Cox Communications, Inc, 1999 (CCI)

Q6: Analyze the solutions proposed in Exhibit 8. What is a FELINE 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 FELINE PRIDES?
1) Issuance of debt (bonds/bank):
For:

Transaction costs effectively 2% less than equity

Negative effect on CCIs stock is estimated to be around 1% - 2%

(moderately low)

Doesnt decrease Cox familys majority stake and voting rights

Against:

Investment grade of CCI is likely to be decreased due to the fact that

the Debt/EBITDA ratio will increase

Current target Debt/EBITDA < 5 ie it has to limit itself to debt with

yields of US Treasury + 65-115 basis point

Will not benefit fully from tax shield as income tax refunds expected

2) Issuance of Class A shares

For:

Positive for ratings as Debt/EBITDA affected positively

Against:

Cox familys economic stake reduced to 59% & voting rights

decreased to 70%

Fees - 2-3% of amount raised

Market impact of raising large equity: 3-4% fall in stock price

3) Sale/Swap of non-strategic assets

Non strategic assets

$4.1 billion equity held in Sprint PCS

$2.5 billion equity held in Discovery Communications

$1.5 billion equity held in @Home equity

$300 million equity held in in Flextech

While outright selling will lead to tax burden (35%), asset swap allows
to escape the same. There is possibility of a tax efficient disposal in
case of AT&T investment due to the fact that CCI had effectively
swapped its original AT&T shares into AT&T cable operator shares
without triggering a taxable event. However, there are limitations on
monetization of other assets

PCS investment cant be hedged or sold until November

Stakes in @Home, Sprint and Flextech are relatively large and will
therefore be hard to liquidate on the market

4) FELINE INCOME PRIDES (Hybrids Flexible Equity Linked

Exchangeable

Preferred

Redeemable

Increased

Dividend

Equity

Security)
Characteristics:

Mandatorily convertible: Investor obligated to convert to company

stocks

Trust preferred securities: Preferred equity + subordinate debt, issued

by a trust designated by the company

When an investor purchases FELINE PRIDES, he gets an obligation

by the investor to purchase a fixed dollar amount of Coxs Class A
Common Stock in three years

Company creates trust, Trust issues Felines

CCI issued debt to itself in form of 7% bonds which Trust bought

Trust issued preferred equity paying 7% dividend yield

With income from PRIDE securities sale, it would purchase CCI bonds

Off balance sheet financing, Trust appears as minority shareholder

interest account (value of preferred equity issue) balanced by revenues
obtained from issuing securities

Preferred equity
For:

Preferred equity component tax deductible

Seen as equity for financial reporting purposes (as investor

obligated to buy shares in 3 yrs)

Healthy balancesheet and ratings

Against:

Coxs family stake will inevitably be diluted when the

securities come to maturity

However, dilution effect could be lower as dependent on

price after 3 yrs

5) Combination of debt, equity and PRIDES

For:

Risk of financial distress, go for mandatory convertible securities

Against:

In worst possible scenario (conversion of 1.4414 shares per unit of

PRIDES), Cox family stake reduces to 63% upon maturity

Fees

Q7: Which solution in Exhibit 8 seems to satisfy the financing constraints

determined above and why?
Financial constraints are:

Cox family doesnt want to dilute interest (65% floor) - equity issuance dilutes
interest

It has to maintain its ratings. For that Debt/EBITDA has to be < 5. Debt issuance
will have negative impact.

In such situation FELINE PRIDES are the best options

Cox can fund itself that looked like equity to debtholders and debt to shareholders
Alternatively it can go for asset swap with its non-strategic assets