Cox Case Solution

Cox Communications, Inc. 1999

Group#10

Why is Cox acquiring Gannett? Does it make sense at 2.7 billions?

In late 1990s, the cable industry has changed a lot due to the new technology innovation. The old cable was replaced by new kinds of cable like coaxial cables with fiber optic bundles. Change of cable made the cable companies be able to provide more wide range of services. For instance, digital cable television service, high-speed internet access, digital telephony, interactive TV, and video gaming, etc. The wide range of service led to a higher cost and more fierce competition. More and more cable operators found consolidation among rivals would save the high cost of increasing new customers, so the acquisitions became popular in the cable industry. Cox also found that they could not afford to lose the valuable cable properties and systems, and they found Gannett was anticipated to sell part of its cable assets due to their high price being paid for cable subscribers, so Cox decided to acquire Gannett at 2.7 billion. The acquisition would make Cox served 522000 customers of Gannett, and combined with other acquisitions, Cox’s subscriber base would increase by 60%.

By assuming a 7% growth rate and 15% of EBITDA as NWC, we can get the free cash flow for 3 years of Cox, and terminal value. And using the 9.6% cost of capital, we get the present value of each year, and total net present value. If Cox will acquire Gannett at 2.7 billion, their net present value of future cash flows should exceed 2.7 or equal at least. After calculation, Cox is supposed to grow at least 7%. Below 7% would not be enough for 2.7 billion. However, it does make sense because the actual growth rate for Cox was nearly 10%.

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?

Based on the analysis, we believe that the Cox need funding for short...