FinanceforM&AandTakeOver

Case:CoxCommunications,Inc., 1999

WhataretheOptionsAvailableforCoxin FundingtheForthcomingAcquisition?
Debt Fundingtobeconsistentwithfirms longruncapacitytofutureactivities

Equity Options SaleofNon StrategicAssets EquityLinked Instruments

Needtoprotecttheimpactof fundingactionsonfirms investmentgradebondratings

RespectthepreferencesoftheCox family(ownedmorethan2/3rd of Coxthroughtheirownershipofthe privatelyheldCEI)

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Revenue Costs of goods sold Selling, general and administartive EBITDA Depreciation and Amortization Non-operating income Interest expenses Income tax Net income

1996 1997 1998 99Q1 99Q2 1460 1610 1717 499 510 468 496 540 168 159 436 505 518 142 156 556 609 659 189 195 335 405 458 123 159 -104 -193 2115 384 890 146 202 223 54 69 23 -54 883 144 352 -52 -137 1210 252 505

Revenue Costs of goods sold Selling, general and administartive EBITDA Depreciation and Amortization Non-operating income Interest expenses Income tax Net income

1996 1997 1998 99Q1 99Q2 100% 100% 100% 100% 100% 32% 31% 31% 34% 31% 30% 31% 30% 28% 31% 38% 38% 38% 38% 38% 23% 25% 27% 25% 31% -7% -12% 123% 77% 175% 10% 13% 13% 11% 14% 2% -3% 51% 29% 69% 68 -4% -9% 70% 51% 99%

Total Assets Cash and marketable securities Total current assets Current liabilities Deferred taxes Long-term debt Other liabilities Total laibilities Total shareholders equity

1996 1997 1998 5784 6557 12879 42 28 31 165 377 197 250 245 336 294 722 2887 2824 3149 3920 155 84 359 3523 4200 7502 2261 2357 5377

99Q1 99Q2 14727 16169 90 23 265 210 334 362 3668 4152 3383 3587 485 439 7870 8540 6857 7629

Total Assets Cash and marketable securities Total current assets Current liabilities Deferred taxes Long-term debt Other liabilities Total laibilities Total shareholders equity

1996 1997 1998 99Q1 99Q2 100% 100% 100% 100% 100% 1% 0% 0% 1% 0% 3% 6% 2% 2% 1% 4% 4% 3% 2% 2% 5% 11% 22% 25% 26% 49% 48% 30% 23% 22% 3% 1% 3% 3% 3% 61% 64% 58% 53% 53% 69 39% 36% 42% 47% 47%

1996 Capital expenditures -579.00 Cash flow from operations 309.00 Cash flow from investing activity -552.00 Cash flow from financing activity 246.00 Shares outstanding (all classes, in mn) 540.00 LT debt / EBITDA 5.10 EBITDA interest coverage 3.80 Free cash flow / LT debt -9.60% LT debt / (LT debt + equity) 55.50% ROE (%) -2.30% Price / book 2.76 D/E (book value) 1.25 D / E (market value) 0.45

1997 -708.00 555.00 -1108.00 539.00 541.00 5.20 3.00 -4.90% 57.20% -5.80% 4.61 1.34 0.29

1998 -809.00 666.00 -1600.00 937.00 545.00 5.90 3.00 -3.70% 42.20% 23.60% 3.64 0.73 0.20

99Q1 -225.00 176.00 515.00 -631.00 555.00 4.50 3.50 -1.40% 33% 3.70% 3.11 0.49 0.16

99Q2 -277.00 18.00 -292.00 207.00 555.00 4.60 2.90 -7.20% 32% 6.60% 2.72 0.47 0.17
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WhataretheFinancingObjectivesofCox?

Doublethesizeofthe companyevery5years

Preservefamilys economicownershipof Cox

Noownershipdilution ofCEI(owns67.3%of commonshares controlling76.8%of votingstock)

ToalignCoxsfamilys interestsas managementwiththose ofothershareholders

Reluctancetoincrease theleverageofthefirm

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WhataretheIssuesinvolvedinIssuing CommonShares?
ClassA:onevote,no dividendpaid,Coxfamily owned379.2millionout of533.8millionshares

Topublicforallorpartof therequiredamountof funding

June1995:IPO,raisedlittle lessthan$400million throughprivateandpublic placement thefirstand onlyshareissuance Classesofshares(firms uniqueownership structure)

IPOfromrivalry

Expecteddownfallin market(DJIA:fell10%in twoweeks)

ClassC:tenvote,no dividendpaid,Coxfamily ownedallthe27.6million shares

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WhataretheIssuesinvolvedinIssuing CommonShares?
Upcoming(inFall) Charter CommunicationsIPO Expectedcorrectionin themarketdueto prolongedeconomic expansioninUS

Proposedissuemight getaffectedby

Underwritingfees:2% to3%ofamountraised

Directcostsofequity issue Underpricingthe issue:3%to4%

Anticipatedissuanceof 38.3millionsharesaspart ofTCAtransactionsinnext fiscalquarter

CEIwouldown67.3%of Coxscommonshares, controlling76.8%ofCoxs votingstock

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WhataretheIssuesinvolvedinRaising DebttoFundGannettCableAcquisition?
Through..
Publicdebtor Bankborrowing

Structure Since1995raised $1.9billionin debt

Sourceofdebt Maturitystructure Levelofcashcoupons Variousoptions redeem,convert,callatpar,sinkingfundprovision

Maturityrangingfrom5to30years Yieldsrangingfrom65to115bpsaboveUStreasuryobligations

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WhataretheIssuesinvolvedinRaising DebttoFundGannettCableAcquisition?
Coxfamily conservativeabout useofdebt Coxalreadyhad thehighestlevelof debtfinancingof allCEIsubsidiaries Wantedtogetthe rightbalanceof debtandequity
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Publiclyarticulated goalofmaintaining ahighdebtrating

WhataretheIssuesinvolvedinRaising DebttoFundGannettCableAcquisition?
Continuingtobe investmentgradeby maintainingrequired financialvariableatalevel TargetingaDebt/EBITDA ratioofnogreaterthan5 goingforward

Debtmarketforcompanies ratedinvestmentgrade largerandmorestablethan fornoninvestmentgrade firms

Noninvestmentgradefirms founddifficulttoobtain accesstocredit

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WhataretheIssuesinvolvedinRaising DebttoFundGannettCableAcquisition?
30yeartreasuryyield hadincreasedmore thanhalfapercentover pastsixmonths Directandindirectcosts ofadebtissuance wouldbelessthanthat forissuingequity

Subinvestmentgrade debtcostmore

Transactioncostswould belessthan2%

Marketimpactofissuing debtonstockprice wouldbearound1%to 2%

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WhataretheIssuesinvolvedinRaising DebttoFundGannettCableAcquisition?

Increasedcreditspreads =Arated:56bpsto 135bpsandBBBrated: 95bpsto181bps

Recentweaknessinthe bondmarketsand cancellationofpreviously announceddealsby GreatLakesPowerInc.,

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Yields for Governemnt and Corporate Bonds for July 15, 1999 1 Year 2 Year 3 Year 5 Year 10 Year Treasury bonds 5.38 5.64 5.70 5.83 5.83 US Treasury strips 5.38 5.66 5.71 5.88 6.16 A-rated industrial bonds 5.99 6.33 6.44 6.70 6.93 BBB-rated industrial bonds 6.30 6.62 6.81 7.05 7.37 BB-rated industrial bonds 6.84 7.51 7.71 8.00 8.80
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WhataretheIssuesinvolvedinSaleof NonStrategicAssets?
SprintPCS:$4.1 billion(Taxable base:$0) Sellinginmarket willattractcapital gaintax(35%) Monetizingor obtaining equivalentcash taxefficientdeal Discover communications: $2.5billion(Taxable base:$34Million) Flextech:$300 million(Taxable base:$48Million)

Sell/swap/ monetizenon strategicequity investments Coxssharesin AT&Thadatax basisof0

@Home:$1.5 billion(Taxable base:$7Million)

Smallerstakesin otherfirms

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WhataretheIssuesinvolvedinSaleof NonStrategicAssets?
Taxeffectivetransaction:Cox hadeffectivelyswappedits AT&Tsharesforsharesin AT&Tsubsidiariesthat ownedcableassetswithout triggeringataxableevent Receivedcashequivalentin valueandalsopostponed thecapitalgaintaxesfrom anysaleforanumberof years

SprintPCS cannotbesold tillNov.

StakesinSprintPCS, @Home,andFlextech largerthandailytrading volumesinthemarket

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FELINEIncomePRIDES
FinancialReportingAdvantages

Debtwouldnotappear onthebalancesheet asdebt

Minorityshareholders Interestappears reflectingthepreferred equityissuance

Taxdeductibleon interestpayments madeondebtissued totrust

FELINEIncomePRIDE appearstobeequityin reports

Ratingagenciestreat thedebtlikeequity

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FELINE PRIDES Structure: Income Prides

$50

$50 Income PRIDES Investor Preferred equity: 7% payments + Cox shares

CCI Debt: 7% Coupon

Trust

Cox Share Price in 3 Years S <= $34.6875 $34.6875 < S < $41.7984 S >= $41.7984

No. of Cox Shares Delivered 1.4414 $50/S 1.1962

Value of Cox Shares Delivered 1.4414*S $50 1.1962*S

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ConversionScheduleofFELINEPRIDES

Slope: 1.1962 C ashflow in 3 Years

Slope: 0

Slope: 1.4414

CCI Stock Price

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DecompositionofFLINEPRIDES
Slope: 1.1962 Cash flo w in 3 Y ears

Slope: 0

Maturityofcall=point intimeinvestorsare requiredtoconvert FELINEPRIDESinto equity Equitycontentof optionscanbe calculatedby computingdeltaof eachoption

Slope: 1.4414

CCI Stock Price

FLINEPRIDES=1.4414shares 1.4414 calls(34.69)+1.1962calls(41.80)

Deltacanbecomputed usingBlackScholes model

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Delta of Options Currrent stock price of CCI Risk free rate Volatility Time-to-maturity (years) Delta of call (34.69) Delta of call (41.80) Equity content in FELINE PRIDES Delta of FELINE PRIDES Model used

$40.69 As on July 31, 1999 5.63% log(1+5.7 1%/2)^2 Exhibit 6 47% 3 0.79 CCI shares 0.72 CCI shares 1.1664 1.1664 BSM
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Dilution Effect of FELINE PRIDES Equivalent CCI stocks issued through FELINE PRIDES Issued at (Per unit) No. of units issued ($720 million / $50 million) Total no. of equivalent shares issued (14.4 million * 1.166 CCI shares) Recomputed Economic Stake of Cox Family Old shares Shares issued through FELINE PRIDES Total shares outstanding Shares owned by COX family Stake of COX family after issuing FLINE PRIDE (406.7/(621+16.79))

1.166 $50 14.4 16.7904 621 16.7904 637.7904 406.7 63.77%

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Whetherinsistencetomaintainaninvestment graderatingmakesense?

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DealFinancing
Firmswhichbelievethat theirstockisundervalued willnotusestocktodo acquisitions Giventhattheexchange ratioinastockacquisitionis setbeforetheexchangetake place,thereisanelementof uncertainlyinastock acquisition

Premiumpaidislargerwhen anacquisitionisfinanced withstockratherthancash

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DealFinancing
Cashtransactionsare taxable require higherpremiumsto compensatefortaxes Signalingeffect use ofcashindicatesthat targethasbetter investment opportunities

Securitiestransactions involveregulatory approvalandlonger acquisitioninterval

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CompanysLifeCycleandCapital Requirements

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CostofCapitalConsiderations

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Financing

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