Cox items for discussion
1. Why is Cox acquiring Gannett? Does it make sense at 2.7 billion.
2. Assuming the Gannett acquisition goes through, estimate CCI’s (1 ½ years) and long term (4 ½ years) funding needs. How much of each funding need must be met through external financing?
3. What constraints do they face in satisfying CCI’s funding needs? Assume a 65% floor on CCIs economic stake”
4. Analyze the proposed solutions. What is a Felines Prides security? What are the advantages/disadvantages to firms using this security? Decompose this security into its debt and equity components. What, economically, is a firm doing when it issues a Felines prides security.?
5. What solution ...view middle of the document...
7 billion dollars to acquire Gannett. After this acquisition and others to which it had recently committed, Cox’s customer base would grow 60% from the levels at the beginning of the year. It was showed in the exhibit 8a, 8b, 8c and 8d, there would be an increase in net income if Cox purchased Gannett by issuing equity of the combination of debt and equity but not only by issuing debt. So we can calculate the cash flow for Cox if it purchases Gannett by issuing equity.
As we can see in the table above, the discounted rate is 9.6%, which we calculated with the market and company data. If we assume tax rate is 34% and NWC is 15% of the EBITDA, the NPV will be positive in the end of 2003. The total value of Gannett will be more than 4.8 billion. Since in here the expected growth rate is about 8%, there will be plenty room for us to adjust the minimum growth rate.
After we lower the growth rate to 6.6%, the NPV will still be positive. So Cox should at least keep 6.6% growth rate so that it can bear the acquisition.
2. In the short-term Cox did many acquisitions recently and the internal cash flow isn’t going to support a lot, they needed to finance them mostly from external.
They will end up with 6.3 billion external funding needed. While in the long-term, the operating cash flow increased but the capital expenditure increased also. They actually will end up with 6.6 billion dollar needed to finance.
3. CCI has to keep their corporate bond rating so they can’t increase a lot of debt. They want to keep their debt to asset ratio low in order to maintain a good bond rate. The other thing of CCI is that it’s a family owned company, so they also don’t want to increase lots of equity so that it will dilute family member’s power. If Cox decided to finance all by issuing equity, family member’s economic equity will drop below 65%, which was not acceptable in this case. But with other ways to finance, it will be fine.
Cox had four financing options:
1) Issuance of debt,
2) Issuance of common share,
3) Feline Income Prides issuance
4) Asset sales.
To know the advantages and disadvantages of these options, we have to analyze financing options by analyzing the actual need of CCI. We thing that the financing decision should be consistent with CCI’s long-term capacity for future activities.
Investment decisions have been affected by some factors.
A. Making double the size of the company every five years.
B. Being able to place a large block of Cox equity in the market.
C. Preserving the family’s economic ownership of Cox. With the control of the firm, the family considered appropriate to maintain a supermajority stake in conjunction.
D. They intended to retain sufficient financial flexibility to continue to fund planned and unexpected business opportunities.
E. Cox was targeting a Debt/EBITDA ratio of no greater than 5 to maintain a investment-grade rating