Cox Communications Case Study
Cox Communications, Inc.
Applied Corporate Finance
Prof. José Neves Adelino Prof. Carla Peixoto Prof. André Fernando
Group 9 Ana Rita Miranda 472 Carolina Oliveira 423 Henrique Queiroz 453 João Santos 438 Tiago Pinho 403
Applied Corporate Finance
Executive Summary
By mid-1999, Cox Communications, majority-owned by the Cox family, was about to take its first step into a planned $7Bn acquisition spree, which would let it stand as a top-tier communication sector firm in the coming years. In a rapidly consolidating industry, where competitive advantages derived mostly from scale, competition for acquisitions was fierce, pushing valuations higher often to thresholds which would arguably be justifiable by the target’s intrinsic value. As the opportunity to acquire Gannett Co. arose, Cox felt it was a strategic opportunity which could not be passed over. At an expected auction price of $2,7Bn, our valuation analysis has proved it to be indeed greatly overpriced. That was, however, the competitive scenario Cox would most likely be facing in the future and the excessive prices were a “necessary evil” if Cox was to meet its founding family ambitious growth objectives. This acquisition, however, could significantly constrain Cox’s future financing capacity, requiring a financing structure that avoided hampering the strategic development of Cox, while abided by specific requirements. A comprehensive financing strategy had to address three main objectives: (1) need for flexibility in order to ensure adequate future financing capacity; (2) the maintenance of the current shareholder structure – an essential requisite for the Cox family, while (3) maintaining Cox’s investment-grade credit rating status. An adequate balance of these objectives left little room for managerial maneuver, as plain vanilla equity and debt instruments seem insufficient to meet such broad goals. Yet, a different hybrid security issuance – FELINE Income PRIDES, merging the most suitable
Applied Corporate Finance
Prof. José Neves Adelino Prof. Carla Peixoto Prof. André Fernando
Group 9 Ana Rita Miranda 472 Carolina Oliveira 423 Henrique Queiroz 453 João Santos 438 Tiago Pinho 403
Applied Corporate Finance
Executive Summary
By mid-1999, Cox Communications, majority-owned by the Cox family, was about to take its first step into a planned $7Bn acquisition spree, which would let it stand as a top-tier communication sector firm in the coming years. In a rapidly consolidating industry, where competitive advantages derived mostly from scale, competition for acquisitions was fierce, pushing valuations higher often to thresholds which would arguably be justifiable by the target’s intrinsic value. As the opportunity to acquire Gannett Co. arose, Cox felt it was a strategic opportunity which could not be passed over. At an expected auction price of $2,7Bn, our valuation analysis has proved it to be indeed greatly overpriced. That was, however, the competitive scenario Cox would most likely be facing in the future and the excessive prices were a “necessary evil” if Cox was to meet its founding family ambitious growth objectives. This acquisition, however, could significantly constrain Cox’s future financing capacity, requiring a financing structure that avoided hampering the strategic development of Cox, while abided by specific requirements. A comprehensive financing strategy had to address three main objectives: (1) need for flexibility in order to ensure adequate future financing capacity; (2) the maintenance of the current shareholder structure – an essential requisite for the Cox family, while (3) maintaining Cox’s investment-grade credit rating status. An adequate balance of these objectives left little room for managerial maneuver, as plain vanilla equity and debt instruments seem insufficient to meet such broad goals. Yet, a different hybrid security issuance – FELINE Income PRIDES, merging the most suitable