Case Analysis Cox Communications

Theories Applied Cash Versus Stock Trade-offs In Cash Transaction, acquiring shareholders take on the entire risk that the expected synergy value embedded in the acquisition premium will not materialize. In the stock transactions, that risk is shared with selling the selling shareholders. In stock transaction the synergy risk is shared in proportion to the percentage of the combined company the acquiring and selling shareholders each will own.

Fixed Shares or Fixed Value In fixed shares the number of shares to be offered is certain but the value of the deal may fluctuate between the announcement of the offer and the closing date. The interests of the two sets of shareholders in the deal’s shareholder value added do not change, even though the actual shareholder value added may turn out to be different than expected. In Fixed Value deal the acquirer has to issue a fixed value of shares. In this type of deal the number of shares to be issued is not fixed until the closing date and depends on the prevailing price. As a result of which the proportional ownership of the combined company is left in doubt until closing. If the acquirer believes that the market is undervaluing its shares, then it should not issue new shares to finance a transaction because to do so would penalise the current shareholders. The decision to use stock or cash also sends signal about the acquirer’s estimation of the risks failing to achieve expected synergies from the deal.

All Cash Deal Acquirer Seller Fixed Share Deal

Pre-Closing Market Risk

Post-Closing Market Risk

All None

All None

Acquirer

Expected percentage of Ownership

Seller Fixed Value Deal

Expected percentage of Ownership

Acquirer

All

Seller

None

Actual Percentage of Ownership Actual Percentage of Ownership

Actual Percentage of Ownership Actual Percentage of Ownership

Shareholder Value at Risk (SVAR) A useful tool for assessing the relative magnitude of synergy risk for the acquirer is called shareholder value at risk (SVAR). The index can be calculated as the premium percentage multiplied by the market value of the seller relative to the market value of the buyer.

Tax Consequences of Acquisition The way an acquisition is paid for affects the tax bills for the shareholders involved. A cash purchase is the most tax-favourable for the acquirer to make an acquisition because it offers the opportunity to revalue assets and hence increase the depreciation expense. Shareholder of the acquired company will face capital gains tax.

Case Analysis Rational for Cox to be on an Acquisition Spree 12.00

Mcap/BV

10.00 8.00 6.00 4.00 2.00 Cox

Comcast

Media One

Time Warner

Major Cable Operator

In cable operator industry we see a general trend of higher Mcap/BV with increase in the total assets. Acquisitions helped in leveraging the Economies of Scale and Scope.

Analog TV Digital TV High Speed Internet Digital Telephony

Current Subscriber Penetration 67% 2 2 1

Target Penetration 67% 30 25 25

Cox expects steep rise in the increase in the Pentration levels of Digital TV, High Speed Internet and Digital Telephony over a period of 8 years. In order to achieve these levels of growth Cox will have to invest in technology and acquire existing companies to grow at a faster pace. Acquisition of companies which could be combined with existing systems could yield substantial market presence and could also lead to fixed cost savings.

Valuation of Gannet Co. Average price paid per customer has been $3,483 whereas Cox was contemplating to pay around $5000 per customer in order to fulfil their long term Strategy.

Price Paid per Cable Customer

6000 5000 4000 3000 2000 1000 0 0

2

4

6

8

10

12

14

16

18

20

Total Value of Acquisition Price Per Customer vs Total Acquisition Value Linear (Price Per Customer vs Total Acquisition Value)

If we regress the price paid per cable customer against Total value of Acquisition we will get the following equation Predicted Price paid per Cable Customer = 3436.68 + (Value of Acquisition)*5.5 So as per the above equation for an acquisition value of $2.7 billion the predicted price paid per cable customer should be $3451.5. However, Cox Communication is willing to pay $5000 per cable customer owing to the increased competition in the market.

Analysing Cox’s Financing Alternatives Issuing Common Shares   

CEI does not want its ownership to be further diluted By Issuing Common Shares worth $2,700mn CEI economic equity will be diluted from 67.3% to 59%. CEI still remains as the majority shareholder in CCI

Issuing Debt    

Reluctance to increase the leverage of the firm Wanted to maintain their rating as investment grade Wanted Debt/EBITDA to remain below 5 By Issuance of Debt the leverage ratio(Debt/EBITDA) is expected to be 5.2 for year 1999 and 2000.

Hybrid Security Issuance $50 CCI

PRIDES Investor

Trust Debt: 7% Coupon



$50

Preferred Equity: 7% payment, Cox shares

If the company is financed through a combination of Debt, Equity($680 million) and PRIDES($720million) then leverage ratio is maintained below 5 and CEI economic equity could be maintained at 65.1%

Asset Sales  

An alternative to monetize or swap some of the firms non-strategic equity investments. It was important to carry out monetization or obtaining equivalent cash in a tax-efficient manner.