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Case Analysis
Rational for Cox to be on an Acquisition Spree
12.00 10.00 Mcap/BV 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. 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.
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.
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 Debt: 7% Coupon Trust Preferred Equity: 7% payment, Cox shares $50
PRIDES Investor
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.