Application Notes for Configuring Cox Communications SIP ...
Case Analysis Cox Communications
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Transcript of Case Analysis Cox Communications
Theories Applied
Cash Versus Stock Trade-offsIn 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 ValueIn 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.
Pre-Closing Market Risk Post-Closing Market RiskAll Cash DealAcquirer All AllSeller None NoneFixed Share Deal
Acquirer Expected percentage of OwnershipActual Percentage of Ownership
Seller Expected percentage of OwnershipActual Percentage of Ownership
Fixed Value Deal
Acquirer AllActual Percentage of Ownership
Seller NoneActual 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 AcquisitionThe 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
Cox Comcast Media One Time Warner -
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Major Cable Operator
Mca
p/BV
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.
Current Subscriber Penetration Target PenetrationAnalog TV 67% 67%Digital TV 2 30High Speed Internet 2 25Digital Telephony 1 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.
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Price Per Customer vs Total Acquisition ValueLinear (Price Per Customer vs Total Acquisition Value)
Total Value of Acquisition
Price
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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
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.
TrustCCIPRIDES Investor
$50 $50
Debt: 7% Coupon
Preferred Equity: 7% payment, Cox shares