategic Vertical Partnership with DirecTV instead of direct acquisition

AT&T’s acquisition of DirecTV would certainly lead to synergies, either in cost reductions or increases in

revenue possibilities due to cross-selling offerings. Proceeding through the acquisition would not fundamentally

alter AT&T’s business, but it could strengthen the firm’s product offering. However, the acquisition of a large

player like DirecTV would require significant capital expenditures, estimated in billions, and could be harmful

to AT&T’s other projects, such as their notoriously immense bidding offers on spectrums. DirecTV would

restrain AT&T’s liquidity flexibility and would represent massive investments in an industry where growth

prospects are limited.

AT&T could develop a strategic vertical partnership with DirecTV instead of proceeding to its acquisition.

We believe a partnership would not generate the promised synergy costs of an acquisition; however, they could

be just as great in terms of revenue increases from cross-selling products. A partnership between these two

players is ideal. AT&T is a US dominant wireless telecommunication player and DirecTV is a dominant

satellite provider.

By partnering with AT&T, DirecTV could still create a content distribution for the mobile, video and

broadband platform. AT&T will be in a position to offer bundled products – Satellite TV, Internet and

Phone4.

DirecTV could use AT&T wireless network to provide superior content quality and expand its offering

to a substantially larger subscriber base, especially in rural areas. A broadband expansion would allow

DirecTV and AT&T to reach and cover a larger clientele.

Both companies would have the opportunity to increase their product offerings, marketing reach, and

brand reputation and awareness.

AT&T will be able to provide high speed broadband competition to more customer locations and with

DirecTV, will be able to provide nationwide package pricing on DirecTV Satellite Pay TV5.

To a certain extent, AT&T could be in a position to realize some of its growth objectives, especially in

revenue increases through cross-selling products, by only partnering with DirecTV instead of proceeding with

the acquisition of the satellite TV provider. We recommend AT&T to be cautious with a possible acquisition of

DirecTV since market growth in Pay TV is saturated, demand is decreasing, and the emergence of streaming

platforms is a serious threat to the industry. Establishing a strategic vertical partnership could be a great

compromise. It would boost top line revenues without requiring AT&T to take unnecessary risk.

Intensive Investment in quality wireline broadband and spectrums

By acquiring DirecTV, AT&T would be opening many doors to itself in a saturated industry. AT&T

could leverage its business through DirecTV’s

operations. Almost half of DirecTV’s

subscribers are located in Latin America;

AT&T could rapidly expand its services to a

new geography. DirecTV would also have a

positive effect on AT&T’s free cash flow,

even if DirecTV would require sizable capital

expenditures year over year.

4 https://support.directv.com/app/answers/detail/a_id/4259/~/directv-and-at%26t-merger-faq

5 http://about.att.com/story/att_to_acquire_directv.html


Top 100 Markets 700 850 PCS AWS H AWS-4 2.3 GHz 2.5 GHZ Total

Verizon 32 25 21 34 0 0 0 0 112

AT&T 30 25 34 5 0 0 20 0 114

T-Mobile 9 0 30 42 0 0 0 0 81

Sprint 0 14 36 0 0 0 0 160 210

DISH 5 0 0 0 10 40 0 0 55

AT&T Current Spectrum Assets

Low Band Mid Band High Band

Page | 12


However, this transaction would not address AT&T’s key needs in order to retain its competitive

advantage; vast capital expenditures in spectrums. US wireless space is saturated and mobile penetration has

crossed the 100% threshold6. Even if a deal with DirecTV could still leave room for spectrum acquisitions, we

believe AT&T will have to significantly increase its capital expenditures in spectrum in the future to keep its

competitive position. AT&T should aggressively continue to increase its spectrum position in United States.

The company has to be aggressive in 2014-2015 AWS-3 auctions. Other auctions will take place such as 600

MHz, 1200 MHz, 1695-1710 MHz and 1755-1780 MHz, and we believe AT&T has to be aggressive in those

bids. DISH possesses an abundance of unused spectrums and AT&T could try to purchase back assets from

established players if these companies do not require a huge payment premium.

The FCC has recently rejected the imposition of a ceiling on the amount of spectrums a carrier could

acquire. It was decided that the FCC would study each demand and would allocate the spectrums based on

auctions war. The only bands that are subject to limits by the FCC are the low band spectrums. Verizon and

AT&T could be subject to limitations in the next auctions since they control the majority of low band spectrums

in the United States. In large density populations, there is no large disparity in quality between low and high

bands, except low band frequency have a better penetration. We strongly believe that AT&T should target, in

the next auctions, high band and higher frequencies spectrum. AT&T possesses a lot of spectrums in the low

band but is short in mid and high band quality spectrums. AT&T should target AWS-3 spectrum, considered

between mid and high band that will be auctioned in the near future, either at the end of 2014 or in 2015. 120

MHz of spectrum will be auctioned and it represents an auction market value between $20 and $40 billion.

AT&T has the financial ability to bid on the majority of the auctioned wireless spectrums, which can prove to

be essential to grow top line figures.

AWS-3 auction is the first meaningful auction in the high band quality spectrum since 2008. Mobile

data demand has had an exponential growth in the last 6 years and since an auction of this size and this quality

could not occurred before long in the future. AT&T has to make sure it can win significant spectrum bids.

Three-pieces of wireless network will be auctioned; the 1695-1710, 1755-1780 and 2155-2180 MHz’s.

AT&T should definitely bid on international spectrums located in 1755-1780 MHz band. This band is

allocated for fixed and mobile commercial services and will potentially be an extension to actual AWS

spectrums. This band is also regionally and internationally covered for mobile broadband and is made for large

national carriers. 2155-2180 MHz’s band is also made for national wireless carriers. This spectrum is in

between AWS-1 spectrums, owned by T-Mobile Verizon and AT&T, and AWS-4 spectrum, owned by DISH.

The acquisition of these spectrums would increase AT&T’s competitive advantage and would advantageously

position the firm in the mid-band market. Mid and high band provide the highest carrying capacity and would

be ideal for AT&T to continue deploying its LTE and 4G network. AT&T will provide quality services in LTE

and would be able to increase its competitive advantage by investing in AWS spectrums.

AT&T could also push its growth and spectrum dominance by acquiring a company like DISH, or

acquiring its spectrum holdings in the United States. DISH possesses several wireless spectrum holdings in

AWS-4 band and could be a great acquisition for AT&T in order to strengthen its wireless position. AT&T has

done it in the past with the acquisition of LEAP to increase its AWS spectrum position on the market. DISH

possesses AWS-4 spectrums specifically made for national wireless telecommunications. By acquiring

spectrum in AWS-3 and AWS-4 band, AT&T would be in a good position for a high quality LTE network

national deployment. 6 http://marketrealist.com/2015/02/wireless-growth-opportunities-att-mexico/


Page | 13


Valuation

Discounted Cash Flow In order to correctly assess DirecTV’s value, two scenarios were built. In the first scenario, DirecTV

was valued on a stand-alone basis, while the second scenario the firm was valued as if it were controlled by

AT&T. AT&T can provide several economies of scale and synergies to DirecTV, such as increases in sales due

to cross-selling products, reduction in specific SG&A costs and can reduce the cost of debt due to AT&T’s debt

rating of A- compared to DirecTV’s BBB.

The cost of capital was determined based on the cost of equity and cost of debt. Major assumptions

included:

Forecast, including terminal year, is based on 6 year from 2014 to 2019. 7 year US T-Bills rate of 2.32%

corresponds to the risk free rate as of April 1st 2014.

Market risk premium is equal to 5.78% in US and 9.5% for Latin America operations. Latin American

has therefore a country equity risk premium of 3.75%.

Beta of 0.866 is derived from DirecTV’s return over S&P 500 in the last 5 years of operation, from

April 1st 2009 to Aprils 1

st 2014.

December 2013 annual financial statement,

last financials available, shows that

DirecTV had 78.45% of its sales in US and

21.55% in Latin America. A weighted

average of respective cost of equity for the

two markets was calculated.

US CAPM is equal to 7.33% and Latin

America is 11.08%, for a global cost of equity of

8.13% for the company. After tax cost of debt of

2.83% was determined based on a weighted

average of DirecTV’s debt of 4.42% as of 2013

year end. Equity weight of 66.98% corresponds to

DirecTV market value of $39.6 billion. Debt

weight is 33.02% due to $19.54 billion in debts

with interest bearing. DirecTV required cost of

capital, due to its financial position, is equal to

6.38%. – Refer to Valuation Appendix

Income Statement Assumptions

Revenues were divided between DirecTV’s two branches; US and Latin American operations. 2013 revenues

were respectively $24.91 billion and $6.84 billion for US and Latin America.

From 2014-2019, it is assumed that US revenues will increase by 6.02% in 2014 and linearly decrease to

1% by 2019. Over the same period of time, Latin America revenues will increase by 9.61% in 2014 and

will linearly decrease to 1.75% by 2019. DirecTV global revenues will equal to $40.12 billion in 2019.

Cost of goods sold (COGS) for the forecast period of 2014 to 2019 represent 51.4% of revenues.

DirecTV has been able to cut down its SG&A in last 3 years and the model assumes SG&A margin will

be equal to 22% of sales for the period from 2014 to 2019.

No. Shares Outstanding 509,953,000

Current Market Price per Shares 77.72$

Market Value of Shares 39,633,547,160$

No. Preferred Shares Outstanding -$

Current Market Price of Preferred Shares -$

Market Value of Preferred Shares -$

US- Beta 0.866

US -Market Risk Premium 5.78%

US - Risk Free rate 2.32%

US CAPM 7.33%

Latin America- Adjusted Beta 0.553

Latin America -Expected MRP 9.50%

Latin America - Country Equity RP 3.75%

Latin America CAPM 11.08%

2013 Sales % in US 78.45%

2013 Sales % in LatAM 21.55%

Size premium -0.0038%

Capital Allocation Pricing Model 8.13%

Current Cost of Equity

Valuation: Discounted Cash Flow Analysis

Page | 14


EBITDA Margin is stable and equals 26.6% of total revenues, ranging from $9.02 billion in 2014 to

$10.79 billion in 2019.

Anticipated growth for the next 5 years is lower than what it had been last 5 years for major obvious

reasons; industry growth is rapidly decreasing, alternative products are supplying the market heavily and US

market is largely saturated; subscribers growth coming from existing consumers.

Balance Sheet Assumptions

Major assumptions regarding the balance sheet will greatly impact the free cash flow available to the firm,

such as capital expenditures and working capital.

Property, Plant and Equipment should increase at a yearly average rate of 7.1% from 2014 to 2019.

Inventory will always represent 2% of Cost of Goods Sold.

Account Receivables always accounts for 8.4% of Total Revenues.

Account Payables always represent 30% of Cost of Goods Sold

All those assumptions lead to value DirecTV at $64.25 billion or $87.68 per equity share. The firm’s total

value per share however is $126. This model assumes that DirecTV sales will increase to more than $40 billion

by 2019 and the EBITDA Margin represents 26.6% of those sales. It is expected that the company’s subscriber

annual growth will range from 3.16% to 0.74%. This valuation is close to the price DirecTV is traded at,

leading us to affirm that the firm is correctly valued by the market. However, as financial advisors, we see room

in the balance sheet and income statement where AT&T could bring synergies and therefore increase the firm’s

value.

Synergy assessments & Improvements AT&T will be able to reduce DirecTV SG&A, increase US revenues and decrease the cost of borrowing

debt. From our synergy valuation, we believe DirecTV is worth 12% more than what it is when operating as a

stand-alone entity. $72.4 is the derived firm valuation when in AT&T’s control, compared to $64.5 billion in

the base case scenario. We expect US revenues to increase due to AT&T’s large reach and opening to new

subscribers from its client base.

Because of AT&T’s inexperience in Latin America,

we do not think it can impact DirecTV sales abroad, but

AT&T will certainly help DirecTV to reach more clients in

the United States through product bundling and special offers.

All of this will be possible because DirecTV, through AT&T,

will have access to 20 million additional customers. The

financial model assumed American sales increase from 2014

to 2019 would slowly linearly decrease from 6.02% to 1.00%.

We still believe sales will decrease because of the saturated

market, but we believe it will transition slowly. Over 5 years,

AT&T will generate 1.5% more in sales growth than if

DirecTV was operated as a stand-alone. This increases the valuation by $2.85 billion.

AT&T, because of its intense marketing structure, will be beneficial to DirecTV costs in subscriber’s

acquisition and retention. On average, subscriber costs represent more than $3 billion each year and 10.77% of

total revenues. This is a major part of DirecTV’s cost structure and SG&A. Over the forecasted 6 years, we

believe AT&T will be able to reduce this number to 9.52% of total sales by 2019, at a reduction rate of 0.25%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

FY 2014E FY 2015E FY 2016E FY 2017E FY 2018E FY 2019E

DirecTV Forecasted Sales Increase

Stand-alone Under AT&T (Synergy Effect)


Page | 15

Cost of Equity 8.13%

- Equity Risk Premium 5.78%

- Beta 0.866

- Risk Free Rate 2.32%

Equity Weight 66.98%

Cost of Debt 2.44%

- Tax Rate of the business 36.00%

- Risk Free Rate 2.32%

- Default Spread 1.50%

Debt Weight 33.02%

Cost of Capital (WACC) 6.253%

Cost of Capital with Synergy


per year starting in 2015. Similarly, retention will be lower due to AT&T’s reputation and capital structure. So

far, retention costs have represented 4.87% of total revenues. Over the forecasted period of 6 years, AT&T will

be able to reduce these costs to 4.37% by 2019, at a rate of 0.1% each year starting in 2015. Retention and

subscriber’s costs reduction increase firm valuation by more than $4 billion.

Because of AT&T infrastructures, plants and equipment, we believe that

annual increases in Capital Expenditure of 7.1% will decrease over time.

DirecTV will benefit from these infrastructures and will have to spend less

over time to develop its business. Over the forecasted period, these cost

increases will move from 7.1% per year needs to 5.6% by 2019,

decreasing by 0.3% starting from 2015. This has an impact of $3.3 billion.

Finally, AT&T’s debt rating is better than DirecTV’s and we therefore

recommend refinancing all debts to AT&T’s rating of A-, saving 0.5%

(1.5% vs 2%) in credit spread. This lead the weighted average of capital

(WACC) to decrease from 6.38% to 6.25%, and valuation increasing by

1.9%. AT&T clearly has a control value advantage when valuing DirecTV

because of its financial situation, costs structure, and established market.

The control value is worth $7.9 billion or 12% from the stand-alone

valuation. DirecTV, in the hands of AT&T, is worth $72.4 billion and per share equity value is $103.69.

Sensitivity Analysis Even if results obtained from the DCF are

concrete, there is a possibility the assumptions

happen to be a little different than what would

actually take place. We could have different

assumptions regarding the debt of the company,

forecasted growth or weights between equity and

debt. The major variables that would impact the

valuation are the terminal growth rate and

weighted average cost of capital. WACC is

equaled to 6.25% and sensitivity analysis

assumed it could actually be between 5.75% and

6.75%. Terminal growth relies on population and

subscribers growth after 2019. There is a chance

the 1.18% forecasted vary greatly and sensitivity

analysis assumed it could end up between 0.68%

and 1.68%. Sensitivity analysis reveals that firm

value is therefore within a range of $61.5 billion

to $88.05 billion. Price value per share would be

between $135.24 and $82.47.

From this sensitivity valuation range, we believe that the 30th

percentile to the 70th

percentile is a better

representation of how worthy DirecTV is. Following sensitivity analysis, DirecTV’s range valued is estimated

to be in between $69.6 billion and $80.4 billion, for a price per share in between $98.35 and $119.40.

Enterprise Values - Sensitivity Analysis Table (in million $)

Weighted Average Cost of Capital

5.75% 6.00% 6.25% 6.50% 6.75%

1.68% 88,508$ 83,278$ 78,622$ 74,451$ 70,694$

1.43% 84,308$ 79,587$ 75,358$ 71,549$ 68,099$

1.18% 80,568$ 76,279$ 72,416$ 68,918$ 65,737$

0.93% 77,214$ 73,297$ 69,750$ 66,524$ 63,577$

0.68% 74,191$ 70,595$ 67,323$ 64,335$ 61,595$

Term

ina

l Gro

wth

%

Share Price - Sensitivity Analysis Table

Weighted Average Cost of Capital

5.75% 6.00% 6.25% 6.50% 6.75%

1.68% 135.24$ 124.99$ 115.86$ 107.68$ 100.31$

1.43% 127.01$ 117.75$ 109.46$ 101.99$ 95.22$

1.18% 119.67$ 111.26$ 103.69$ 96.83$ 90.59$

0.93% 113.10$ 105.42$ 98.46$ 92.13$ 86.36$

0.68% 107.17$ 100.12$ 93.70$ 87.84$ 82.47$

Term

ina

l Gro

wth

%


Page | 16


Comparable Multiple Analysis

5.8%

2.9%

8.85%

2.30%

5.10%

20.00%

DirecTV

Cablevision Systems

Dish Network

Time Warner Cable

Echostar Corp

Empresas Cablevision

Total Revenue Growth (%)

Fig (a): TTM Total Revenue Growth

7.4%

10.7%

0.03%

8.00%

15.81%

28.13%

DirecTV

Cablevision Systems

Dish Network

Time Warner Cable

Echostar Corp


EBITDA Growth (%)

Fig (b): TTM EBITDA Growth

24.6%

26.7%

19.4%

34.0%

26.5%

34.4%

DirecTV

Cablevision Systems

Dish Network

Time Warner Cable

Echostar Corp


EBITDA Margin (%)

Fig (c): TTM EBITDA Margin

15.6%

13.1%

12.4%

19.6%

10.5%

15.9%

DirecTV

Cablevision Systems

Dish Network

Time Warner Cable

Echostar Corp


EBIT Margin (%)

Fig (d): TTM EBIT Margin

Valuation: Comparable Company Analysis

Name Mkt Cap EV EV/TTM EBITDA P/E

($ mn) ($ mn)

Cablevision Systems Corp 4,640.73 13,288.46 8.13x 43.81x

DISH Network Corp 27,517.68 31,278.61 13.02x 26.98x

Time Warner Cable Inc. 38,080.63 62,611.63 7.96x 19.59x

EchoStar Corp 4,519.29 5,329.89 8.73x 1726.89x

Empresas Cablevision SA 1,569.20 1,773.15 7.54x 23.25x

Low Valuation 7.10x 19.50x

High Valuation 8.13x 41.20x

Page | 17


Selected firms from screening

The selected comparable firms all operate within the video entertainment industry and share a similar business

model to DirecTV which is to provide a wide range of television programs and shows. DirecTV’s operations are

located in both the United States and Latin America and so comparable firms from both geographic regions

were selected in order to establish a solid base for comparison.

An important feature to take into consideration is the means by which television programs are broadcasted;

some are broadcasted through satellite but the majority is done through cable. From the final screening list,

observers should be made aware that DirecTV and Time Warner Cable Inc. are by far the largest market cap

companies. Moreover EchoStar Corp. and Empresas Cablevision SA appear as outliers for certain calculated

multiple which can be attributed to their relatively small market capitalization.

Growth Benchmarking

DirecTV’s main operations are almost divided equally between the United States and Latin America. DirecTV

revenue growth is in line with the average, but is growing at a faster rate compared to well-established

American players Time Warner Cable and Cablevision systems. On the other hand, Latin American based

company, Empresas Cablevision, boasts much higher revenue and EBITDA growth when compared to its peers.

This can be explained by its smaller size and the slightly higher growth being experienced by the Latin Market.

As seen in figure (b), DirecTV has lower EBITDA growth rates than its U.S. and Latin America peers. As a

result, it is expected that DirecTV be trading at a lower EV/EBITDA multiples when compared to other well

established US firms such as Cablevision Systems and Time Warner Cable Inc. based solely on projected

growth rate. Empresas Cablevision whose entire operations are in Latin America is once again witnessing

much higher EBITDA growth rates compared to its U.S. peers but is trading at lower 1-year forward multiples

and is mainly due to its smaller size and different operating geographic region.

Return on Invested Capital Benchmarking

Using EBITDA margins as a proxy for return on invested capital, DirecTV should be trading at lower multiples

compared to its U.S. peers which boast margins between 27 % and 34% compared to DirecTV’s 24% EBITDA

Margin.

Proposed Valuation

Based on the previous analysis for both future growth prospects and expected return on invested capital,

DirecTV is expected to be trading at a discount to Cablevision systems’ TTM EV/EBITDA which has a

significantly higher EBITDA growth rate and EBITDA margin. Hence a multiple of 8.13x for the TTM

EV/EBITDA serves as a ceiling to DirecTV’s valuation. As seen in figures 2, 3 and 5 Time Warner is the most

comparable firm to DirecTV. DirecTV demonstrates similar growth but around 10% lower ROIC prospects

when compared to Time Warner Cable. Moreover, DirecTV and Time Warner Cable are both the leading US

firms in TV broadcasting and are both at maturity stages in the company life cycle. As a result DirecTV should

not be trading at lower than 7.1x TTM EV/EBITDA, reflecting a 10% discount to Time Warner’s multiple.

Based on an 8.235 billion TTM EV/EBITDA, DirecTV’s enterprise value is projected to be between $58.46

billion and $66.95 billion. Using historical data for control premiums within the communication industry, a

premium of 15% is added leading to a final control adjusted valuation of $67.23 billion to $76.9 billion.

Valuation: Comparable Company Analysis

Page | 18


Precedent Transactions

Evidently, we need to focus on deals involving telecommunication firms looking to expand their product

offering by acquiring firms focused primarily on their television services. Many of these deals involve a very

similar type of acquisition, however it is crucial that our valuation is based around those deals which involve a

target firm whose primary revenue generating operations hinge around their television services, as opposed to a

mass media firm such as Charter Communications. Transaction rationale is our most important deal filter as we

must align the incentives of AT&T’s deal to any prospective comparable deals. Following this preliminary

screening, we can further specify our selection by the market in which the television company operates.

DirecTV operates in both the United States and Latin America, which undoubtedly consists of a vastly different

market landscape than that of Asia’s, especially considering the likelihood of a more aligned demographic in

the Asian countries.

Below is a chart outlining the initial list of comparable transactions, prior to any subsequent screenings.

Included in the table are the firms’ primary line of business, transaction dates, deal size, and deal rationale.

*Source of deal figures; Bloomberg

Please see the appendix for a synopsis of each of the precedent transactions.

Drastically important to take into account is the specific type of television product the company is

looking to add. Although most forms of providing television are similar in nature, AT&T is looking to acquire a

satellite TV provider, whereas many of these transactions involve digital cable TV providers. Digital cable TV

represented the “next generation” in television content offering relative to satellite. As the market moves away

from satellite television content in the name of convenience, it suggests a potentially lower valuation for

DirecTV relative to the deals involving digital cable. However, as mentioned above, television content is a

discretionary good and so exposure to Latin American markets also leads to a lower valuation, given the

relatively lower income per capita. DirecTV’s lower price point will help raise the attractiveness of satellite TV

and it will become more comparable to digital cable. It is apparent AT&T is attempting to acquire DirecTV to

expand its service offerings into television content as well as gaining market share in Mexico.

Acquirer Primary LOB TargetPrimary LOB

(prior merger)Date

Deal Size

($Ms)Deal Rationale

Comcast Corporation Telecommunications Time Warner Cable Inc Digital Cable TV 13-02-14 $ 68,404.80 Expand service offering with

TV (US)

Vodafone Group PLC TelecommunicationsKabel Deutschland Holding

AGDigital Cable TV 24-06-13 $ 11,185.66

Expand service offering with

TV (Germany)

Promotora de

informaciones (PRISA)Mass Media

Prisa Television SAU

(PRISA TV)Digital Cable TV 20-12-07 $ 4,168.77


TV (Spain)

KDDI Group TelecommunicationsJupiter Telecommunications

Co.Cable TV 25-01-10 $ 4,006.41


TV (Japan)

Management GroupN/A (founder

repurchase)

Mediacom Communications

CorCable TV 01-06-10 $ 3,623.59

Founder to repurchase his

company

Sumitomo Corp ConglomerateJupiter Telecommunications

Co.Cable TV 24-10-12 $ 3,212.37


TV (Japan)

Foxtel (sub of Twenty-

First Century Fox)Telecommunications

Austar United

CommunicationsDigital Satellite TV 26-05-11 $ 2,734.91


TV (Australia)

Liberty Media Corp Mass MediaCharter Communications

Inc.Mass Media 19-03-13 $ 2,637.88

Leverage recent financial

returns and growth

Valuation: Precedent Transactions Analysis

Page | 19


As such, the following valuation outlines the comparable transactions chosen given the aforementioned

criteria. DirecTV’s TTM EBITDA value of $8.235 billion was used to derive the valuation figures. Solely two

deals were chosen, as many of the other deals involved large discrepancies in market locations as well as the

acquisition of the leading digital cable provider in the country, such as Kabel Deutcheland and PRISA TV,

which is a luxury not enjoyed by DirecTV. The Comcast deal was selected as it is the most related transaction

in terms of which market Time Warner Cable operates in and the deal rationale. Many have suggested AT&T’s

deal was directly in response to this Comcast move. However, Comcast did not obtain entry into the faster

growing Latin market as opposed to AT&T’s potential access to Latin America through DirecTV. This prompts

us to estimate the transaction value multiple at a premium to Comcast’s 8.57x multiple. Foxtel’s acquisition of

Austar was included as the only deal involving a satellite TV provider being purchased by a

telecommunications company. It is important to note that this deal also suffers from the acquisition of the

leading satellite provider in the country, as Austar dominated the Australian market. As a result we estimate that

a transaction value multiple for DirecTV should be at a significant discount to Austar’s TV/TTM EBITDA

multiple of 10.61x. As such, we value DirecTV’s transaction in the range of 8.5x to 9x TV/TTM EBITDA.

Based on precedent transactions, we have arrived at an average valuation of $72.06 billion, with a range of $70

billion to approximately $74 billion.

Valuation: Precedent Transactions Analysis

Acquirer Target Company Deal RationaleTV/TTM

EBITDA

Comcast Corporation Time Warner Cable Expand Srvc. with TV(US) 8.57x

Foxtel (Twenty-First Century Fox) Austar United Com. Expand Srvc. with TV(AUST) 10.61x

KDDI Group Jupiter Comm. Expand Srvc. with TV(JPN) 8.06x

Vodaphone Group Kabel Deutschland Expand Srvc. with TV(GRMN) 13.08x

Low Valuation 8.50x

High Valuation 9.00x

Page | 20


Recommendation and Action Plan

After a thorough analysis of the environment outlook of both the Telecommunication and Satellite TV

industry in the US and also Latin American perspectives, we came to the conclusion that even if AT&T’s

finance team had correctly valued the acquisition (in between $60-$70 billion), it was not the right deal for the

company at the moment. We would recommend AT&T to fall back on this deal, irrespective of an attractive

valuation. The following is a list of impacts, positive and negative, that were weighed when valuing the

purchase of DirecTV by AT&T, and the reasons why we believe the future of AT&T is not with DirecTV.

Further researches lead us to find alternative investments that we thought to be more appropriate for

AT&T to pursue in order to grow its business operations. An action plan was proposed in order to fulfill

AT&T’s capital deployment in other diversified opportunities. These alternatives suggest an outlet for the

potentially newly available in billions of dollars of unused capital should the deal not be pursued.

Pros – DirecTV attributes making it a great acquisition for AT&T

DirecTV is the number 2 player in the satellite US industry, this surely leads to some positive outcomes

should AT&T decide to go further with this deal. The major incentives being the following:

DirecTV boasts an established franchise in the US with a strong market presence. Most of their revenues

are derived from US operations (78% as of 2014).

Synergies lie in the potential of substantial cross-selling of product offerings through leveraging

AT&T’s market reach. Additionally, AT&T would be able to offer bundled services to its customer’s

base and increase top line figures. In a saturated market, increasing the value proposition offered to

consumers could prove to be highly beneficial.

Although generally low, the potential for growth in Latin America, where DirecTV generated 21.5% of

its sales as of 2013, are relatively better than those in the US (given less market saturation).

DirecTV enjoys a large portion of the market share in the US and Latin America. AT&T could rapidly

penetrate its business and services to a new geographic market in Latin America and consolidate its

American positions.

DirecTV has been able to sustain moderate growth due to a market niche that should continue providing

a sizeable competitive advantage through their sports content. Their NFL Sunday Ticket offering retains

its differentiation in sports content.

Cons – Reasons why DirecTV is not made for AT&T

Even if AT&T’s in-house valuation of DirecTV is in line with our forecasts, we see major flaws in DirecTV

that are relevant enough for AT&T to stop this project. It is not because valuation seems appealing that a buy is

required. Here are some of the negative outlooks highlighted:

Slower growth potential in the US satellite industry where DirecTV generated the 78.5% of its revenues

in 2013; smaller growth being primarily due to competition coming from alternative TV content

providers such as Netflix, free online content communities, and free streaming.

AT&T would be deploying substantial capital into a stagnant initiative in terms of the satellite TV

industry. Television content competition continues to increase due to the introduction of new

alternatives as well as continued market saturation.

Poor recent economic growth signifies a dwindling disposable income for consumers, potentially

hindering top line growth in this market.

Recommendation & Action Plan

Page | 21


Substantial CAPEX is required in this acquisition from the onset given preliminary valuations. This will

undoubtedly hinder AT&T’s ability to complete other projects in the near future. It will greatly increase

their financial leverage, lessening their financial flexibility.

o This CAPEX continues to be required during the PMI process to grow DirecTV’s business in

Latin America and to also expand AT&T’s brand outside of the US border. To retain a

competitive advantage, US Satellite businesses, similar to the Telecommunications industry,

need to continually reinvest capital to grow and maintain their revenue base.

By investing in DirecTV, AT&T is attempting to grow through a vertical expansion. However, there are

several risks associated with this type of growth;

o Limits capital flexibility given considerable valuations (assuming capital is committed up front)

o Requires AT&T to understand and efficiently run operations outside of its primary line of

business. This in itself is a costly and risky proposition.

o Expected synergy costs may not materialize, or may even fall short of conservative expectations.

We strongly believe that given the aforementioned pros and cons, we can see that the risks inherent in

the listed cons outweigh any of the benefits and synergies, assuming they come to fruition. Even if AT&T is

able to achieve the forecasted synergy costs, we are very concerned with the maturity of US Satellite industry

and we do not think there is substantial growth within that industry. AT&T would basically have to compete

like it does in telecommunication, spending large capital to retain its customer base.

We propose 3 alternative uses for the unused capital which will allow AT&T to build their core business

line, while still moving into other markets and lines of business. For growth perspectives and competitive

advantage building, those alternatives provide more to AT&T in our opinion.

Action Plan Following our studies of the market, our team came to the conclusion that there were more appropriate

and appealing solutions to ensure AT&T’s growth in its actual Telecommunications market. We strongly

believe AT&T has to continue growing its business within its core operation and continue solidifying its

leadership position.

AT&T derives the bulk of its revenues from wireless and the service quality it can offers. We believe the

focus should be placed on US spectrum acquisition at first. Secondly, because auctions are rare, AT&T has to

look at the market and acquire more spectrums from competitors. A competitor like DISH, who possesses

unused spectrums and also provide satellite service, could be a target acquisition for AT&T. Thirdly, because

the US telecommunications market is saturated, we believe it is time for AT&T to expand its business abroad

and we believe the timing is ideal to expand into Mexico.

Alternative #1 –Investment in US quality spectrums

Since AT&T derives most of its revenues from their cellular and internet business, the focus should be

on improving and extending the competitive advantage through the acquisition of extra spectrum. Since the U.S.

Wireless space is saturated at a value greater than 100%, AT&T has to acquire and retain customers by

providing marginally better service. With the upcoming auctions for AWS-3 in 2014-2015, it is crucial for the

company to acquire said licenses in order to keep providing distinctive service to their clients. AT&T should

mostly concentrate on AWS mid-band because acquiring more low-band spectrum could potentially create a

problem with the FCC, since AT&T already controls most of the low band spectrums in the U.S.

The next auction is the greatest opportunity for an AWS-3 spectrum acquisition since 2008, which

demonstrates just how prestigious these spectrums are to the industry and presses on the importance to increase

spectrum when the opportunity arises. Moreover, spectrum auctions are becoming scarcer. If AT&T does not


Page | 22


have enough cash flow, it would miss a great opportunity. The new possibly acquired mid-band spectrums will

continue to help AT&T develop its LTE and 4G networks, which in turn grants the company with a competitive

advantage in a very concentrated industry.

The amount of spectrum that will be auctioned is 120 MHz which represents an auctions market value

between $20 and $34 billion. AT&T’s business is mainly internet and cellular, which makes it more prudent for

them to improve their core business by buying the extra spectrum rather than break into a stagnant industry.

Furthermore, since the cost for this project is a mere fraction of the DirecTV deal cost, other promising

alternatives can be followed alongside.

Alternative #2 – Investment in H-Block spectrums and DISH for spectrum holdings

As seen in the figure above, Verizon currently has a higher market share in wireless communication

when compared to AT&T. With the market at 100% saturation and the industry as a whole at peak maturity

levels, it is imperative that AT&T protects its market share by providing quality services to its customers.

AT&T’s current available spectrum is mainly concentrated in the lower frequency range, which provides

customers with cellular and 3G connectivity. With the growing demand for faster and more reliable data

services, customer demand for 4G LTE is on the rise. As a result, AT&T must purchase higher frequency

bandwidth (AWS4 or H or higher) in order to cater to its existing customers’ needs and potentially attract

prospects from competitors. This in turn will drive revenues upward and secure AT&T’s market share.

DISH, a direct broadcast satellite service provider, currently holds around 75 MHz of mid to high-band

cellular spectrum that it does not actively utilize. This bandwidth is of the ideal quality and quantity for AT&T

to strengthen its position in the highly demanded 4G LTE market. Knowing that DISH has no direct use for the

spectrum and that it is facing increasing competition from HD cable, paid online streaming services, and from

other satellite companies, a possible inflow of capital(from the sale of the spectrum) may help DISH pursue

strategic opportunities that it might not have been able to take. As a result, there is a strong incentive for DISH

to sell its unused bandwidth to AT&T at a fair price.

Fair Value of DISH's Cellular Spectrum

Source: Trefis analyst report The table above details the fair value of DISH’s spectrum. As stated earlier, the spectrum consists of

AWS-3 and AWS-4 bandwidths, which are ideal for improved cellular and data service. Moreover, the H-block

spectrum is adjacent to the AWS-3 spectrum and hence can be paired with it, further improving the value of this

Spectrum Type Acquired Bandwidth Price per MHz/Pop Value

AWS - 3 25 MHz $1.52 $8.7 Billion

AWS - 4 40 MHz $1.73 $19.1 Billion

H - Block 10 MHz $1.00 $1.2 Billion

Total 75 MHz $29 Billion


Page | 23


bandwidth. Assuming that DISH will likely require a small premium in order to sell the spectrum over its fair

market value, a plausible purchase price is around $30 billion, for the spectrum assets only.

An additional alternative to be looked into is a possible merger between AT&T and DISH, instead of

only acquiring the assets. This arrangement can be highly beneficial to both parties as the communication

industry is witnessing more and more consolidations between cellular and TV services. These mergers are

producing one stop shops for all customers’ communication needs and so pose a significant threat for both

AT&T’s and DISH’s current operations. As a result, a merger would allow AT&T to more adequately compete,

not to mention gaining access to DISH’s 4G LTE spectrum while also introducing the possibility for cross-

selling opportunities. A preliminary valuation of DISH leads us to estimate a possible acquisition value of

around $40 billion, which is a cheaper price to enter the TV services market when compared to acquiring

DirecTV.

Alternative #3 – Business operation expansion in Mexico

At a point in time, AT&T will have no other choice than to deploy its operations abroad, outside of the

US. Many factors lead to this conclusion; the US market is saturated, population growth is presently under 1%,

and industry consolidation has been increasing competition between the major market players.

The alternative investment section of this report highlighted an enormous opportunity for AT&T to

expand its business into a foreign country. Mexico’s telecommunications industry is currently highly

monopolistic and dominated by American Movil through its subsidiaries Telmex and Telcel. Telmex and Telcel

are both exercising a monopoly and will have to divest some of their operation to own less than 50% of market

share respectively.

Mexico’s telecommunications industry is appealing because it represents relatively better growth

opportunities and the market is less saturated than the American market is with 87% subscriber’s saturation rate.

The Mexican market has experienced moderate growth in subscribers over the last couple of years. Mexican

wireless expected total revenues for 2014 are $18.9 billion. Telecommunications growth has generally been

slowing; however, AT&T would gain immediate market share if it expanded through an acquisition of Telcel.

The amount of subscribers, which represented 103.6 million subscribers in 2013, is estimated to grow to a

record amount of 118.6 million subscribers by 2019. However, we believe that the most appealing element of

this deal is the position of American Movil. The company is in a weak position in terms of their subsequent

auctions seeing as the whole market is aware of its required divestiture. AT&T is the perfect acquirer because of

its competencies and financial ability. We believe that the purchase price would not represent a large premium

and would immediately provide AT&T with market share and customers. AT&T could rapidly occupy a strong

market position.

1. Direct investments from foreign companies are now permitted, up to investments of 100% in

telecommunications and satellites communications.

2. IFT wants to create a competitive market. They control network neutrality, the number of players within

the industry, and the access to services and satellite communications.

AT&T’s opportunities rely on IFT regulations and the Telmex and Telcel divestiture imposition. AT&T can

service as a strategic replacement to those companies. It meets the capital requirements needed to acquire

infrastructures. AT&T could certainly acquire assets in the North and East of the country from Telcel and build

its subsequent network.


Page | 24


Bibliography

AT&T Annual Report 2014




DirecTV Annual Report 2014



Market Outlook – Wireless Telecommunication Services in Mexico, February 2014, from MarketLine

Industry Profile Database.

Market Outlook – Wireless Telecommunication Services in USA, February 2014, from MarketLine

Industry Profile Database.

IBIS World Industry Report, 2014, 51711B US Satellite TV Providers in the United States Industry

Report.

IBIS World Industry Report, 2014, Wireless Telecommunication Carriers in the United States Industry

Report.

Consulted Platforms:

Bloomberg

Capital IQ

Morningstar

Consulted Website:

http://www.budde.com.au/Research/Mexico-Mobile-Market-Insights-Statistics-and-Forecasts.html

The new Mexican Federal Telecommunications and Broadcasting Law,


www.hlmediacomms.com/2014/08/05/mexico-new-telecommunications-and-broadcasting-law-to-enter-

into-effect-13-august-2014/

http://www.forbes.com/sites/doliaestevez/2014/07/09/in-a-surprising-move-mexican-billionaire-carlos-

slim-to-sell-telecom-assets-in-compliance-with-new-anti-trust-rules/

https://support.directv.com/app/answers/detail/a_id/4259/~/directv-and-at%26t-merger-faq

http://about.att.com/story/att_to_acquire_directv.html

http://marketrealist.com/2015/02/wireless-growth-opportunities-att-mexico/

Bibliography

http://www.budde.com.au/Research/Mexico-Mobile-Market-Insights-Statistics-and-Forecasts.html






https://support.directv.com/app/answers/detail/a_id/4259/~/directv-and-at%26t-merger-faq

http://about.att.com/story/att_to_acquire_directv.html

http://marketrealist.com/2015/02/wireless-growth-opportunities-att-mexico/

Page | 25


Appendix

AT&T’s competition

Verizon Communications

AT&T’s largest competitor is Verizon Communications, whose wireless division is leading the industry with

approximately 36% of market share. Verizon Communications focuses primarily on their wireless and

broadband services. Given the current demand for spectrum, Verizon continued to solidify its lead by increasing

its spectrum by 60% in 2008. They followed this up with an additional $4 billion purchase of spectrum from

several cable companies. This poses a substantial threat to AT&T as the FCC is currently in deliberation as to

whether or not to allow additional bidding on newly available spectrum by both AT&T and Verizon. Seeing as

AT&T is focusing on employing its capital in a significant M&A deal to broaden its service offerings, Verizon

may be poised to obtain additional spectrum and further spread its competitive advantage in terms of the

spectrum available in its wireless division. As AT&T attempts to broaden its offerings, it is important that it

remains competitive in Wireless as it stands as their main catalyst for revenue generation. Many have

speculated that AT&T’s proposed acquisition of DirecTV is a response to Verizon’s 2013 acquisition of both

content distribution network EdgeCast and streaming services UpLynk, providing it with immediate exposure in

media streaming content and content delivery networks for the likes of Twitter and Hulu.

Sprint Corporation

Sprint Corporation represents approximately 15% of market share in the telecom industry. They are a prime

example of the industry consolidations taking place, being the product of the 2005 Sprint and Nextel merger,

and following this up with the 2009 acquisition of Wireless competitor Virgin Mobile. Sprint has ultimately

been unable to benefit on being first to market with the 4G technology in the United States as the industry has

shifted to the LTE network, rendering 4G inferior. As such, just prior to 2013, Sprint has transitioned to moving

to LTE and abandoning its 4G strategy. Sprint has been aggressive in its spectrum acquisition, following suit on

both what AT&T and Verizon have done. In 2013, they purchased the remaining equity in Clearwire

Corporation that they had not already owned, strengthening both their spectrum and underlying customer base.

Sprint has yet to announce any plans of moving into the cable or satellite content providing services, rendering

them a lesser threat to AT&T’s future direction.

Deutsche Telekom AG on T-Mobile US

The company holds operations in over 50 countries across North America, South America, Europe, Asia and

Africa. It covers the business sectors through Germany, the US, Europe, systems solutions and, group

headquarters and shared services. In the US it functions in the name of T-Mobile US involved in delivering

mobile communications services under the T-Mobile, MetroPCS, and GoSmart brands. It functions through its

primary subsidiary; T-Mobile USA, Inc. in which Deutsche Telekom AG holds 67% ownership. The company

provides postpaid and prepaid wireless voice, messaging and data services, and wholesale wireless services

using 4G long-term evolution, evolved 4G high speed packet access, universal mobile telecommunications

systems, general packet radio service, enhanced data rates for GSM evolution, and global system for mobile

communications technologies. Moreover, T-Mobile runs facilities through various individual, family, prepaid

and mobile internet plans. Furthermore, it services the machine-to-machine (M2M) customers and mobile

virtual network operator (MVNO) customers that operate on the company's network, but are managed by

wholesale partners. T-Mobile had approximately 52.9 million customers As of September 30, 2014. The

financial metrics as at December 2014 included revenue of $29.56bn, a 21% increase Year-over-Year and a Net

Loss of $0.247bn, a ratio of over six times when compared with that of the end of previous year.

Appendix: AT&T’s Competition

Page | 26


Industry Review

Synopses of Precedent Transactions Comcast Corp acquires Time Warner Cable

Many have speculated that AT&T’s acquisition of DirecTV was a response to this very transaction.

Comcast and Time Warner had reached an agreement in February of 2014 where Comcast would acquire Time

Warner for about $68 billion. It was said much pressure had been put against Comcast as Charter

Communications had also been bidding for Time Warner at the time of the agreement. The deal would allow

Comcast, primarily a telecommunications firm, to add an already established cable TV product to their bundles.

The deal was said to create significant cost synergies through economies of scale given the size of the two

firms. This merger would provide Comcast with the ability to offer American’s one of the most broad and

comprehensive packages in the country.

Vodafone Group PLC acquirers Kabel Deutschland Holding AG

In June of 2013, Vodafone announced it would be acquiring Kabel Deutschland Holding AG for $11

billion. This deal was a voluntary public takeover bid to acquire all of the shares outstanding. At the time, Kabel

Deutschland was Germany’s leading cable TV provider. This deal would provide Vodafone with access to

Germany’s market and would create a leading integrated communications operator. This deal allowed Vodafone

to expand its service offering in Germany and offer not only telecommunications, but add both broadband and

cable TV services. The deal was expected to create over $300 million in both cost and capital expenditure

synergies.

Promotora de Informaciones, S.A (PRISA) acquires PRISA TV (formerly Sogecable)

PRISA, a Spanish media conglomerate, acquired cable company Sogecable in 2007, which was then

renamed to PRISA TV in 2010, for approximately $4 billion. PRISA initially purchased only 20% of

Sogecable’s outstanding shares. They then raised this percentage to 50%, which then required that PRISA make

an offer on the rest of the shares outstanding based on the Spanish law. This was an unexpected surprise to

PRISA as they did not intend on having to purchase the rest of PRISA TV but it was made a legal obligation.

Appendix: Industry Review & Synopses of Precedent Transactions

Page | 27


PRISA TV was the first company to offer digital TV in Spain, and so PRISA was able to expand their product

offering by now offering digital cable TV. PRISA had initially increased its holdings in PRISA TV (formely

Sogecable) solely to increase their control of the operations, but had indecently forced a full on acquisition.

KDDI Group acquires Jupiter Telecommunications Co Ltd

KDDI, a Japanese telecommunications provider, purchased Liberty Japan in January of 2010, a

subsidiary of Liberty Global Inc. (LGI), and thus gained full ownership of LGI’s interest in Jupiter

Communications. The value of the deal was about $4 billion. Jupiter was the largest Multiple System Operator

("MSO") in Japan. They operated a cable television business in Japan, which KDDI would now be able to

leverage through their 3 million subscribers. KDDI was aiming to add more value to their offerings for their

consumers and grow into a more comprehensive telecommunications provider.

Mediacom brought Private by Founder/CEO and his management group

Mediacom, a US cable television provider, was brought public by its founder and CEO Rocco B.

Commisso in 2010 for almost about $4 billion. Commisso recognized the potential of increased future cash

flows given a trend of decreased capital expenditures and sought to take advantage of this opportunity.

Sumitomo Corp, along with KDDI, acquire Jupiter Telecommunications Co Ltd

Following KDDI’s aforementioned acquisition of Jupiter Telecommunications, Sumitomo Corporation

and KDDI have entered into a joint venture. Both Sumitoro, the Japanese conglomerate, and KDDI, had decided

to expand their television services and have partnered to obtain the rest of the equity ownership of Jupiter.

Sumitoro had agreed to assist in the integration of Jupiter’s new specialized channels television project prior to

the deal, whereas KDDI was looking to expand its interest in the firm, seeing as it only held ownership through

its ownership in Liberty Japan but actually only owned about 30% of its equity. The deal was valued at just over

$3 billion.

Twenty-First Century Fox acquires Austar United Communications Ltd.

Foxtel, an Australian subsidiary of 21st Century Fox, would be acquiring Austar United

Communications for $2.7 billion in May of 2011. Austar was a telecommunications company which offered

both wireless and internet services, however its main operations revolved around subscription television using

digital satellite technology. This allowed Foxtel, a telecommunications firm, to gain immediate access to

Australia’s satellite television market.

Liberty Media Corp acquires Charter Communications Inc

Liberty Media Corp, an American mass media company involved in a wide array of services from

television to radio, acquired Charter Communications in 2013 for approximately $2.6 billion. Charter

Communications was an American company focused in internet, telephone, and cable TV services. Liberty

Media had been impressed with Charter’s growth in both their telephone and television divisions and wanted to

pass on this value to their shareholders. Liberty was interested in all of Charter’s service offerings and believed

they could introduce further growth opportunities.

Appendix: Synopses of Precedent Transactions

Appendix: Synopses of Precedent Transactions

Page | 28

Name Mkt Cap EVEV/TTM

EBITDA

EV/

EBITDA

FY

P/EP/E

FY1P/FCF P/Book

DIRECTV 43,419.59 61,154.59 7.72x 6.89x 16.07x 12.68x 18.11x --

Cablevision Systems Corp 4,640.73 13,288.46 8.13x 7.28x 43.81x 22.90x 24.40x --

DISH Network Corp 27,517.68 31,278.61 13.02x 10.19x 26.98x 29.93x 26.83x 28.12x

Time Warner Cable Inc 38,080.63 62,611.63 7.96x 7.19x 19.59x 16.23x 15.39x 5.47x

EchoStar Corp 4,519.29 5,329.89 8.73x 5.64x 1726.89x 39.57x 75.78x 1.40x

Empresas Cablevision SA 1,569.20 1,773.15 7.54x -- 23.25x -- 19.58x 2.00x

Median 4,640.73 13,288.46 8.13x 7.24x 26.98x 26.42x 24.40x 3.74x

Average 15,265.51 22,856.35 9.08x 7.58x 368.10x 27.16x 32.40x 9.25x


Comparable Tables


EBITDA

EV/

EBITDA

FY

EV/

EBITDA

FY

P/EP/E

FY1

P/E

FY2P/FCF P/Book

DIRECTV 43,419.59 61,154.59 7.72x 6.89x 6.56x 16.07x 12.68x 10.54x 18.11x --

Comcast Corp 130,255.30 174,132.30 8.12x 7.18x 6.67x 20.02x 15.37x 13.22x 23.28x 2.58x

Cablevision Systems Cor 4,640.73 13,288.46 8.13x 7.28x 7.07x 43.81x 22.90x 19.56x 24.40x --

DISH Network Corp 27,517.68 31,278.61 13.02x 10.19x 9.64x 26.98x 29.93x 27.13x 26.83x 28.12x

Time Warner Cable Inc 38,080.63 62,611.63 7.96x 7.19x 6.79x 19.59x 16.23x 14.81x 15.39x 5.47x

AT&T Inc 190,680.60 262,623.60 5.37x 5.89x 5.79x 13.74x 12.92x 12.46x 14.24x 2.11x

Verizon Communications 203,206.18 299,248.18 6.16x 6.33x 6.16x 17.04x 12.74x 12.15x 6.33x 3.62x

Charter Communications 14,876.23 29,036.23 10.51x 8.30x 7.51x -- 51.35x 27.56x 42.08x 96.63x

Sirius XM Holdings Inc 18,795.23 22,262.02 17.19x 13.80x 12.68x 38.21x 24.53x 21.34x 20.88x 6.92x

EchoStar Corp 4,519.29 5,329.89 8.73x 5.64x 5.33x 1726.89x 39.57x 44.38x 75.78x 1.40x

Empresas Cablevision SA 1,569.20 1,773.15 7.54x -- -- 23.25x -- -- 19.58x 2.00x

Median 23,156.46 30,157.42 8.13x 7.19x 6.79x 23.25x 22.90x 19.56x 22.08x 3.62x

Average 63,414.11 90,158.41 9.27x 7.98x 7.52x 214.39x 25.06x 21.40x 26.88x 16.54x

After Screening


EBITDA

EV/

EBITDA

FY

EV/

EBITDA

FY

P/EP/E

FY1

P/E

FY2P/FCF P/Book

DIRECTV 43,419.59 61,154.59 7.72x 6.89x 6.56x 16.07x 12.68x 10.54x 18.11x --

Cablevision Systems Corp 4,640.73 13,288.46 8.13x 7.28x 7.07x 43.81x 22.90x 19.56x 24.40x --

DISH Network Corp 27,517.68 31,278.61 13.02x 10.19x 9.64x 26.98x 29.93x 27.13x 26.83x 28.12x

Time Warner Cable Inc 38,080.63 62,611.63 7.96x 7.19x 6.79x 19.59x 16.23x 14.81x 15.39x 5.47x

EchoStar Corp 4,519.29 5,329.89 8.73x 5.64x 5.33x 1726.89x 39.57x 44.38x 75.78x 1.40x

Empresas Cablevision SA 1,569.20 1,773.15 7.54x -- -- 23.25x -- -- 19.58x 2.00x

Median 4,640.73 13,288.46 8.13x 7.24x 6.93x 26.98x 26.42x 23.35x 24.40x 3.74x

Average 15,265.51 22,856.35 9.08x 7.58x 7.21x 368.10x 27.16x 26.47x 32.40x 9.25x

Appendix: Comparable Tables

Page | 29


Dish Holding – Monetize Spectrums Holdings

Latin American Market Outlook

Since the North-American market has been saturated with pay-tv content, the Latin American market

has been blooming and driving the growth of DirecTV. In this region, the company has more than 12 million

subscribers that have been growing at an average rate of 25% (from 3.3 million in 2003 to 12.4 million in

2014). The content that is widely available in the United States has also been issued into the Latin American

market, for example, its on-demand video services and the “Pivot TV Everywhere” which allows users to

stream their content on their mobile devices. The Latin American market accounts for more than 25 percent of

DirecTV’s subscription base and could promise more growth, with the penetration of the market expected to be

84% in the next five years. The possible concerns

that are faced in the United States are also a

problem in this market. That is, the threat of free

online streaming, alternative platform providers,

and changing demographics are very applicable

to Latin America, as well as other issues that are

specific to this region. The sensitive economic

growth accounts for the specific issues that could

be encountered in this region.

Sensitive Economic Growth: The Latin

American market (LAC-7) which comprises the 7

largest countries in South America, namely, Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela;

which together account for 93 percent of the region’s GDP. Over the past decade, Latin America has

Appendix: Monetize Spectrums Holdings & LatAn Market Outlook

Page | 30


demonstrated a period of uninterrupted growth, with the

exception of the Lehman Brothers’ crisis period of 2009.

Between the years of 2004 and 2011 –excluding the Lehman

Brothers crisis – LAC-7 counties have grown at an average of 6.1

percent per year, which is substantially above the historical

average of 3.7 percent since the early 1990s. However, from 2012

on the economy seems to have slowed down, with a projected

growth of only 2 percent yearly going into the year 2014. The

factors that lead to the acceleration and deceleration of the LAC-7

countries including the growth rates in advanced economies

(most importantly the U.S.), growth rates in China, prices of the

commodities that LAC-7 both produces and exports, and the cost

of international financing for emerging countries.

The growth rate of advanced economies: the U.S. is expected

to grow at an average rate of 2.7 percent in 2014-2018, close to

its historical average of 3 percent, while Eurozone growth is

expected to be substantially below its historical average. In spite

of the fact that current output is still significantly below what was

predicted before the financial crisis, monetary policy is highly

stimulative and interest rates are close to zero, the Eurozone is

not able to replicate its historical average growth rate, and the

U.S. barely able to do so. The possibility of a higher than

expected interest rate hike in the U.S. would hinder growth even

more affecting the LAC-7

China’s Growth rate: China is also pointing towards a dismal

deceleration in the future as their “investment-led-credit

propelled” model of growth, failed to be sustainable after its

implementation short after the global crisis. The recent decline in

property pricing also signals a slower economy and growth for

the coming future.

Commodity Prices: Geopolitical tensions leading to a sharp

decrease in oil prices observed as of late could

also hinder the growth of these commodity

dependent countries.

Cost of international financing: For

economic growth to continue on a healthy path,

government expenditure must occur where their

citizens need it the most. Countries that have

defaulted or have a low credit rating will

struggle to find internal or external financing,

leading them to restrict their growth prospects.

In general, international financing costs have

decreased from 2000-2014 drastically, aiding to the exponential growth that was observed from 2004-2011.

Appendix: Latin American Market Outlook

Page | 31


Macroeconomic Problems

Mediocre growth rates are already generating increasing social discontent, as observed by the protests that have

recently exploded in many countries in the region (for example Brazil’s citizens protesting for the enormous

amounts spent to host the world cup). These protests, mostly convened through social media, reflect the

concerns of an emerging but still vulnerable middle class that fears for its economic well-being.

Appendix: Latin American Market Outlook

MFIN 5300 Final Valuation Report

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