Based on DCF Valuation | STP Submitted to

AT & T
INC.

EQUITY RESEARCH REPORT

Submitted by:
Ankit Gupta

10FN-014

Rudra Shankar Chowdhry 10FN-097

Srikanth Kumar Konduri
10FN-109

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Contents
AT&T...................................................................................................................... 3
Company Profile:................................................................................................ 3
Financial Outlook: Latest published quarterly reports (2Q-2011).......................3
Key Businesses:.................................................................................................. 4
WIRELESS:....................................................................................................... 4
WIRELINE:........................................................................................................ 4
ADVERTISING SOLUTIONS:...............................................................................5
OTHER:............................................................................................................ 5
Financial Performance:....................................................................................... 6
Key trends in Business & Operations:.................................................................6
Revenue Trends:.............................................................................................. 6
Expense Trends:.............................................................................................. 7
AT&Ts proposed acquisition of T-Mobile:...........................................................7
AT&T acquisition of spectrum controlled by Qualcomm:....................................7
Impacts of past acquisitions: (STT, AT&T merger in 2006).................................8
Competitive Landscape:..................................................................................... 9
Standalone valuation:....................................................................................... 10
Risk factors:...................................................................................................... 11

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AT&T
Company Profile:
AT&T Inc., together with its subsidiaries, provides telecommunication
services to consumers, businesses, and other service providers worldwide.
AT&T, along with its subsidiaries and affiliates, provides a variety of
telecom services including local wireless communications service, longdistance phone service, wireless and data communication, roaming
services. It also provides Internet access and messaging, IP based and
satellite television. The company is also into security services,
telecommunication equipment selling, directory advertising and
publishing.
In April 2010, AT&T Inc. sold its remaining stake of more than 7% in
Tech Mahindra Limited.
In June 2010, the Company completed the acquisition of wireless
assets from Verizon Wireless.
In July 2010, the Company divested its Wayport Holdings A/S to
Hospitality Services Plus SA.
In August 2010, the Company completed divestiture of Sterling
Commerce to IBM.
Largest number of total broadband connections in US with fastest
network:
Wired residential broadband
Largest Wi-Fi network in US based on branded and operated hotspots
Wireless (including mobile broadband)
3-Screen integration strategy to deliver services across:
The mobile device
The PC
The TV

Financial Outlook: Latest published quarterly reports (2Q2011)

Sales rose 2.2% to $31.5 billion, net income declined 10%, and earnings
per share were 60 cents.
Reported a 39% surge in margins during the quarter driven by a strong
wireless revenue growth and sales of smartphones
Major Concern is loss of exclusive rights to sell Apple Inc.'s iPhone.
AT&T cut the price of the older 3GS model to $49 to entice customers to
stay.
Significant increase in net additions, strong sales of branded computing
subscribers and higher post-paid ARPU
Continuous investment to upgrade its network services
Introduced its new cloud-based Content Delivery Network (CDN) platform.

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Constant efforts to enhance its broadband deployment and high speed

internet connections in rural area
The gain of 331,000 contract users at AT&T, which is seeking to buy TMobile USA Inc., beat the average estimate of 96,000.

Key Businesses:
It operates in four segments: wireless, which provides both wireless voice
and data communications services across the United States and, through
roaming agreements, in foreign countries; wireline, which provides
landline voice and data communication services, AT&T U-Verse TV, highspeed broadband and voice services (U-Verse) and managed networking to
business customers; advertising solutions, which publishes Yellow and
White Pages directories and sells directory advertising and Internet-based
advertising and local search, and other, which provides results from
customer information services and all corporate and other operations.

WIRELESS:
Wireless consists of the Companys subsidiary, AT&T Mobility, which operates
as a wireless provider to both business and consumer customers.
The Wireless segment provided approximately 47% of the segment
operating revenues during the year ended December 31, 2010.
At December 31, 2010, the Company had more than 95 million wireless
subscribers. It classifies its customers as either postpaid, prepaid,
connected device or reseller.
It offers a range of wireless voice and data communications services,
including postpaid and prepaid service plans. Its voice service is offered on
a contract basis for one- or two-year periods, referred to as postpaid.
Service is billed and provided on a monthly basis according to the
applicable rate plan chosen. The wireless services include basic local
wireless communications service, long-distance service and roaming
services.
Roaming services enable subscribers to utilize other carriers networks
when they are roaming outside network footprint.

The Company sells a variety of handsets, wirelessly enabled computers (such as

notebooks and tablets) and personal computer wireless data cards manufactured
by various suppliers for use with its voice and data services.
It sells through its company owned or through agents or third-party retail stores.
It also sells accessories, such as carrying cases, hands-free devices, batteries,
battery chargers and other items, to consumers, as well as to agents and other
third-party distributors for resale.

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WIRELINE:
The Wireline subsidiaries provide both retail and wholesale communication
services domestically and internationally. The Wireline segment provided
approximately 49% of the segment operating revenues during 2010.
The Company divides its wireline services into three product-based
categories: voice, data and other. Voice includes traditional local and longdistance service provided to retail customers and wholesale.
At December 31, 2010, the wireline subsidiaries served approximately 23
million retail consumer access lines, 19 million retail business access lines
and two million wholesale access lines.
It has a of integrated voice and data services, such as integrated network
connections, that provide customers the ability to integrate access for
their voice and data services, the data component of which is included in
the data category.
Long distance also includes services provided by calling card, 1-800
services and conference calling. These services are used in a variety of
business applications, including sales, reservation centers or customer
service centers.
The Company provides data services that rely on Internet Protocol (IP)based technology and data services that rely on circuit-based
technology.
The managed Web-hosting services for businesses provide network, server
and security infrastructure, as well as built-in data storage and include
application performance management, database management, hardware
and operating system management.
The hosting services also provide customers with secure access to detailed
reporting information about their infrastructure and applications.
Packet services consist of data networks using packet switching and
transmission technologies, including traditional circuit-based, and IP
connectivity services.
High-speed packet services are used by enterprise (large business)
customers. Enterprise networking services provide support from network
design, implementation and installation to ongoing network operations
and management for networks of varying scales.
Security services include business continuity and disaster recovery
services, as well as premise and network based security products.

ADVERTISING SOLUTIONS:
Advertising Solutions includes directory operations, which publish Yellow and
White Pages directories and sell directory advertising and Internet-based
advertising and local search.

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The Advertising Solutions segment provided approximately 3% of total segment
operating revenues during 2010. This segment sells advertising services
throughout the United States, with print directory operations primarily covering
its 22-state area.

OTHER:
The Other segment includes customer information services (such as operator
services) and corporate and other operations.
The Other segment provided approximately 1% of total segment operating
revenues during 2010. The Company also includes in this segment the equity
income (loss) from its investments in Telmex and America Movil. In August 2010,
it sold Sterling Commerce Inc. (Sterling).

Financial Performance:

Key trends in Business & Operations:

Revenue Trends:
The operating environment in 2011 will remain challenging as weak economic
conditions continue and competition remains strong.
Despite these challenges, it is expected that At&T will grow its operating
revenues in 2011, reflecting continuing growth in wireless data and IP-related
wireline data services including U-verse and business services.

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The primary driver of growth is expected to be wireless, especially in sales of and
increases in data usage on advanced handsets and emerging devices (such as
tablets, eReaders and mobile navigation devices).
All major customer categories are expected to show increase in their use of
Internet-based broadband/data services. Continuing declines in traditional access
lines and in print directory advertising is anticipated. Where available, U-verse
services have proved effective in stemming access line losses, and this is
expected to continue in 2011.

Expense Trends:
To focus sharply on cost-control measures, including areas such as simplifying
product offerings. Continue on-going initiatives to improve customer service and
billing to realize the strategy of bundling services and providing a simple
customer experience.
2011 operating income margin is expected to improve, as revenues improve.
Expenses related to growth areas of our business, especially in the wireless, Uverse and strategic business services areas, will apply some pressure to
operating income margin.
In addition, as the company complete readying their Long-Term Evolution (LTE)
technology for its intended use, it will no longer capitalize interest on this
spectrum.

AT&Ts proposed acquisition of T-Mobile:

More wireless spectrum for expanding its upcoming 4G LTE network. Expect the
transaction to close in ~12 months, depends on the review by Federal
Communications Commission (FCC) and Department of Justice (DOJ)
AT&T assumes no debt from T-Mobile or Deutsche Telekom. (actual $15.9B
till 2010 end)
Unsecured bridge loan facility from JP Morgan ($20B in 18 months)
Strong balance sheet of AT&T; >$12B FCF after dividend for past 2
years
Terms: (AT&T rated B3H, 3rd lowest investment grade rating, sustains for
further $25B debt)
Purchase Price: $39B ; ~7.1x T-Mobiles 2010 EBITDA
Cash ~ 64%
AT&T shares ~36% (8% stake in AT&T; Issue of $14B shares to
Deutsche Telekom)

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Combined Financials (2010 End figures)
TAT&T
Mobile
Total
96M
34M
130M
Wireless subscribers*
$53.5
$18.7B
$72.2B
Wireless service revenues
B
$58.5
$21.3B
$79.8B
Total wireless revenues
B
41%
29%
Wireless service EBITDA margin
$62.57
$52.00
Postpaid ARPU
0.0131
0.034
Total churn
* combination to hold 43.46% of US Mobile Subscription
(31.03.2011)

AT&T acquisition of spectrum controlled by Qualcomm:

Company expects the 12MHz of the lower 700MHz D & E block spectrum to play
a key role in its 4G plans. FCC is taking a coordinated look at this proposition
along with above. The deal is expected to be closed by 2 nd half of 2011. Purchase
price: $1.925B.

Impacts of past acquisitions: (STT, AT&T merger in 2006)

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Competitive Landscape:
A competitor comparison of USA Wireless market shares:

Source: Indigo Equity Research, Company Data

It can be inferred from the above graph that the competitiveness in this sector is
becoming ineffective as more than 80% of the market share being concentrated
with top 4 players.
AT & T is the 2nd largest player in the telecommunications industry of USA with
32% market share, it is only a step away from surpassing Verizon and becoming
the leading market player once its proposed $39bn acquisition of T-Mobile gets
regulatory nod.

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Acquisition will provide AT & T the required spectrum needed to aggressively rollout LTE based 4G services. Beginning with Atlanta, Chicago, Dallas, Houston and
San Antonio, it plans to spread its services across 15 markets to reach 70 million
Americans by late 2011. By 2013, AT&T intends to extend its 4G network to 97%
of US population.

Removal of customer checks and offering unlimited pre-paid plans with

credit facilities, targeting youth customers has positioned Leap Wireless
as a niche player and indirectly compete with AT&T.
A basket of sub-brands Sprint, Nextel, Boost Mobile, Virgin Mobile and
Assurance Wireless sub-brands makes Sprint Nextel a strong competitor
in both wireless and wireline segments. However, it has been significantly
losing out customers recently.
A focused approach on targeting densely populated urban youth &
minority pre-paid segments is proving worthy for MetroPCS, though the
company lacks the scale of AT&T or Verizon, it need not rely on massive
capital expenditure & helped it to comparatively higher margins.
Rivals in the 4G space:
o

Though AT & T is the only company that delivers 4G services using

both LTE & HSPA technologies, it is well behind to Verizon Wireless
in LTE network deployment. The joint venture between Verizon
Communications Inc. (VZ) and Vodafone Group plc (VOD) has
already rolled out the LTE network in 102 markets, reaching around
160 million customers.

4G services of 3rd largest wireless company Sprint Nextel Corp.

(S) have already spanned across 71 U.S. markets and reached 120
million people by 2010. It is likely to cover 130 million customers by
the end of 2011.

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Standalone valuation:
We value AT&T using discounted cash flow (DCF) considering Weighted Cost of
Capital as 7.02%
and terminal growth rate as 1.5%. The fair value appears to
be $42.45, a potential upside of 46% based on its last traded price of $29.06.
The following are the underlying assumption used in DCF:
Parameter
Risk free rate
Beta
Equity risk
premium
Cost of debt
Debt/Equity
Tax rate

Value
4.50%
0.66
5%
6.70%
40.60%
24%

DCF Sensitivity Analysis by varying WACC against Terminal Growth Rate:

WACC

Equit
y
Value
42.36
6.92%
6.97%
7.02%
7.07%
7.12%

Terminal Growth Rate

1.00%
40.18
39.93
39.69
39.44
39.21

1.25%
41.49
41.22
40.96
40.69
40.43

1.50%
42.93
42.63
42.34
42.05
41.77

1.75%
44.50
44.18
43.86
43.54
43.23

2.00%
46.24
45.88
45.52
45.18
44.84

DCF Sensitivity Analysis by varying COGS margin against Total Revenue Growth
Rate:
Equit
y
Value

Total
Reven
ue
Growt
h
Rate

42.36
1.00%
0.50%
0.00%
0.50%
1.00%

COGS/(Total Revenue)
Rate

Growth

-1.00%

-0.50%

0.00
%

0.50
%

1.00
%

42.82

35.33

27.85

20.36

12.87

52.70
64.53
78.64
95.40

43.58
53.44
65.20
79.15

34.46
42.36
51.76
62.91

25.33
31.27
38.31
46.66

16.21
20.18
24.87
30.42

Risk factors:

A worsening U.S. economy would magnify our customers and

suppliers current financial difficulties and could materially adversely
affect our business

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Adverse changes in medical costs and the U.S. securities markets

and interest rates could materially increase our benefit plan costs.
The ongoing uncertainty in global financial markets could materially
adversely affect our ability and our larger customers ability to
access capital needed to fund business operations.
Changes in available technology could increase competition and our
capital costs.
Changes to federal, state and foreign government regulations and
decisions in regulatory proceedings could materially adversely affect
us.
Increasing competition in the wireless industry could adversely
affect our operating results.
Increasing competition in our wireline markets could adversely
affect wireline operating margins.
Continuing growth in our wireless services will depend on continuing
access to adequate spectrum, deployment of new technology and
offering attractive services to customers.
Equipment failures, natural disasters and terrorist attacks may
materially adversely affect our operations.
The continued success of our U-verse services initiative will depend
on the timing, extent and cost of deployment; the development of
attractive and profitable service offerings; the extent to which
regulatory, franchise fees and build-out requirements apply to this
initiative; and the availability and reliability of the various
technologies required to provide such offerings.
Unfavourable litigation or governmental investigation results could
require us to pay significant amounts or lead to onerous operating
procedures.