comcast corporation acquisition of time warner cable inc. analysis
DESCRIPTION
Comcast Corporation Acquisition of Time Warner Cable Inc. Analysis.TRANSCRIPT
Comcast Corporation Acquisition of Time Warner Cable Inc. Analysis
June 8, 2014
Authored by: Nikolay Zvezdin
1
Certain Information Regarding Forward Looking Statements
All statements included or incorporated by reference in this communication other than statements or characterizations of historic fact, are forward-looking statements. These
forward-looking statements are based on the document author’s current expectations, estimates and projections about the business and industry, and certain assumptions have
been made, all of which are subject to change. Forward-looking statements can often be identified by words such as “anticipates”, “expects”, “intends”, “plans”, “predicts”,
“projects”, “positioning”, “create”, “may”, “will”, “should”, “would”, “continue”, “ongoing”, “upside”, “increases”, similar expressions, and variations or negatives of these words.
Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological, strategic and/or
regulatory factors, and other factors affecting the operations of Comcast Corporation and Time Warner Cable Inc.
These forward-looking statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that could cause the actual results to differ materially
and adversely from those expressed in any forward-looking statement. Important risk factors that could contribute to such differences or otherwise affect the business, results of
operations and financial condition include: the ultimate outcome of any possible transaction between Comcast Corporation and Time Warner Cable Inc. including the possibility that
Comcast Corporation will not pursue a transaction with Time Warner Cable Inc., and if a transaction between Comcast Corporation and Time Warner Cable Inc. were to occur. The
forward-looking statements in this communication speak only as of the date of this presentation. We undertake no obligation to revise or update publicly any forward-looking
statement.
The materials herein may contain certain previously published third-party material. Unless otherwise indicated, consent of the author and publication has not been obtained to use
the material as proxy soliciting material.
This Presentation is for information purposes only and is not a prospectus, disclosure statement, product disclosure or other offering document under any law. This presentation is
not a financial product of investment advice nor a recommendation to acquire New Shares and has been prepared without taking into account the objectives, financial situation or
needs of individuals.
2
Purpose statement
The aim of the “Comcast Corporation Acquisition of Time Warner Cable Inc. Analysis” paper is not to disclose any real transaction related data and information, but instead to
illustrate the possible analysis techniques that can be (could be) used in order to complete the respective acquisition transaction. Therefore, the paper may not reflect the "reality" of
the research process that has occurred in investment banks and other advisory firms that were involved in the transaction between Time Warner Cable Inc. and Comcast
Corporation.
This paper will examine a number of analysis techniques, such as Precedent Transactions, DCF Analysis, LBO Analysis, Merger Consequences Analysis, and Regression Analysis, on the
example of real acquisition of Time Warner Cable Inc. by Comcast Corporation transaction.
Table of Contents:
Acquirer Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Target Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Recent Press Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Executive Transaction Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Target Company Input Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Target Precedent Transactions Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Sales Regression Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Target’s Sales Regression Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Acquirer’s Sales Regression Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Target Discounted Cash Flow Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Target Leveraged Buyout Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Acquisition Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
3
Acquirer Overview
Comcast Corporation (NASDAQ: CMCSA) is the largest mass media and communications company in the world by
revenue, with two primary businesses, Comcast Cable and NBCUniversal. It is the largest cable company and home
Internet service provider in the United States, and the third largest home telephone service provider in the US. Comcast
provides cable television, broadband Internet, telephone service and in some areas home security and home
automation to both residential and commercial customers in 40 states and the District of Columbia. Since January 2011,
having acquired NBCUniversal, Comcast is also a producer of film and television contents, operates cable channels,
national channels (NBC and Telemundo), the major film studio Universal Pictures, and Universal Parks & Resorts.
Target Overview
Time Warner Cable Inc. (NYSE: TWC) is among the largest providers of video, high-speed data and voice services in the US, connecting more than 15
million customers to entertainment, information and each other. Time Warner Cable Business Class offers data, video
and voice services to businesses of all sizes, cell tower backhaul services to wireless carriers and enterprise-class, cloud-
enabled hosting, managed applications and services. Time Warner Cable Media, the advertising arm of Time Warner
Cable, offers national, regional and local companies innovative advertising solutions. TWC generates the vast majority
of its revenue from subscription for services such as cable television, broadband Internet access, and VoIP. The
company offers "bundled" packages through which it sells customers all three services at once.
4
Recent Press Release
Time Warner Cable to Merge with Comcast Corporation to Create a World-Class Technology and Media Company
02/13/2014
Strategic Combination Will Accelerate Delivery of Comcast’s Technologically Advanced Products and Services to Time Warner Cable’s Customers
Transaction Creates Multiple Pro-Consumer and Pro-Competitive Benefits,
Including for Small and Medium-Sized Businesses PHILADELPHIA & NEW YORK--(February 13, 2014)--Comcast Corporation (Nasdaq:CMCSA)(Nasdaq:CMCSK) and Time Warner Cable (NYSE:TWC) today announced that their Boards of Directors have approved a definitive agreement for Time Warner Cable to merge with Comcast. The agreement is a friendly, stock-for-stock transaction in which Comcast will acquire 100 percent of Time Warner Cable’s 284.9 million shares outstanding for shares of CMCSA amounting to approximately $45.2 billion in equity value. Each Time Warner Cable share will be exchanged for 2.875 shares of CMCSA, equal to Time Warner Cable shareholders owning approximately 23 percent of Comcast’s common stock, with a value to Time Warner Cable shareholders of approximately $158.82 per share based on the last closing price of Comcast shares. The transaction will generate approximately $1.5 billion in operating efficiencies and will be accretive to Comcast’s free cash flow per share while preserving balance sheet strength. The merger will also be tax free to Time Warner Cable shareholders. This transaction will create a leading technology and innovation company, differentiated by its ability to deliver ground-breaking products on a superior network while leveraging a national platform to create operating efficiencies and economies of scale. “The combination of Time Warner Cable and Comcast creates an exciting opportunity for our company, for our customers, and for our shareholders,” said Brian L. Roberts, Chairman and Chief Executive Officer, Comcast Corporation. “In addition to creating a world-class company, this is a compelling financial and strategic transaction for our shareholders. Also, it is our intention to expand our buyback program by an additional $10 billion at the close of the transaction. We believe there are meaningful operational efficiencies and the adjusted purchase multiple is approximately 6.7x Operating Cash Flow. This transaction will be accretive and will yield many synergies and benefits in the years ahead. Rob Marcus and his team have created a pure-play cable company that, combined with Comcast, has the foundation for future growth. We are looking forward to working with his team as we bring our companies together to deliver the most innovative products and services and a superior customer experience within the highly competitive and dynamic marketplace in which we operate.” “This combination creates a company that delivers maximum value for our shareholders, enormous opportunities for our employees and a superior experience for our customers,” said Robert D. Marcus, Chairman and CEO of Time Warner Cable. “Comcast and Time Warner Cable have been the leaders in all of the industry’s most important innovations of the last 25 years and this merger will accelerate the pace of that innovation. Brian Roberts, Neil Smit, Michael Angelakis and the Comcast management team have built an industry-leading platform and innovative products and services, and we’re excited to be part of delivering all of the possibilities of cable’s superior broadband networks to more American consumers.”
5
The new cable company, which will be led by President and CEO Neil Smit, will generate multiple pro-consumer and pro-competitive benefits, including an accelerated deployment of existing and new innovative products and services for millions of customers. Comcast’s subscribers today have access to the most comprehensive video experience, including the cloud-based X1 Entertainment Operating System, plus 50,000 video on demand choices on television, 300,000 plus streaming choices on XfinityTV.com, Xfinity TV mobile apps that offer 35 live streaming channels plus the ability to download to watch offline later, and the newly launched X1 cloud DVR. Comcast is also a technology leader in broadband and has increased Internet speeds 12 times in the past 12 years across its entire footprint. Time Warner Cable owns cable systems located in key geographic areas, including New York City, Southern California, Texas, the Carolinas, Ohio, and Wisconsin. Time Warner Cable will combine its unique products and services with Comcast’s, including StartOver, which allows customers to restart a live program in progress to the beginning, and LookBack, which allows customers to watch programs up to three days after they air live, all without a DVR. Time Warner Cable also has been a leader in the deployment of community Wi-Fi, and will combine its more than 30,000 hotspots, primarily in Los Angeles and New York City, and its in-home management system, IntelligentHome, with Comcast’s offerings. Through this merger, more American consumers will benefit from technological innovations, including a superior video experience, higher broadband speeds, and the fastest in-home Wi-Fi. The transaction also will generate significant cost savings and other efficiencies. American businesses will benefit from a broader platform, and the Company will be better able to offer advanced services like high-performance point-to-point and multi-point Ethernet services and cloud-based managed services to enterprises. Additionally, the transaction will combine complementary advertising platforms and channels and allow Comcast to offer broader and more valuable packages to national advertisers. Through the merger, Comcast will acquire Time Warner Cable’s approximately 11 million managed subscribers. In order to reduce competitive concerns, Comcast is prepared to divest systems serving approximately 3 million managed subscribers. As such, Comcast will, through the acquisition and management of Time Warner Cable systems, net approximately 8 million managed subscribers in this transaction. This will bring Comcast’s managed subscriber total to approximately 30 million. Following the transaction, Comcast’s share of managed subscribers will remain below 30 percent of the total number of MVPD subscribers in the U.S. and will be essentially equivalent to Comcast Cable’s subscriber share after its completion of both the 2002 AT&T Broadband transaction and the 2006 Adelphia transaction. The companies said the merger agreement between Comcast and Time Warner Cable is subject to shareholder approval at both companies and regulatory review and other customary conditions and is expected to close by the end of 2014. J.P. Morgan, Paul J. Taubman, and Barclays Plc acted as financial advisors to Comcast and Davis Polk & Wardwell LLP and Willkie Farr & Gallagher LLP are its legal advisors. Morgan Stanley, Allen & Company, Citigroup and Centerview Partners are financial advisors to Time Warner Cable and its Board of Directors, and Paul, Weiss, Rifkind, Wharton & Garrison LLP and Skadden, Arps, Slate, Meagher & Flom LLP are legal advisors.
Link to the official press release (February 13, 2014)
6
Executive Transaction Summary The proposed acquisition of Time Warner Cable by Comcast Corporation, first was publicly announced on February 13, 2014.
The acquisition is to take the form of a stock-for-stock estimated at the time of announcement to be worth about $45.2 billion. Comcast Corporation began the regulatory review
process of the deal by filing a public interest statement at the Federal Communications Commission on April 8, 2014, and is currently in the process of obtaining permission from both
the FCC and US Department of Justice to complete the acquisition.
• Comcast Corporation to acquire Time Warner Cable Inc. for $45.2 billion a business with pro-forma FY14 sales of $23,035 million and pro-forma FY14 EBITDA of $8,738.5 million
Acquisition
• Strategic fit with Comcast Corporation
• Increase the market share
• Accessing to premier markets, including Los Angeles, New York and Dallas
• Bring technologically superior video and high speed data platforms to TWC customers
• Deployment and development of advanced services
• Benefits for enterprise customers
• Benefiting from potential synergies by eliminating the duplicative costs
• Over $400 million of synergies in capital expenditures
• Run-rate synergies of $1.5 billion in operating expenditures
Strategic Rationale
• Comcast will acquire 100% of the outstanding Time Warner Cable shares for Comcast Corporation shares in a share-for-share exchange equal to ownership of approximately 23% of Comcast Corporation
Funding
7
Target Company Input Data
In order to start the acquisition analysis, the input data of target (Time Warner Cable Inc.) is needed.
The target financial information such as annual and quarterly financial data was obtained from official 10-K, 10-Q forms. The input data is as follows:
Company Information
Company Name Time Warner Cable Inc.
Ticker TWC
Stock Exchange NYSE
Fiscal Year Ending Dec. 31
Moody’s Corporate Rating Baa2
S&P Corporate Rating BBB
Predicted Beta 0.87
Marginal Tax Rate 31.9%
Prior Current
Stub Stub LTM
2011A 2012A 2013A 30/09/2012 30/09/2013 14/06/2014
Sales 19,675.00 21,386.00 22,120.00 15,901.00 16,543.00 22,762.00
COGS (incl. D&A) 9,138.00- 9,942.00- 10,342.00- 7,377.00- 7,764.00- 10,729.00-
Gross Profit 10,537.00 11,444.00 11,778.00 8,524.00 8,779.00 12,033.00
SG&A 3,311.00- 3,620.00- 3,798.00- 2,694.00- 2,825.00- 3,929.00-
Other Expense/(Income) 3,246.00- 2,882.00- 3,389.00- 2,061.00- 2,537.00- 3,865.00-
EBIT 3,980.00 4,942.00 4,591.00 3,769.00 3,417.00 4,239.00
Interest Expense 1,518.00- 1,606.00- 1,552.00- 1,204.00- 1,175.00- 1,523.00-
Pre-tax Income 2,462.00 3,336.00 3,039.00 2,565.00 2,242.00 2,716.00
Income Taxes 795.00- 1,177.00- 1,085.00- 920.00- 828.00- 993.00-
Noncontrolling Interest 2.00- 4.00- - 3.00- - 3.00
Preffered Dividends NA NA NA NA NA NA
Net Income 1,665.00 2,155.00 1,954.00 1,642.00 1,414.00 1,726.00
Effective Tax Rate
Weighted Avg. Diluted Shares 335.3 312.4 287.6 314.8 293.8 266.6
Diluted EPS 4.97 6.90 6.70 5.22 4.81 6.29
Fiscal Year Ending December 31,
Reported Income Statement
13/06/2014 144.14
98.60%
14/06/2013 146.19
14/06/2013 84.57
2.60
285.89
41,208.04
23,261.00
3.00
876.00
63,596.04
Current Price
Plus: Total Debt
52-week High Price
Dividend Per Share (MRQ)
Fully Diluted Shares Outstanding
Less: Cash and Cash Equivalents
Enterprise Value
Selected Market Data
Plus: Noncontrolling Interest
Plus: Preffered Stock
52-week Low Price
Equity Value
% of 52-week High
LTM NFY NFY+1 NFY+2
13/06/2014 2014E 2015E 2016E
EV/Sales 2.79 1.50 1.04 0.82
Metric 22,762.00 42,396.67 60,983.61 78,021.64
EV/EBITDA 8.45 8.45 3.17 2.62
Metric 7,530.00 15,088.00 20,055.67 24,267.36
EV/EBIT 15.00 15.00 5.02 3.93
Metric 4,239.00 8,799.42 12,657.13 16,193.37
P/E 22.92 22.92 19.24 17.66
Metric 6.29 6.29 7.49 8.16
FCF Yield 0.05 0.05 0.06 0.07
Metric 2,136.00 2,136.00 2,581.75 2,781.44
Trading Multiples
8
Basic Shares Outstanding 281.89
Plus: Shares from in-the-Money Options 91.00
Less: Shares Repurchased 87.00
Net New Shares from Options 285.89
Plus: Shares from Convertible Securities -
Fully Diluted Shares Outstanding 285.89
Calculation of Fully Diluted Shares Outstanding
14%
25%
4%
7%
Return on Invested Capital
Return on Equity
Return on Assets
Implied Annual Dividend Per Share
LTM Return on Investment Ratios
Reported Gross Profit 10,537.00 11,444.00 11,778.00 8,524.00 8,779.00 12,033.00
Non-recurring Items in COGS -
Adj. Gross Profit 10,537.00 11,444.00 11,778.00 8,524.00 8,779.00 12,033.00
% margin 53.56% 53.51% 53.2% 53.6% 53.07% 52.86%
Reported EBIT 3,980.00 4,942.00 4,591.00 3,769.00 3,417.00 4,239.00
Non-recurring Items in COGS - - - - - -
Other non-recurring Items in COGS - - - - - -
Adjusted EBIT 3,980.00 4,942.00 4,591.00 3,769.00 3,417.00 4,239.00
% margin 20.23% 23.11% 20.8% 23.7% 20.66% 18.62%
Depreciation & Amortization 3,027.00 3,264.00 3,281.00 2,456.00 2,466.00 3,291.00
Adjusted EBITDA 7,007.00 8,206.00 7,872.00 6,225.00 5,883.00 7,530.00
% margin 35.61% 38.37% 35.6% 39.1% 35.56% 33.08%
Reported Net Income 1,665.00 2,155.00 1,954.00 1,642.00 1,414.00 1,726.00
Non-recurring Items in COGS - - - - - -
Other non-recurring Items in COGS - - - - - -
Non-operating Non-rec. Items - - - - - -
Tax Adjustment - - - 920.00 828.00 993.00
Adjusted Net Income 1,665.00 2,155.00 1,954.00 2,562.00 2,242.00 2,719.00
% margin 8.46% 10.08% 16.11% 13.55% 11.95%
Adjusted Diluted EPS 4.97 6.90 6.79 8.14 7.63 10.20
Adjusted Income Statement
Cash from Operations 5,688.00 5,525.00 5,753.00 4,115.00 4,154.00 5,792.00
Capital Expenditures 2,937.00- 3,095.00- 3,476.00- 2,191.00- 2,371.00- 3,656.00-
% sales 14.93% 14.47% 15.7% 13.8% 14.33% 16.06%
Free Cash Flow 2,751.00 2,430.00 2,277.00 1,924.00 1,783.00 2,136.00
% margin 14.0% 11.4% 10.3% 12.1% 10.8% 9.4%
FCF/Share 9.76 8.62 8.08 6.83 6.33 7.58
Depreciation & Amortization 3,027.00 3,264.00 3,281.00 2,456.00 2,466.00 3,291.00
% sales 15.39% 15.26% 14.83% 15.45% 14.91% 14.46%
Cash Flow Statement Data
2013A 30/09/2013
525.00 876.00
954.00 892.00
- -
665.00 888.00
2,144.00 2,656.00
15,056.00 14,627.00
29,760.00 29,471.00
1,313.00 677.00
48,273.00 47,431.00
565.00 468.00
1,057.00 1,089.00
3,604.00 3,407.00
5,226.00 4,964.00
23,285.00 23,261.00
12,815.00 12,540.00
41,326.00 40,765.00
4.00 4.00
- -
6,943.00 6,662.00
48,273.00 47,431.00
- -
Inventories
Cash and Cash Equivalents
Accounts Receivable
Balance Sheet Data
Property, Plant and Equipment, net
Goodwill and Intangible Assets
Other Assets
Total Assets
Prepaids and Other Current Assets
Total Current Assets
Total Debt
Other Long-Term Liabilities
Total Liabilities
Accounts Payable
Accrued Liabilities
Other Current Liabilities
Total Current Liabilities
Noncontrolling Interest
Preferred Stock
Shareholders' Equity
Total Liabilities and Equity
Balance Check
0.78
3.09
4.64
4.94
7.34
2.78
EBITDA/Interest Expense
(EBITDA-capex)/Interest Expense
EBIT/Interest Expense
LTM Credit Statistics
Debt/Total Capitalization
Total Debt/EBITDA
Net Debt/EBITDA
The detailed excel file with target company input data can be obtained from the link in Appendix 1: Target Company Input Excel File
.
9
Target Precedent Transactions Analysis
Precedent transactions analysis is an important tool that employs a multiple-based approach in order to derive an implied valuation range for a given
company (target). It is premised on multiples paid for comparable companies prior to the acquisition transaction.
The universe of comparable acquisitions that were completed by the Time Warner Cable Inc. is comprised of the acquisitions that took place during the period of 2011-2013. During
the respective period Time Warner Cable Inc. has acquired four companies: NaviSite; NewWave Communications; Insight Communications Co. Inc.; DukeNet Communications.
Due to the reason that the NewWave Communications, Insight Communications Co. Inc., DukeNet Communications are private companies, it is not possible to obtain detailed
financial information regarding the transactions.
LTM
Date Transaction Purchase Equity Enterprise LTM LTM LTM EBITDA
Announced Acquirer Target Type Consideration Value Value Sales EBITDA EBIT Margin
21/04/2011 Time Warner Cable Inc. NaviSite Public/Public Cash 230.18 304.44 2.32 6.46 0.10 36%
13/06/2011 Time Warner Cable Inc. NewWave Communications Public/Private Cash NA 260.00 NA NA NA NA
14/08/2011 Time Warner Cable Inc. Insight Communications Co. Inc. Public/Private Cash NA 3,000.00 NA NA NA NA
07/10/2013 Time Warner Cable Inc. DukeNet Communications LLC Public/Private Cash NA 600.00 NA NA NA NA
Enterprise Value /
Date Transaction Purchase
Announced Acquirer Target Type Consideration
21/04/2011 Time Warner Cable Inc. NaviSite Public/Public Cash
13/06/2011 Time Warner Cable Inc. NewWave Communications Public/Private Cash
14/08/2011 Time Warner Cable Inc. Insight Communications Co. Inc. Public/Private Cash
07/10/2013 Time Warner Cable Inc. DukeNet Communications LLC Public/Private Cash
Equity Value /
LTM
Net Income 1 7 30
12.43 0.2% 0.7% 51.9%
NA NA NA NA
NA NA NA NA
NA NA NA NA
Days Prior to Unaffected
Premiums Paid
The detailed excel file with target company precedent transactions analysis input and output data can be obtained from the links in Appendix 2: TWC Precedent Transactions Input
Excel File, and Appendix 3: TWC Precedent Transactions Analysis Output Excel File.
10
Sales Regression Analysis
In order to predict acquirer’s and target’s pro-forma future sales performance, the regression analysis was used.
The regression analysis has the form of: +
Where: = dependent variable (predicted sales)
parameters of the regression model
independent variables (years)
random variable
The analysis of possible number of independent parameters in the model presented that:
Where: coefficient of determination adjusted for the number of independent variables
Therefore the decision is to use 2 independent variables for the regression models.
In addition to that, the 99% confidence intervals for the sales should be built. The 99% confidence intervals for both target and acquirer have the form of: ̂
√
Where: ̂ forecasted annual sales
the t value providing an area of /2 in the upper tail of a t distribution with n - 3 degrees of freedom
s = sample standard deviation of forecasted errors
n = sample size
11
Target’s Sales Regression Analysis
In order to predict target’s future sales, the regression analysis was used.
The regression model for target’s sales has the form of: ̂
The regression model’s specifications for the target company are as follows:
The evidences of the regression model’s validity are as follows: the average forecast error = 0.00 and the error values scatter randomly above and below the trend line on a scatter
diagram.
$-2,000
$-1,500
$-1,000
$-500
$-
$500
$1,000
$1,500
$2,000
2000 2002 2004 2006 2008 2010 2012 2014
FOR
ECA
ST E
RR
OR
, $ M
ILLI
ON
ERROR PATTERN
and X = number of years since 2001 (i.e., X = 1
for 2002, 2 for 2003, 3 for 2004, etc.)
943.55
2,696.32
76.69-
10,211,810.45
0.00-
963.51
6.59
97.63%
2.37%
97.10%
98.81%
420,793,684.55
10,211,810.45
431,005,495.00
Intercept =
Model Specifications:
where Y = annual sales, $ million
Y = 943.55+ 2,696.32*X-76.69*X^2
Sum of Squares due to Regression =
Sum of Squares due to Error =
Total Sum of Squares =
Parametr X^2 =
Parametr X =
Average Forecast Error =
t-Value =
Standard Deviation of Forecast Errors =
Coefficient of Determination (R^2) =
Coefficient of Nondetermination (1-R^2) =
Adjusted Coefficient of Determination =
Correlation Coefficient =
Model's standard error of estimate =
12
Based on the regression model, target’s sales were forecasted for the period of 2014-2020. In addition to that the 99.99% confidence intervals were built. The predicted sales of Time
Warner Cable Inc. and 99% confidence intervals are illustrated above.
The detailed excel file with target company regression analysis can be obtained from the link in Appendix 4: TWC Regression Analysis Excel File.
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
DATA VALUES, QUADRATIC REGRESSION LINE, MINIMUM AND MAXIMUM CONFIDENCE LIMITS
AN
NU
AL
SALE
S, $
MIL
LIO
N
Minimum Maximum
$ million $ million
1,729 5,397
4,195 7,863
6,508 10,176
8,668 12,336
10,674 14,342
12,527 16,195
14,226 17,894
15,772 19,440
17,164 20,832
18,404 22,072
19,489 23,157
20,422 24,090
21,201 24,869
21,826 25,494
22,299 25,967
22,618 26,286
22,783 26,451
22,795 26,463
22,654 26,322
99.99% Confidence IntervalsForecast
Fiscal Error,
Year X X^2 Data Forecast $ million
2002 1 1 4,923$ 3,563$ 1,360$
2003 2 4 5,351$ 6,029$ -678 $
2004 3 9 7,861$ 8,342$ -481 $
2005 4 16 8,812$ 10,502$ -1,690 $
2006 5 25 11,767$ 12,508$ -741 $
2007 6 36 15,955$ 14,361$ 1,594$
2008 7 49 17,200$ 16,060$ 1,140$
2009 8 64 17,868$ 17,606$ 262$
2010 9 81 18,868$ 18,998$ -130 $
2011 10 100 19,675$ 20,238$ -563 $
2012 11 121 21,386$ 21,323$ 63$
2013 12 144 22,120$ 22,256$ -136 $
2014 13 169 23,035$
2015 14 196 23,660$
2016 15 225 24,133$
2017 16 256 24,452$
2018 17 289 24,617$
2019 18 324 24,629$
2020 19 361 24,488$
Annual Sales,
$ million
13
Acquirer’s Sales Regression Analysis
In order to predict acquirer’s future sales, the regression analysis was used.
The regression model for acquirer’s sales has the form of: ̂
The regression model’s specifications for the acquiring company are as follows:
The evidences of the regression model’s validity are as follows: the average forecast error = 0.00 and the error values scatter randomly above and below the trend line on a scatter
diagram.
$-8,000
$-6,000
$-4,000
$-2,000
$-
$2,000
$4,000
$6,000
$8,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
FOR
ECA
ST E
RR
OR
, $ M
ILLI
ON
ERROR PATTERN
and X = number of years since 2003 (i.e., X = 1
for 2004, 2 for 2005, 3 for 2005, etc.)
18,061.38
1,057.13
386.39
99,148,098.10
0.00
3,319.10
11.21
96.04%
3.96%
94.90%
98.00%
2,402,745,740.30
99,148,098.10
2,501,893,838.40
Sum of Squares due to Error =
Total Sum of Squares =
Parametr X^2 =
Parametr X =
Average Forecast Error =
t-Value =
Standard Deviation of Forecast Errors =
Coefficient of Determination (R^2) =
Coefficient of Nondetermination (1-R^2) =
Adjusted Coefficient of Determination =
Correlation Coefficient =
Model's standard error of estimate =
Sum of Squares due to Regression =
Intercept =
Model Specifications:
where Y = annual sales, $ million
Y = 18,061.38+ 1,057.13*X+386.39*X^2
14
Based on the regression model, target’s sales were forecasted for the period of 2014-2020. In addition to that the 99.99% confidence intervals were built. The predicted sales of
Comcast Corporation and 99% confidence intervals are as follows:
The detailed excel file with acquiring company regression analysis can be obtained from the link in Appendix 5: CMCSA Regression Analysis Excel File.
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
$180,000
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
DATA VALUES, QUADRATIC REGRESSION LINE, MINIMUM AND MAXIMUM CONFIDENCE LIMITS
AN
NU
AL
SALE
S, $
MIL
LIO
N
Minimum Maximum
$ million $ million
7,734 31,276
9,950 33,492
12,939 36,481
16,701 40,243
21,236 44,778
26,543 50,085
32,623 56,165
39,476 63,018
47,102 70,644
55,501 79,043
64,672 88,214
74,616 98,158
85,333 108,875
96,823 120,365
109,085 132,627
122,120 145,662
135,928 159,470
99.999% Confidence IntervalsForecast
Fiscal Error,
Year X X^2 Data Forecast $ million
2004 1 1 19,221$ 19,505$ -284 $
2005 2 4 21,075$ 21,721$ -646 $
2006 3 9 24,966$ 24,710$ 256$
2007 4 16 31,060$ 28,472$ 2,588$
2008 5 25 34,432$ 33,007$ 1,425$
2009 6 36 35,756$ 38,314$ -2,558 $
2010 7 49 37,937$ 44,394$ -6,457 $
2011 8 64 55,842$ 51,247$ 4,595$
2012 9 81 62,570$ 58,873$ 3,697$
2013 10 100 64,657$ 67,272$ -2,615 $
2014 11 121 76,443$
2015 12 144 86,387$
2016 13 169 97,104$
2017 14 196 108,594$
2018 15 225 120,856$
2019 16 256 133,891$
2020 17 289 147,699$
Annual Sales,
$ million
15
Target Discounted Cash Flow Analysis
As the discounted cash flow (DCF) analysis is the fundamental valuation methodology, that premises on the principle that the value of the company
can be derived from the present value of its expected free cash flow. A company’s projected free cash flow (FCF) is derived from a variety of assumptions and judgments about its
expected financial performance, including sales growth rates, profit margins, capital expenditures, and new working capital (NWC) requirements.
The valuation implied for a target by a DCF is also known as its intrinsic value, as opposed to its market value, which is the value ascribed by the market at a given point in time. As a
result, when performing a comprehensive valuation, a DCF serves as an important alternative to market-based valuation techniques such as precedent transactions analysis, which
can be destroyed by a number of factors, including market anomalies. Therefore, a DCF plays an important role as a check on the prevailing market valuation for a publicly traded
company.
In a DCF, a company’s FCF is typically projected for a period of five years. However, the projected period may be longer depending on the company’s sector, stage of development,
and the underlying predictability of its financial performance.
The predicted FCF and terminal value are discounted to the present at the target’s weighted average cost of capital (WACC), which is a discount rate commensurate with its business
and financial risks. The present value of the FCF and terminal value are summed to determine an enterprise value, which serves as the basis for the DCF valuation. The WACC and
terminal value assumptions have a significant impact of the output, with even slight variations producing meaningful differences in valuation. As a result, a DCF output is viewed in
terms of a valuation range based on a range of key input assumptions, rather than as a single variable. Therefore, the impact of these assumptions on valuation is tested using
sensitivity analysis.
The calculations of the WACC, terminal value, and the DCF analysis can be found on the tables bellow.
The values for the expected amortization for the period of 2013-2017 were taken from the 10-K report of Time Warner Cable Inc. for the year of 2012.
The sales expected growth rates were obtained thought the regression analysis, explained before.
16
CAGR LTM CAGR
2011A 2012A 2013A ('13-'11) 12/06/2014 2014 2015 2016 2017 2018 2019 ('19-'14)
Sales 19,675.0 21,386.0 22,120.0 6.0% 22,028.0 22,894.3 23,516.1 23,985.5 24,302.4 24,466.9 24,478.9 1.3%
% growth NA 8.7% 3.4% NA 3.5% 2.7% 2.0% 1.3% 0.7% 0.0%
Cost of Goods Sold 8,925.0 9,268.0 10,057.0 10,329.0 10,409.0 11,052.6 11,273.2 11,422.1 11,499.4 11,505.1
% sales 45.4% 43.3% 45.5% 46.9% 45.5% 47.0% 47.0% 47.0% 47.0% 47.0%
Gross Profit 10,750.0 12,118.0 12,063.0 5.9% 11,699.0 12,485.2 12,463.5 12,712.3 12,880.3 12,967.5 12,973.8 0.8%
% margin 54.6% 56.7% 54.5% 53.1% 54.5% 53.0% 53.0% 53.0% 53.0% 53.0%
Selling, Deneral & Administrative 3,125.0 3,311.0 3,620.0 3,751.0 3,746.7 3,848.5 3,925.3 3,977.2 4,004.1 4,006.0
% sales 15.9% 15.5% 16.4% 17.0% 16.4% 16.4% 16.4% 16.4% 16.4% 16.4%
EBITDA 7,625.0 8,807.0 8,443.0 5.2% 7,948.0 8,738.5 8,615.1 8,787.0 8,903.1 8,963.4 8,967.8 0.5%
% margin 38.8% 41.2% 38.2% 36.1% 38.2% 36.6% 36.6% 36.6% 36.6% 36.6%
Depreciation 2,961.0 2,994.0 3,154.0 3,148.0 3,264.4 3,353.1 3,501.9 3,548.2 3,547.7 3,549.4
% sales 15.0% 14.0% 14.3% 14.3% 14.3% 14.3% 14.6% 14.6% 14.5% 14.5%
Amortization 168.0 33.0 110.0 126.0 124.0 119.0 115.0 111.0 107.0 73.4 (1)
% sales 0.9% 0.2% 0.5% 0.6% 0.5% 0.5% 0.5% 0.5% 0.4% 0.3%
EBIT 4,496.0 5,780.0 5,179.0 7.3% 4,674.0 5,350.1 5,143.0 5,170.1 5,244.0 5,308.7 5,344.9 0.0%
% margin 22.9% 27.0% 23.4% 21.2% 23.4% 21.9% 21.6% 21.6% 21.7% 21.8%
3-year
Average
Capex 2,930.0 2,937.0 3,095.0 1,708.0 3,203.3 3,290.3 3,356.0 3,400.4 3,423.4 3,425.1
% sales 14.9% 13.7% 14.0% 14.2% 7.8% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Balance Sheet DataCurrent Assets
Accounts Receivable 718.0 767.0 883.0 NA
DSO 13.32 13.09 14.57 13.7 NA
Inventory - - - -
DIH - - - - -
Prepaid Expences and Other 425.0 187.0 223.0 NA
% sales 2.2% 0.9% 1.0% 1.3% NA
Current Liabilities
Accounts Payable 529.0 545.0 653.0 NA
DPO 21.63 21.46 23.70 22.27 NA
Accrued Liabilities 765.0 807.0 872.0 NA
% sales 3.9% 3.8% 3.9% 3.9% NA
Other Current Liabilities 1,792.0 4,018.0 3,800.0 NA
% sales 9.1% 18.8% 17.2% 15.0% NA
Historical Period Projection Period
Operating Data
($ in millions, fiscal year ending December 31)
Time Warner Cable Inc. Summary Historical and Projected Operating and Balance Sheet Data
17
The assumptions for the working capital projections are as follows: Days sales outstanding, Prepaids and other current assets (% of sales), Days payable outstanding, Accrued
liabilities (% of sales), Other current liabilities (% of sales) = constant value that equal to the last value obtained from the official financial statements.
2011 2012 2013 2014 2015 2016 2017 2018 2019
Sales 19,675.0 21,386.0 22,120.0 22,894.3 23,516.1 23,985.5 24,302.4 24,466.9 24,478.9
Cost of Goods Sold 8,925.0 9,268.0 10,057.0 10,409.0 11,052.6 11,273.2 11,422.1 11,499.4 11,505.1
Current Assets
Accounts Receivable 718.0 767.0 883.0 913.9 938.7 957.5 970.1 976.7 977.2
Inventories - - - - - - - - -
Prepaid Expenses and Other 425.0 187.0 223.0 230.8 237.1 241.8 245.0 246.7 246.8
Total Current Assets 1,143.0 954.0 1,106.0 1,144.7 1,175.8 1,199.3 1,215.1 1,223.3 1,223.9
Current Liabilities
Accounts Payable 529.0 545.0 653.0 675.9 717.6 732.0 741.6 746.7 747.0
Accrued Liabilities 765.0 807.0 872.0 902.5 927.0 945.5 958.0 964.5 965.0
Other Current Liabilities 1,792.0 4,018.0 3,800.0 3,933.0 4,039.8 4,120.5 4,174.9 4,203.2 4,205.2
Total Current Liabilities 3,086.0 5,370.0 5,325.0 5,511.4 5,684.5 5,798.0 5,874.6 5,914.3 5,917.3
Net Working Capital - 1,943.0 - 4,416.0 - 4,219.0 - 4,366.7 - 4,508.7 - 4,598.7 - 4,659.5 - 4,691.0 - 4,693.3
% sales -9.9% -20.6% -19.1% -19.1% -19.2% -19.2% -19.2% -19.2% -19.2%
(Increase)/Decrease in NWC 2,473.00 197.00- 147.68 142.03 89.99 60.76 31.54 2.31
Assumptions
Current Assets
Days Sales Outstanding 13.32 13.09 14.57 14.57 14.57 14.57 14.57 14.57 14.57
Prepaids and other CA (% of sales) 2.2% 0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Current Liabilities
Days Payable Outstanding 21.63 21.46 23.70 23.70 23.70 23.70 23.70 23.70 23.70
Accrued Liabilities (% of sales) 3.9% 3.8% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9% 3.9%
Other Current Liabilities (% of sales) 9.1% 18.8% 17.2% 17.2% 17.2% 17.2% 17.2% 17.2% 17.2%
Historical Period Projection Period
($ in millions, fiscal year ending December 31)
Working Capital Projections
Time Warner Cable Inc.
18
The WACC was calculated as follows:
WACC = After-tax Cost of Debt * % of Debt in the Capital Structure + Cost of Equity * % of Equity in the Capital Structure
( )
Where: = cost of debt
= cost of equity
T = marginal tax rate
D = market value of debt
E = market value of equity
The cost of debt of the Time Warner Cable Inc. was obtained from the official 10-K form.
In order to estimate the cost of equity for the target company, the CAPM equation was used.
( )
Where: = risk-free rate
= levered beta
= expected return on the market
= market risk premium
SP = size premium
The risk-free rate was taken as of January 30, 2014 yield of the 20-year Treasury bond. The historical period of 1963-2012 was used for the calculation of the market risk premium.
Due to the reason that Time Warner Cable Inc. is mature company, there is no need in calculating size premium.
19
In order to calculate levered beta, the following equation was used:
(
)
Where: = levered beta
= unlevered beta
D/E = debt to equity ratio (market values)
T = marginal tax rate
Average unlevered beta was taken as 0.92 as Washington State Department of Revenue, reports for the 2013 Assessment year, Telecommunications Sector.
Bellow the full output DCF analysis can be found.
Target Capital Structure
Debt-to-Total Capitalization 78.6%
Equity-to-Total Capitalization 21.4%
Cost of Debt
Cost-of-Debt 5.89%
Tax Rate 31.9%
After-tax Cost of Debt 4.0%
Cost of Equity
Risk-free Rate 3.4%
Market Risk Premium 4.5%
Levered Beta 2.92
Size Premium 0.0%
Cost of Equity 16.6%
WACC 6.70%
WACC Calculation
6.7% 3.9% 4.9% 5.9% 6.9% 7.9%
58.6% 8.4% 8.8% 9.2% 9.6% 10.0%
68.6% 7.0% 7.5% 7.9% 8.4% 8.9%
78.6% 7.0% 7.5% 7.9% 8.4% 8.9%
88.6% 4.2% 4.8% 5.4% 6.0% 6.6%
98.6% 2.8% 3.5% 4.2% 4.9% 5.5%
Pre-tax Cost of Debt
De
bt-
to-T
ota
l
Ca
pit
ali
za
tio
n
WACC Sensitivity Analysis
Mean Target Target
Unlevered Debt / Marginal Relevered
Beta Equity Tax Rate Beta
Relevered Beta 0.92 366.5% 31.9% 2.92
Relevered Beta
20
Operating Scenario Base1
Y CAGR CAGR
2011 2012 2013 ('13-'11) 2014 2015 2016 2017 2018 2019 ('19-'14)
19,675.0 21,386.0 22,120.0 6.0% 22,894.3 23,516.1 23,985.5 24,302.4 24,466.9 24,478.9 1.0%
NA 8.7% 3.4% 3.5% 2.7% 2.0% 1.3% 0.7% 0.0%
6,818.0 7,096.0 7,709.0 6.3% 8,738.5 8,615.1 8,787.0 8,903.1 8,963.4 8,967.8 1.0%
34.7% 33.2% 34.9% 38.2% 36.6% 36.6% 36.6% 36.6% 36.6%
3,129.0 3,027.0 3,264.0 3,388.4 3,472.1 3,616.9 3,659.2 3,654.7 3,622.9
3,689.0 4,069.0 4,445.0 9.8% 5,350.1 5,143.0 5,170.1 5,244.0 5,308.7 5,344.9 1.0%
18.7% 19.0% 20.1% 23.4% 21.9% 21.6% 21.6% 21.7% 21.3%
Taxes (1) 883.0 795.0 1,177.0 7,303.3 1,640.6 1,649.3 1,672.8 1,693.5 1,705.0
2,806.0 3,274.0 3,268.0 7.9% - 1,953.1 3,502.4 3,520.9 3,571.1 3,615.2 3,639.9 1.0%
3,129.0 3,027.0 3,264.0 3,388.4 3,472.1 3,616.9 3,659.2 3,654.7 3,622.9
- 2,930.0 - 2,937.0 - 3,095.0 - 3,203.3 - 3,290.3 - 3,356.0 - 3,400.4 - 3,423.4 - 3,425.1
142.0 90.0 60.8 31.5 2.3
3,826.1 3,871.7 3,890.7 3,878.1 3,840.0
6.70%
0.50 1.50 2.50 3.50 4.50
1.00 0.94 0.88 0.82 0.77
3,826.1 3,628.7 3,417.6 3,192.6 2,962.9
17,027.9 Enterprise Value 78,635.0 Terminal Year Free Cash Flow (2018E) 3,840.0
Less: Total Debt 23,261.0 WACC 6.7%
Less: Preferred Stock - Terminal Value 257.2
8,967.8 Less: Noncontrolling Interest 4.0
9.5 Plus: Cash and Cash Equivalents 876.0 Implied Perpetuity Growth Rate 2.0%
85,194.0
0.7 Implied Equity Value 56,246.0
61,607.2 Enterprise Value 78,635.0
78.3% Fully Diluted Shares Outstanding 312.4 LTM 2/02/2014 EBITDA 7,948.0
78,635.0 Implied Equity Value 180.0 Implied EV/EBITDA 9.9
78,635.0 8.5 9.0 9.5 10.0 10.5 2.0% 8.5 9.0 9.5 10.0 10.5
4.7% 78,233.52 81,797.39 85,361.26 88,925.13 92,489.00 4.7% -0.4% -0.2% 0.1% 0.3% 0.5%
5.7% 75,105.26 78,503.71 81,902.15 85,300.60 88,699.05 5.7% 0.5% 0.8% 1.0% 1.2% 1.4%
6.7% 72,143.76 75,385.91 78,628.06 81,870.21 85,112.37 6.7% 1.4% 1.7% 2.0% 2.2% 2.4%
7.7% 69,338.57 72,432.97 75,527.37 78,621.78 81,716.18 7.7% 2.3% 2.6% 2.9% 3.1% 3.3%
8.7% 66,679.98 69,634.64 72,589.30 75,543.96 78,498.62 8.7% 3.3% 3.6% 3.8% 4.1% 4.3%
($ in millions, fiscal year ending December 31)
Discounted Cash Flow Analysis
Time Warner Cable Inc.
WA
CC
% of Enterprise Value
Enterprise Value
Implied Equity Value and Share Price Implied Perpetuity Growth Rate
Implied EV/EBITDA
Terminal Year EBOTDA (2018E)
Exit Multiple
Terminal Value
Discount Factor
Present Value of Terminal Value
WA
CC
Exit Multiple
Implied Perpetuity Growth RateEnterprise ValueExit Multiple
Historical Period Projection Period
Enterprise ValueCumulative Present Value of FCF
Terminal Value
Present Value of Free Cash Flow
Less: Inc./(Dec.) in Net Working Capital
Unlevered Free Cash Flow
WACC
Discount Period
Discount Factor
Less: Capital Expenditures
Plus: Depreciation & Amortization
EBIAT
% margin
EBIT
Depreciation & Amortization
Operating Scenario
% margin
EBITDA
% growth
Sales
Mid-Year Convention
21
Sensitivity Analysis
2.0% 8.5 9.0 9.5 10.0 10.5
4.7% -0.4% -0.2% 0.1% 0.3% 0.5%
5.7% 0.5% 0.8% 1.0% 1.2% 1.4%
6.7% 1.4% 1.7% 2.0% 2.2% 2.4%
7.7% 2.3% 2.6% 2.9% 3.1% 3.3%
8.7% 3.3% 3.6% 3.8% 4.1% 4.3%
WA
CC
Exit Multiple
Implied Perpetuity Growth Rate
110,840.6 8.5 9.0 9.5 10.0 10.5
4.7% 110,036.8 116,353.2 116,585.4 128,986.0 135,302.5
5.7% 104,538.9 110,562.2 110,828.4 122,608.6 128,631.8
6.7% 99,347.0 105,093.8 56,246.0 116,574.6 122,320.8
7.7% 94,409.2 99,893.6 105,377.9 110,862.3 116,346.7
8.7% 89,741.6 94,978.3 100,215.0 105,451.7 110,688.4
Exit Multiple
WA
CC
Implied Equity Value
16.76 8.5 9.0 9.5 10.0 10.5
4.7% 16.66 17.46 18.25 19.05 19.84
5.7% 15.97 16.73 17.49 18.24 19.00
6.7% 15.32 16.04 9.89 17.48 18.21
7.7% 14.70 15.39 16.08 16.77 17.46
8.7% 14.11 14.77 15.43 16.08 16.74
Exit Multiple
Implied Enterprise Value / LTM EBITDA
WA
CC
The detailed excel file with target DCF analysis can be obtained from the link in Appendix 5: CMCSA Regression Analysis Excel File.
22
Target Leveraged Buyout Analysis
Leveraged buyout (LBO) is the acquisition of a target company using debt to finance a large portion of the purchase price. The remaining portion of the
purchase price is funded with an equity contribution by a financial sponsor or the acquiring company.
Due to the reason that the transaction that is used in this paper as the example did not involve debt financing (it was 100% stock-for-stock transaction), the LBO did not occur.
Therefore, the LBO analysis was not involved in Comcast Corporation-Time Warner Cable Inc. acquisition transaction valuation, however for the illustration purposes the LBO analysis
is demonstrated in this paper, as if the debt financing was required for the transaction completion.
The typical participants of the LBO transaction are illustrated on the graph below.
LBO Participants
Financial sponsors Private Equity
Firms, Merchant
banks, Hedge Funds, Venture Capital Funds, Growth Capital
Funds
Investment banks
Banks and institutional
lenders
Bond investors
Target’s management
23
Generally, there are some steadfast rules and characteristics of a strong LBO candidate. These characteristics are aiming to give a general idea of the candidate. The characteristics of
a LBO candidate as follow: strong cash flow generation, leading market position, growth opportunities, efficiency enhancement opportunities, low capital expenditures requirements,
strong asset base, and proven management team.
Before starting analysing the LBO of Time Warner Cable Inc. in more details, we check whenever it satisfies the LBO candidate’s
characteristics.
As Time Warner Cable Inc. is among the leading cable companies in the US, it has a strong established customer base, strong brand
name, and long-term sales contracts. All of the respective factors serve to increase the predictability of future cash flows. In addition
to that, the regression analysis that was illustrated before proves in a more mathematical, i.e. accurate way the assumption of
strong future cash flow generation.
In addition to that, as stated in Comcast Cable’s investor presentation of February 13, 2014, Time Warner Cable Inc. has more than
fifteen thousand subscribers in New York, Los Angeles, Dallas-Ft. Worth, Cleveland-Akron, Raleigh-Durham, Charlotte, San Diego,
Kansas City, Columbus, OH, Milwaukee, Cincinnati, San Antonio, Austin, TX, Greensboro-H. Point-W. Salem, and Louisville.
That proves that Time Warner Cable Inc. has leading and defensible market positions.
Due to the reason, that there are few areas where Time Warner Cable Inc. does not operate yet, we may assume that there are
strong growth opportunities. Moreover, there is a big international cable market, which is considered as big growth opportunity as
well.
Time Warner Cable’s efficiency enhancement opportunities include such as selling, general and administrative expenses, non-
administrative labour, and other expenses not directly associated with the delivery of company’s services.
The picture is taken from Time Warner Cable Inc.
presentation “Charter’s Proposal is Grossly Inadequate”
of January 15, 2014
24
Financial statements of Time Warner Cable Inc. indicate that it has average capital expenditures of 15.81% of sales. However the average Capex-to-Sales ratio for the telecom
industry is 2.35% as indicated by Aswath Damodaran (teacher of corporate finance and valuation at the Stern School of Business at New York University) on his web-page “Capital
Expenditures by Sector” where he has used the data from S&P Capital IQ, Bloomberg, Federal Reserve, and made the analysis on January 2014. Therefore we can state that Time
Warner Cable has high capital expenditures requirements relative to telecom industry, and that provides it with addition future efficiency enhancement opportunity.
Time Warner Cable’s asset base cannot be considered to be strong, due to the reason that majority of its assets are illiquid. Only 4.44% of the company’s assets are considered as
high quality, because most of the firm’s assets are long-term assets, which cannot be converted into cash easily. Therefore, in the event of bankruptcy (and liquidation) company will
not have enough sufficient assets as collateral against a loan benefits lenders, by decreasing the likelihood of principal recovery.
As the management team is critical in LBO scenario given the need to operate under a highly leveraged capital structure with ambitious performance targets, the management team
of Time Warner Cable Inc. can be considerate as very effective, due to the reasons that the team could sustain company’s operations during the world financial crisis, and the current
management team has previous experience of operation under the low capital expenditures opportunities when Time Warner Cable was acquiring NaviSite, NewWave
Communications, Insight Communications Co. Inc., and DukeNet Communications.
To sum up, Time Warner Cable Inc. has almost all characteristics of strong LBO candidate, except for capex requirements, and liquid asset base. Therefore the company could be a
satisfactory LBO target.
Checklist for strong LBO candidate characteristics:
✓ • Strong cash flow generation
✓ • Leading and defencible market positions
✓ • Growth opportunities
✓ • Efficiency enhancement opportunities
× • Low capex requirements
× • Strong asset base
✓ • Proven management team
25
The following LBO analysis is based on five possible operation scenarios.
The scenarios are as follows:
1st Scenario: Base – neutral scenario, based on regression analysis
2nd Scenario: Sponsor – positive scenario
3rd Scenario: Management – the most positive scenario
4th Scenario: Downside 1 – pessimistic scenario
5th Scenario: Downside 2 – the worst scenario
There are several sources of LBO financing available for the transaction. The sources are as follows:
First Lien Secured Debt
Second Lien Secured Debt
Senior Unsecured Debt
Senior Subordinated Debt
Subordinated Debt
Preferred Stock
Common Stock
Bank Debt
High Yield Bonds
Mezzanine Debt
Equity Contribution
Low
High
Risk
26
Summary of Selected Financing Key Terms
Bank Debt High Yield Bonds Mezzanine Debt
Senior Seniority Junior
Secured Security Unsecured
Low Cost of Capital High
Low Coupon High
More Prepayability Call Protection Negotiated
More Restrictive Covenants Less Restrictive
Low Flexibility High
Shorter Maturity Longer
The LBO analysis is based on five different deal financing structures.
The financing structures are as follows:
1st Structure: 65% Equity Contribution and 35% Senior Notes
2nd Structure: 65% Equity Contribution and 35% Term Loan B
3rd Structure: 65% Equity Contribution, 17.31% Senior Notes, 17.31% Senior Subordinated Notes
4th Structure: 65% Equity contribution, 17.31% Term Loan B, 10.39% Senior Notes, 6.92% Senior Subordinated Notes
5th Structure: Status Quo
The excel file with different financing options as well as possible effect on the company can be obtained from the link in Appendix 7: TWC Leveraged Buyout Analysis Excel File.
However, this paper will demonstrate the analysis of the 1st financing structure: 65% Equity Contribution and 35% Senior Notes, because such structure, as believed by the author of
the paper, provides the best financing structure for the LBO transaction, as it includes 35% of Senior Notes it provides more flexibility for the company, lower cost of capital and
coupons, than the Bank Debt would provide the company with, meanwhile it is more secured than mezzanine debt.
27
Purchase Price
Public / Public Target 1
Offer Price Per Share 158.8
Fully Diluted Shares Outstanding 284.9
Equity Purchase Price 45,247.8
Plus: Total Debt 23,285.0
Plus: Preferred Stock -
Plus: Noncontrolling Interest -
Less: Cash and Cash Equivalents 2,503.0
Enterprise Value 66,029.8
Assumptions Page (Financing Structure):
Amortization of Financing FeesYear 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Term 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Revolving Credit Facility Size 6 - - - - - - - - - -
Term Loan A 7 - - - - - - - - - -
Term Loan B 7 - - - - - - - - - -
Term Loan C 7 - - - - - - - - - -
2nd Lien 8 - - - - - - - - - -
Senior Notes 8 74.9 74.9 74.9 74.9 74.9 74.9 74.9 74.9 - -
Senior Subordinated Notes 10 - - - - - - - - - -
Senior Bridge Facility 1 - - - - - - - - - -
Senior Subordinated Bridge Facility 2 - - - - - - - - - -
Other Financing Fees & Expenses 8 3.7 3.7 3.7 3.7 3.7 3.7 3.7 3.7 - -
Annual Amortization 78.6 78.6 78.6 78.6 78.6 78.6 78.6 78.6 - -
Financing Structures
1 2 3 4 5
Sources of Funds Structure 1 Structure 2 Structure 3 Structure 4 Status Quo
Revolving Credit Facility Size - - - - -
Revolving Credit Facility Draw - - - - -
Term Loan A - - - - -
Term Loan B - 23,958.9 - 11,979.4 -
Term Loan C - - - - -
2nd Lien - - - - -
Senior Notes 23,958.9 - 11,979.4 7,187.7 -
Senior Subordinated Notes - - 11,979.4 4,791.8 -
Equity Contribution 45,247.8 45,247.8 45,247.8 45,247.8 -
Rollover Equity - - - - -
Cash on Hand - - - - -
- - - - -
Total Sources of Funds 69,206.7 69,206.7 69,206.7 69,206.7 -
Uses of Funds
Equity Purchase Price 45,247.8 45,247.8 45,247.8 45,247.8 -
Repay Existing Bank Debt 23,285.0 23,285.0 23,285.0 23,285.0 -
Tender / Call Premiums 15.0 15.0 15.0 15.0 -
Financing Fees 628.9 628.9 628.9 628.9 -
Other Fees and Expenses 29.9 29.9 29.9 29.9 -
- - - - - -
- - - - - -
Total Uses of Funds 69,206.7 69,206.7 69,206.7 69,206.7 -
Structure
Financing Fees
Structure 1 Size (%) ($)
Revolving Credit Facility Size - 1.500% -
Term Loan A - 1.500% -
Term Loan B - 1.500% -
Term Loan C - 1.500% -
2nd Lien - 2.500% -
Senior Notes 23,958.9 2.500% 599.0
Senior Subordinated Notes - 2.500% -
Senior Bridge Facility - 1.000% -
Senior Subordinated Bridge Facility - 1.000% -
Other Financing Fees & Expenses 29.9
Total Financing Fees 628.9
Fees
28
The detailed page with assumptions about company’s Income Statement, Cash Flow Statement, and Balance Sheet can be found on the page “Assumptions 1” of the Appendix 7: TWC Leveraged Buyout Analysis Excel File.
($ in millions, fiscal year ending December 31)
Income Statement
LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2011 2012 2013 13/06/2014 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Sales 19,675.0 21,368.0 22,120.0 22,028.0 22,938.4 23,561.5 24,031.7 24,349.3 24,514.1 24,526.1 24,415.6 24,275.5 24,014.9 23,637.0 23,146.9
% growth NA 8.6% 3.5% NA 3.7% 2.7% 2.0% 1.3% 0.7% 0.0% -0.5% -0.6% -1.1% -1.6% -2.1%
Cost of Goods Sold 9,138.0 9,942.0 10,342.0 10,329.0 13,772.0 11,073.9 11,294.9 11,444.2 11,521.6 11,527.3 11,475.3 11,409.5 11,287.0 11,109.4 10,879.0
Gross Profit 10,537.0 11,426.0 11,778.0 11,699.0 9,166.4 12,487.6 12,736.8 12,905.1 12,992.5 12,998.9 12,940.3 12,866.0 12,727.9 12,527.6 12,267.8
% margin 53.6% 53.5% 53.2% 53.1% 40.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0%
Selling, General & Administrative 3,311.0 3,620.0 3,798.0 3,751.0 5,001.3 3,981.9 4,061.4 4,115.0 4,142.9 4,144.9 4,126.2 4,102.6 4,058.5 3,994.7 3,911.8
% sales 16.8% 16.9% 17.2% 17.0% 21.8% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9%
Other Expense / (Income) 130.0 115.0 119.0 84.0 112.0 235.6 240.3 243.5 245.1 245.3 244.2 242.8 240.1 236.4 231.5
EBITDA 7,096.0 7,691.0 7,861.0 7,864.0 4,053.1 8,270.1 8,435.1 8,546.6 8,604.4 8,608.7 8,569.9 8,520.7 8,429.2 8,296.6 8,124.6
% margin 36.1% 36.0% 35.5% 35.7% 17.7% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1%
Depreciation 2,994.0 3,154.0 3,155.0 3,148.0 4,197.3 3,298.6 3,364.4 3,408.9 3,432.0 3,433.7 3,418.2 3,398.6 3,362.1 3,309.2 3,240.6
Amortization 33.0 110.0 126.0 126.0 168.0 141.4 144.2 146.1 147.1 147.2 146.5 145.7 144.1 141.8 138.9
EBIT 4,069.0 4,427.0 4,580.0 4,590.0 - 312.2 4,830.1 4,926.5 4,991.6 5,025.4 5,027.9 5,005.2 4,976.5 4,923.1 4,845.6 4,745.1
% margin 20.7% 20.7% 20.7% 20.8% -1.4% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5% 20.5%
Interest Expense
Revolving Credit Facility - - - - - - - - - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5
Senior Subordinated Notes - - - - - - - - - -
Commitment Fee on Unused Revolver - - - - - - - - - -
Administrative Agent Fee - - - - - - - - - -
Cash Interest Expense 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5
Amortization of Deferred Financing Fees 78.6 78.6 78.6 78.6 78.6 78.6 78.6 78.6 - -
Total Interest Expense 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,036.5 2,036.5
Interest Income - 46.7 93.7 140.6 187.2 233.2 278.7 323.3 366.9 409.2
Net Interest Expense 2,115.1 2,161.8 2,208.8 2,255.7 2,302.3 2,348.3 2,393.8 2,438.4 2,403.4 2,445.7
Earnings Before Taxes 2,715.0 2,764.7 2,782.8 2,769.7 2,725.5 2,656.9 2,582.7 2,484.7 2,442.1 2,299.4
Income Tax Expense 866.1 881.9 887.7 883.5 869.4 847.5 823.9 792.6 779.0 733.5
Net Income 1,848.9 1,882.8 1,895.1 1,886.1 1,856.1 1,809.3 1,758.8 1,692.1 1,663.1 1,565.9
% margin 7.8% 7.8% 7.8% 7.7% 7.6% 7.4% 7.2% 7.0% 7.0% 6.8%
Income Statement Assumptions
Sales (% YoY growth) NA 8.6% 3.5% NA 3.7% 2.7% 2.0% 1.3% 0.7% 0.0% -0.5% -0.6% -1.1% -1.6% -2.1%
Cost of Goods Sold (% margin) 46.4% 46.5% 46.8% 46.9% 60.0% 47.0% 47.0% 47.0% 47.0% 47.0% 47.0% 47.0% 47.0% 47.0% 47.0%
SG&A (% of sales) 16.8% 16.9% 17.2% 17.0% 21.8% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9%
Other Expense / (Income) (% of sales) -0.7% -0.5% -0.5% -0.4% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Depreciation (% of sales) 15.2% 14.8% 14.3% 14.3% 14.3% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
Amortization (% of sales) 0.2% 0.5% 0.6% 0.6% 0.7% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%
Interest Income 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Tax Rate 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9% 31.9%
Historical Period Projection Period
29
($ in millions, fiscal year ending December 31)
Balance Sheet
Opening Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2014 + - 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Cash and Cash Equivalents 525.0 - 525.0 - 9,335.2 18,732.3 28,123.6 37,441.6 46,641.5 55,739.2 64,653.9 73,388.7 81,842.7
Accounts Receivable 954.0 954.0 981.2 1,000.8 1,014.0 1,020.9 1,021.4 1,016.8 1,010.9 1,000.1 984.3 963.9
Prepaids and Other Current Assets 665.0 665.0 706.8 721.0 730.5 735.4 735.8 732.5 728.3 720.4 709.1 694.4
Total Current Assets 2,144.0 2,144.0 1,688.0 11,056.9 20,476.8 29,879.9 39,198.7 48,390.7 57,478.4 66,374.5 75,082.1 83,501.0
Property, Plant and Equipment, net 15,056.0 15,056.0 11,757.4 8,392.9 4,984.0 1,552.1 - 1,881.6 - 5,299.8 - 8,698.3 - 12,060.4 - 15,369.6 - 18,610.2
Goodwill 3,196.0 40,177.8 - 3,196.0 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8 40,177.8
Intangible Assets 26,564.0 26,564.0 26,422.6 26,278.4 26,132.3 25,985.3 25,838.1 25,691.6 25,546.0 25,401.9 25,260.0 25,121.2
Other Assets 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0 1,313.0
Deferred Financing Fees - 628.9 628.9 550.3 471.7 393.1 314.5 235.8 157.2 78.6 - - -
Total Assets 48,273.0 85,883.7 81,909.2 87,690.8 93,477.0 99,222.5 104,881.9 110,430.6 115,895.5 121,206.7 126,463.4 131,502.9
Accounts Payable 565.0 565.0 455.1 464.2 470.3 473.5 473.7 471.6 468.9 463.8 456.6 447.1
Acrued Liabilities 1,057.0 1,057.0 1,083.8 1,105.5 1,120.1 1,127.6 1,128.2 1,123.1 1,116.7 1,104.7 1,087.3 1,064.8
Other Current Liabilities 3,604.0 3,604.0 3,769.8 3,845.1 3,895.9 3,922.3 3,924.2 3,906.5 3,884.1 3,842.4 3,781.9 3,703.5
Total Current Liabilities 5,226.0 5,226.0 5,308.8 5,414.7 5,486.3 5,523.4 5,526.1 5,501.2 5,469.6 5,410.9 5,325.8 5,215.3
Revolving Credit Facility - - - - - - - - - - - - -
Term Loan A - - - - - - - - - - - - -
Term Loan B - - - - - - - - - - - - -
Term Loan C - - - - - - - - - - - - -
Existing Term Loan 23,285.0 - 23,285.0 - - - - - - - - - - -
2nd Lien - - - - - - - - - - - - -
Senior Notes - 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9
Existing Senior Notes 5,790.0 - 5,790.0 - - - - - - - - - - -
Senior Subordinated Notes - - 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other Debt - - - - - - - - - - - -
Deferred Income Taxes 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0 12,098.0
Other Long-Term Liabilities - - - - - - - - - - - -
Total Liabilities 46,399.0 41,282.9 41,365.6 41,471.6 41,543.2 41,580.3 41,583.0 41,558.1 41,526.5 41,467.8 41,382.7 41,272.2
Noncontrolling Interest - - - - - - - - - - - -
Shareholders' Equity 1,874.0 45,202.9 - 1,874.0 44,600.9 40,543.5 46,219.2 51,933.9 57,642.2 63,298.9 68,872.5 74,368.9 79,738.9 85,080.7 90,230.6
Total Shareholders' Equity 1,874.0 44,600.9 40,543.5 46,219.2 51,933.9 57,642.2 63,298.9 68,872.5 74,368.9 79,738.9 85,080.7 90,230.6
Total Liabilities and Equity 48,273.0 85,883.7 81,909.2 87,690.8 93,477.0 99,222.5 104,881.9 110,430.6 115,895.5 121,206.7 126,463.4 131,502.9
Balance Check - - - - - - - - - - - -
Net Workign Capital - 3,607.0 - 3,607.0 - 3,620.7 - 3,693.0 - 3,741.8 - 3,767.1 - 3,769.0 - 3,752.0 - 3,730.5 - 3,690.4 - 3,632.3 - 3,557.0
(Increase) / Decrease in Net Working Capital 13.7 72.3 48.8 25.3 1.9 - 17.0 - 21.5 - 40.1 - 58.1 - 75.3
Balance Sheet Assumptions
Current Assets
Days Sales Outstanding (DSO) 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2
Prepaid and Other Current Assets (% of sales) 2.9% 2.9% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Current Liabilities
Days Payable Outstanding (DPO) 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0 15.0
Accrued Liabilities (% of sales) 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6% 4.6%
Other Current Liabilities (% of sales) 15.7% 15.7% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0%
Projection Period
Adjustments
30
($ in millions, fiscal year ending December 31)
Cash Flow Statement
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Operating Activities
Net Income 1,848.9 1,882.8 1,895.1 1,886.1 1,856.1 1,809.3 1,758.8 1,692.1 1,663.1 1,565.9
Plus: Depreciation 3,298.6 3,364.4 3,408.9 3,432.0 3,433.7 3,418.2 3,398.6 3,362.1 3,309.2 3,240.6
Plus: Amortization 141.4 144.2 146.1 147.1 147.2 146.5 145.7 144.1 141.8 138.9
Plus: Amortization of Financing fees - - - - - - - - - -
Changes in Working Capital Items
(Inc.) / Dec. in Accounts Receivable - 27.2 - 19.6 - 13.2 - 6.9 - 0.5 4.6 5.8 10.9 15.7 20.4
(Inc.) / Dec. in Inventories - - - - - - - - - -
(Inc.) / Dec. in Prepaid and Other Current Assets - 41.8 - 14.1 - 9.5 - 4.9 - 0.4 3.3 4.2 7.8 11.3 14.7
(Inc.) / Dec. in Accounts Payable - 109.9 9.1 6.1 3.2 0.2 - 2.1 - 2.7 - 5.0 - 7.3 - 9.5
(Inc.) / Dec. in Accrued Liabilities 26.8 21.6 14.6 7.6 0.6 - 5.1 - 6.4 - 12.0 - 17.4 - 22.5
(Inc.) / Dec. in Other Current Liabilities 165.8 75.2 50.8 26.4 1.9 - 17.7 - 22.4 - 41.7 - 60.5 - 78.4
(Inc.) / Dec. in Net Working Capital 13.7 72.3 48.8 25.3 1.9 - 17.0 - 21.5 - 40.1 - 58.1 - 75.3
Cash Flow from Operating Activities 5,316.3 5,535.9 5,547.7 5,515.8 5,440.6 5,340.0 5,260.0 5,118.1 4,998.0 4,794.7
Investing Activities
Capital Expenditures - 3,724.9 - 3,799.2 - 3,849.4 - 3,875.5 - 3,877.4 - 3,859.9 - 3,837.8 - 3,796.6 - 3,736.8 - 3,659.3
Other Investing Activities - - - - - - - - - -
Cash Flow from Investing Activities - 3,724.9 - 3,799.2 - 3,849.4 - 3,875.5 - 3,877.4 - 3,859.9 - 3,837.8 - 3,796.6 - 3,736.8 - 3,659.3
Financing Activities
Revolving Credit Facility - - - - - - - - - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes - - - - - - - - - -
Senior Subordinated Notes - - - - - - - - - -
Other Debt - - - - - - - - - -
Dividends - - - - - - - - - -
Equity Issuance / (Repurchase) - - - - - - - - - -
Cash Flow from Financing Activities - - - - - - - - - -
Excess Cash for the Period 9,335.2 9,397.1 9,391.3 9,318.0 9,199.9 9,097.7 8,914.7 8,734.8 8,454.0
Beginning Cash Balance - 9,335.2 18,732.3 28,123.6 37,441.6 46,641.5 55,739.2 64,653.9 73,388.7
Ending Cash Balance 9,335.2 18,732.3 28,123.6 37,441.6 46,641.5 55,739.2 64,653.9 73,388.7 81,842.7
Cash Flow Statement AssumptionsCapital Expenditures (% of sales) 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8%
Projection Period
31
($ in millions, fiscal year ending December 31)
Debt Schedule
Pro Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Forward LIBOR Curve 0.35% 0.50% 0.75% 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75%
Cash Flow from Operating Activities 5,316.3 5,535.9 5,547.7 5,515.8 5,440.6 5,340.0 5,260.0 5,118.1 4,998.0 4,794.7
Cash Flow from Investing Activities 3,724.9 3,799.2 3,849.4 3,875.5 3,877.4 3,859.9 3,837.8 3,796.6 3,736.8 3,659.3
Cash Available for Debt Repayment 9,041.2 1,736.7 1,698.3 1,640.4 1,563.2 1,480.1 1,422.2 1,321.6 1,261.1 1,135.4
Total Mandatory Payments MinCash - - - - - - - - - -
Cash from Balance Sheet 20% - 1,867.0 3,746.5 5,624.7 7,488.3 9,328.3 11,147.8 12,930.8 14,677.7 16,368.5
Cash Available for Optional Debt Repayment 9,041.2 3,603.8 5,444.7 7,265.1 9,051.5 10,808.4 12,570.1 14,252.4 15,938.9 17,503.9
Revolving Credit FacilitySize -
Spread 4.500%
LIBOR Floor 1.250%
Term 6
Commitment Fee on Unused Portion 2.25%
Beginning Balance - - - - - - - - - -
Mandatory Payments - - - - - - - - - -
Optional Repayments - - - - - - - - - -
Ending Balance - - - - - - - - - -
Interest Rate 5.75% 5.75% 5.75% 5.75% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25%
Interest Expense - - - - - - - - - -
Commitment Fee - - - - - - - - - -
Administrative Agent Fee - - - - - - - - - -
Term Loan A FacilitySize -
Spread 4.500%
LIBOR Floor 1.250%
Term 7.0
Repayment Schedule 1.0% Per Annum, Bullet at Maturity
Beginning Balance - - - - - - - - - -
Mandatory Payments - - - - - - - - - -
Optional Repayments - - - - - - - - - -
Ending Balance - - - - - - - - - -
Interest Rate 5.75% 5.75% 5.75% 5.75% 6.00% 6.25% 6.50% 6.75% 7.00% 7.25%
Interest Expense - - - - - - - - - -
Projection Period
Senior Notes
Size 23,958.9
Coupon 8.500%
Term 8 years
Beginning Balance 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89
Repayment - - - - - - - - - -
Ending Balance 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89
Interest Expense 2,036.51 2,036.51 2,036.51 2,036.51 2,036.51 2,036.51 2,036.51 2,036.51 2,036.51 2,036.51
32
($ in millions, fiscal year ending December 31)
Return Analysis
Pro Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Entry EBITDA Multiple 8.92
Initial Equity Investment 45,247.8
EBITDA 8,270.1 8,435.1 8,546.6 8,604.4 8,608.7 8,569.9 8,520.7 8,429.2 8,296.6 8,124.6
Exit EBITDA Multiple 8.92
Enterprise Value at Exit 73,763.0 75,235.3 76,229.4 76,745.4 76,783.1 76,437.0 75,998.5 75,182.6 73,999.5 72,465.1
Less: Net Debt
Revolving Credit Facility - - - - - - - - - -
Term Loan A - - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Senior Notes 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9
Senior Subordinated Notes - - - - - - - - - -
Other Debt - - - - - - - - - -
Total Debt 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9
Less: Cash and Cash Equivalents - 9,335.2 18,732.3 28,123.6 37,441.6 46,641.5 55,739.2 64,653.9 73,388.7 81,842.7
Net Debt 23,958.9 14,623.7 5,226.6 - 4,164.7 - 13,482.7 - 22,682.6 - 31,780.4 - 40,695.0 - 49,429.8 - 57,883.8
Equity Value at Exit 49,804.1 60,611.6 81,456.0 72,580.7 63,300.4 53,754.4 44,218.2 34,487.6 24,569.7 14,581.2
Cash Return 1.1 1.3 1.8 1.6 1.4 1.2 1.0 0.8 0.5 0.3
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Initial Equity Investment - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8 - 45,247.8
Equity Proceeds 49,804.1 - - - - - - - - -
60,611.6 - - - - - - - -
81,456.0 - - - - - - -
72,580.7 - - - - - -
63,300.4 - - - - -
53,754.4 - - - -
44,218.2 - - -
34,487.6 - -
24,569.7 -
14,581.2
IRR 10.1% 15.7% 21.6% 12.5% 6.9% 2.9% -0.3% -3.3% -6.6% -10.7%
Projection Period
6.9% 7.92 8.42 8.92 9.42 9.92 6.9% 2016 2017 2018 2019 2020
7.92 3.9% 3.9% 3.9% 3.9% 3.9% 7.92 3.9% 3.9% 3.9% 3.9% 3.9%
8.42 5.4% 5.4% 5.4% 5.4% 5.4% 8.42 5.4% 5.4% 5.4% 5.4% 5.4%
8.92 6.9% 6.9% 6.9% 6.9% 6.9% 8.92 6.9% 6.9% 6.9% 6.9% 6.9%
9.42 8.4% 8.4% 8.4% 8.4% 8.4% 9.42 8.4% 8.4% 8.4% 8.4% 8.4%
9.92 9.7% 9.7% 9.7% 9.7% 9.7% 9.92 9.7% 9.7% 9.7% 9.7% 9.7%
Entry
Multiple
IRR - Assuming 8.92 Entry Multiple
Exit Year
Exit
Multiple
IRR - Assuming Exit in 2018E
Exit Multiple
33
Time Warner Cable Inc.
Leveraged Buyout Analysis Financing Structure: Structure 1
($ in millions, fiscal year ending December 31) Operating Scenario: Base
% of Total % of Total Offer Price per Share 158.8 Exit Year 2018
Amount Sources 13/06/2014 Cumulative Pricing Amount Uses Fully Diluted Shares 284.9 Entry Multiple 8.92
Revolving Credit Facility - - - - L+425 bps Purchase Time Warner Cable Inc. 45,247.8 65.38% Equity Purchase Price 45,247.8 Exit Multiple 8.92
Term Loan A - - - - NA Repay Existing Debt 23,285.0 33.65% Plus: Existing Net Debt 23,285.0 IRR 6.9%
Term Loan B - 0.0% - - L+425 bps Tender / Call Premiums 15.0 0.02% Enterprise Value 68,532.8 Cash Return 1.40
Term Loan C - - - - NA Financing Fees 628.9 0.91%
2nd Lien - - - - NA Other Fees and Expenses 29.9 0.04%
Senior Notes 23,958.9 34.6% 3.0 3.0 8.50% Enterprise Value / Sales Financing Structure Structure 1
Senior Subordinated Notes - 0.0% - 3.0 9.50% LTM 30.09.2013 3.11 Operating Scenario Base
Equity Contribution 45,247.8 65.4% 5.8 8.8 2012E 3.10 Cash Flow Sweep Base
Rollover Equity - - - 8.8 Enterprise Value / EBITDA Cash Balance Base
Cash on Hand - 0.0% - 8.8 LTM 30.09.2013 8.71 Average Interest Structure 1
Total Sources 69,206.7 100.0% 8.8 8.8 Total Uses 69,206.7 100.00% 2012E 8.72 Financing Fees Structure 1
LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2011 2012 2013 13/06/2014 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Sales 19,675.0 21,368.0 22,120.0 22,028.0 22,938.4 23,561.5 24,031.7 24,349.3 24,514.1 24,526.1 24,415.6 24,275.5 24,014.9 23,637.0 23,146.9
% growth NA 8.6% 3.5% NA 3.7% 2.7% 2.0% 1.3% 0.7% 0.0% -0.5% -0.6% -1.1% -1.6% -2.1%
Gross Profit 10,537.0 11,426.0 11,778.0 11,699.0 9,166.4 12,487.6 12,736.8 12,905.1 12,992.5 12,998.9 12,940.3 12,866.0 12,727.9 12,527.6 12,267.8
% margin 53.6% 53.5% 53.2% 53.1% 40.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0% 53.0%
EBITDA 7,096.0 7,691.0 7,861.0 7,864.0 4,053.1 8,270.1 8,435.1 8,546.6 8,604.4 8,608.7 8,569.9 8,520.7 8,429.2 8,296.6 8,124.6
% margin 36.1% 36.0% 35.5% 35.7% 17.7% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1% 35.1%
Capital Expenditures 2,930.0 2,937.0 3,095.0 3,275.0 4,366.7 3,724.9 3,799.2 3,849.4 3,875.5 3,877.4 3,859.9 3,837.8 3,796.6 3,736.8 3,659.3
% sales 14.9% 13.7% 14.0% 14.9% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8% 15.8%
Cash Interest Expense - - - - - 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5 2,036.5
Total Interest Expense - - - - - 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,115.1 2,036.5 2,036.5
Free Cash Flow
EBITDA 8,270.1 8,435.1 8,546.6 8,604.4 8,608.7 8,569.9 8,520.7 8,429.2 8,296.6 8,124.6
Less: Cash Interest Expense - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5 - 2,036.5
Plus: Interest Income - 46.7 93.7 140.6 187.2 233.2 278.7 323.3 366.9 409.2
Less: Income Taxes - 866.1 - 881.9 - 887.7 - 883.5 - 869.4 - 847.5 - 823.9 - 792.6 - 779.0 - 733.5
Less: Capital Expenditures - 3,724.9 - 3,799.2 - 3,849.4 - 3,875.5 - 3,877.4 - 3,859.9 - 3,837.8 - 3,796.6 - 3,736.8 - 3,659.3
Less: Increase in Net Working Capital 13.7 72.3 48.8 25.3 1.9 - 17.0 - 21.5 - 40.1 - 58.1 - 75.3
Free Cash Flow 1,656.3 1,836.4 1,915.4 1,974.9 2,014.4 2,042.1 2,079.8 2,086.8 2,053.1 2,029.1
Cumulative Free Cash Flow 1,656.3 3,492.8 5,408.2 7,383.1 9,397.5 11,439.6 13,519.4 15,606.1 17,659.2 19,688.4
Transaction Summary
Multiple of EBITDA
Sources of Funds
Historical Period Projection Period
Uses of Funds Return Analysis
Options
Purchase Price
Transaction Multiples
Summary Financial Data
34
The detailed Leveraged Buyout Analysis data can be found on the page “Transaction Summary” of Appendix 7: TWC Leveraged Buyout Analysis Excel File.
Cash - - 9,335.2 18,732.3 28,123.6 37,441.6 46,641.5 55,739.2 64,653.9 73,388.7 81,842.7
Revolving Credit Facility - - - - - - - - - - -
Term Loan A - - - - - - - - - - -
Term Loan B - - - - - - - - - - -
Term Loan C - - - - - - - - - - -
Existing Term Loan - - - - - - - - - - -
2nd Lien - - - - - - - - - - -
Other Debt - - - - - - - - - - -
Total Senior Secured Debt - - - - - - - - - - -
Senior Notes 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9
Total Senior Debt 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9
Senior Subordinated Notes - - - - - - - - - - -
Total Debt 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9 23,958.9
Shareholders' Equity 44,600.9 40,543.5 46,219.2 51,933.9 57,642.2 63,298.9 68,872.5 74,368.9 79,738.9 85,080.7 90,230.6
Total Capitalization 68,559.7 64,502.4 70,178.1 75,892.8 81,601.1 87,257.8 92,831.4 98,327.8 103,697.8 109,039.6 114,189.5
% of Bank Debt Repaid - 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
% Debt / Total Capitalization 34.9% 37.1% 34.1% 31.6% 29.4% 27.5% 25.8% 24.4% 23.1% 22.0% 21.0%
EBITDA / Cash Interest Expense NA 4.1 4.1 4.2 4.2 4.2 4.2 4.2 4.1 4.1 4.0
(EBITDA - Capex) / Cash Interest Expense NA 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.2 2.2
EBITDA / Total Interest Expense NA 3.9 4.0 4.0 4.1 4.1 4.1 4.0 4.0 4.1 4.0
(EBITDA - Capex) / Total Interest Expense NA 2.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2
Senior Secured Debt / EBITDA - - - - - - - - - - -
Senior Debt / EBITDA 5.9 2.9 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.9 2.9
Total Debt / EBITDA 5.9 2.9 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.9 2.9
Net Debt / EBITDA
Capitalization
Credit Statistics
35
Acquisition Analysis
Acquisition analysis is the key technique in the M&A deal, due to the reason that it includes all necessary data, and predicts
the outcomes and future performance of the merged company.
The entire analysis is based on the assumptions that were explained before, such as: 5 Operating Scenarios; Financing Structures; Assumptions regarding the target’s and acquirer’s
Income Statement, Balance Sheet, and Cash Flow Statement. However in the Acquisition analysis presents the effect of possible synergies created by the transaction on the merged
company’s operations. The synergies estimated to be “$1.5 billion in operating expenditures and $400 million in capital expenditures” as stated in “Comcast and Time Warner Cable
Transaction Fact Sheet”. For the analysis purposes author of the paper included options for changing the synergies amounts in the excel file, such as “
{ }; { }; { }, to illustrate the effects of realized or not
realized synergies on the merged company’s operations. However, in this paper only the synergies estimated by transaction participants are included in the analysis: Cost saving
synergies = 1,500; Capex synergies = 400.
Moreover, the author included the option of changing the percentage of cash from balance sheet that will be used for debt repayment (20%, 40%, 60%, 80%, 100%) for both
companies separately, and for the merged company. For this paper, the percentage of cash from balance sheet used for debt repayment is estimated to be 100% due to the reason
that as the companies will merge, the new entity will be highly leveraged by bank debts and bonds, that will not allow the new company to operate under its full capacity, therefore,
working off of all the debts is assumed to be as the best option.
The first part of the acquisition analysis is contribution analysis. Contribution analysis illustrates the financial contribution that each company makes to the pro forma entity in terms
of sales, EBITDA, EBIT, net income, and equity value. This analysis is typically used in stock-for-stock deals, and it allows us to assess the relative valuation of each party. The
contribution analysis can be seen below.
36
As evident from the analysis above, Comcast Corporation contributes much more than Time Warner Cable to the pro-forma entity. Comcast’s contribution on average is 3 times more
than Time Warner’s. Moreover, as we can see the contribution of Time Warner Cable Inc. to the pro-forma entity’s net income for the 2014E is negative (-56.1%), that is due to the
big amortization expenses as well as bonds repayments.
The detailed data regarding the pro-forma financial statements of Time Warner Cable Inc. and Comcast Corporation can be obtained from Appendix…
Contribution Analysis($ in millions, except per share data)
Pro Forma
Combined
Enterprise ValueSales
LTM 65,755.0 22,028.0 87,783.0 74.9% 25.1%
2014E 68,924.4 22,177.3 91,101.6 75.7% 24.3%
2015E 78,321.0 22,953.6 101,274.6 77.3% 22.7%
EBITDA
LTM 22,523.0 7,739.0 30,262.0 74.4% 25.6%
2014E 15,362.9 3,125.3 18,488.1 83.1% 16.9%
2015E 19,919.0 8,056.7 27,975.7 71.2% 28.8%
Enterprise Value
Current 161,374.1 66,694.8 228,068.9 70.8% 29.2%
4% Premium 167,829.1 69,362.6 237,191.7 70.8% 29.2%
6% Premium 171,056.6 70,696.5 241,753.1 70.8% 29.2%
8% Premium 174,284.1 72,030.4 246,314.5 70.8% 29.2%
Equity ValueNet Income
LTM 14,594.0 4,465.0 19,059.0 76.6% 23.4%
2014E 6,367.9 2,288.2- 4,079.7 156.1% -56.1%
2015E 11,144.9 5,665.2 16,810.1 66.3% 33.7%
Equity Value
Current 118,525.1 45,247.8 163,772.9 72.4% 27.6%
4% Premium 123,266.1 47,057.7 170,323.9 72.4% 27.6%
6% Premium 125,636.6 47,962.7 173,599.3 72.4% 27.6%
8% Premium 128,007.1 48,867.6 176,874.8 72.4% 27.6%
Comcast
Corporation
Time Warner
Cable Inc. Contribution (%)
74.9%
75.7%
77.3%
74.4%
83.1%
71.2%
70.8%
70.8%
70.8%
70.8%
25.1%
24.3%
22.7%
25.6%
16.9%
28.8%
29.2%
29.2%
29.2%
29.2%
76.6%
156.1%
66.3%
72.4%
72.4%
72.4%
72.4%
23.4%
-56.1%
33.7%
27.6%
27.6%
27.6%
27.6%
37
The next analysis that illustrates the effect of the acquisition is the Capitalization and Credit Statistics Analysis. Capitalization and Credit Statistics Analysis of the transaction between
Comcast Corporation and Time Warner Cable demonstrates that the pro-forma entity might be confident that it will not face rating downgrade, as the key leverage and coverage
ratios has changed in positive way after the transaction.
Credit and capitalization statistics can be seen below.
($ in millions, fiscal year ending December 31)
Capitalization
Comcast Corporation Time Warner Cable Inc. Pro Forma 1 2 3 4 5
2013 2013 + - 2013 2014 2015 2016 2017 2018
Cash 1,718.00 525.00 - 2,243.00 9,289.83 19,301.18 30,348.66 42,465.75 55,633.18
Revolving Credit Facility - - - - - - - - -
Time Warner Cable Inc. Term Loan - 23,285.00 23,285.00- - - - - - -
New Term Loan A - - - - - - - - -
New Term Loan B - - - - - - - - -
New Term Loan C - - - - - - - - -
Other Debt - - - - 29,867.18 24,439.00 24,439.00 24,439.00 24,439.00
Total Senior Secured Debt - 23,285.00 23,285.00 29,867.18 24,439.00 24,439.00 24,439.00 24,439.00
Comcast Corporation Senior Notes 44,567.00 - - - 44,567.00 44,630.00 44,630.00 44,630.00 44,630.00 44,630.00
Time Warner Cable Inc. Senior Notes - 5,790.00 - 5,790.00- - - - - - -
New Senior Notes - - 23,958.89 - 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89 23,958.89
Total Senior Debt 44,567.00 29,075.00 91,810.89 98,456.07 93,027.89 93,027.89 93,027.89 93,027.89
Senior Subordinated Notes - - - - - - - - -
Total Debt 44,567.00 29,075.00 91,810.89 98,456.07 93,027.89 93,027.89 93,027.89 93,027.89
Shareholders' Equity 50,694.00 1,874.00 45,202.85 1,874.00- 95,896.85 105,146.31 110,956.82 117,746.94 125,550.15 134,347.17
Total Capitalization 95,261.00 30,949.00 187,707.74 203,602.38 203,984.71 210,774.83 218,578.04 227,375.06
Projection Period
Adjustments
Credit StatisticsEBITDA 20,578.70 3,250.62 1,500.00 23,829.31 34,132.16 37,719.40 41,512.74 45,512.18 49,717.74
Capital Expenditures 15,664.20 3,628.77 400.00- 15,487.28 17,216.68 19,054.69 21,001.32 23,056.56 25,220.43
Interest Expense 2,343.30 497.40 4,226.28 4,226.28 4,226.28 4,226.28 4,226.28 4,304.90
EBITDA / Interest Expense 8.78 6.54 5.64 8.08 8.92 9.82 10.77 11.55
(EBITDA - Capex) / Interest Expense 2.10 0.76- 1.97 4.00 4.42 4.85 5.31 5.69
Senior Secured Debt / EBITDA - 7.16 0.98 0.88 0.65 0.59 0.54 0.49
Senior Debt / EBITDA 2.17 8.94 3.85 2.88 2.47 2.24 2.04 1.87
Total Debt / EBITDA 2.17 8.94 3.85 2.88 2.47 2.24 2.04 1.87
Net Debt / EBITDA 2.08 8.78 3.95 3.16 2.98 2.97 2.98 2.99
% Debt / Total Capitalization 46.8% 93.9% 48.9% 48.4% 45.6% 44.1% 42.6% 40.9%
38
The next analysis that needs to be conducted in order to observe the effect of the transaction on a potential acquirer’s earnings, assuming a given financing structure is the Accretion
/ (Dilution) Analysis.
The Accretion / (Dilution) Analysis compares the acquirer’s EPS pro-forma for the transaction versus on a standalone basis. If the pro-forma combined EPS is lower that the acquirer’s
standalone EPS, the transaction is dilutive, if the pro-forma EPS is higher, then the transaction is accretive.
The detailed Accretion / (Dilution) Analysis is illustrated below.
($ in millions, except per share data)
Accretion / (Dilution) Analysis - 100% Stock
Pro Forma 1 2 3 4 5
2013 2014 2015 2016 2017 2018
Comcast Corporation EBIT 7,051.68 10,598.80 12,154.57 13,861.40 15,724.05 17,747.26
Time Warner Cable Inc. EBIT - 1,240.05 4,705.48 4,833.28 4,929.76 4,994.90 5,028.70
Synergies 1,900.00 1,900.00 1,900.00 1,900.00 1,900.00 1,900.00
Pro Forma Combined EBIT (pre-deal structure) 7,711.63 17,204.28 18,887.85 20,691.15 22,618.94 24,675.97
Depreciation from Write-Up 752.80 752.80 752.80 752.80 752.80 752.80
Amortization from Write-Up 284.09 284.09 284.09 284.09 284.09 284.09
Pro Forma Combined EBIT 8,748.52 18,241.17 19,924.74 21,728.04 23,655.83 25,712.86
Standalone Net Interest Expense 2,334.71 2,343.30 2,343.30 1,631.42 1,105.70 1,105.70
Incremental Net Interest Expense 1,891.58 1,882.99 1,882.99 2,594.87 3,120.59 3,199.20
Earnings Before Taxes 4,522.23 14,014.88 15,698.46 17,501.76 19,429.55 21,407.96
Income Tax Expense @35.0% 1,582.78 4,905.21 5,494.46 6,125.62 6,800.34 7,492.78
Pro Forma Combined Net Income 6,105.02 18,920.09 21,192.91 23,627.37 26,229.89 28,900.74
Comcast Corporation Stanalone Net Income 6,367.92 11,144.93 13,245.21 16,510.47 19,734.77 22,466.12
Standalone Fully Diluted Shares Outstanding 2,138.08 2,228.33 2,228.33 2,228.33 2,228.33 2,228.33
Net New Shares Issued in Transaction 850.68 850.68 850.68 850.68 850.68 850.68
Pro Forma Fully Diluted Shares Outstanding 2,988.76 3,079.02 3,079.02 3,079.02 3,079.02 3,079.02
Pro Forma Combined Diluted EPS 2.04 6.14 6.88 7.67 8.52 9.39
Comcast Corporation Diluted EPS 2.98 5.00 5.94 7.41 8.86 10.08
Accretion / (Dilution) - $ - 0.94 1.14 0.94 0.26 - 0.34 - 0.70
Accretion / (Dilution) - % -31.4% 22.9% 15.8% 3.6% -3.8% -6.9%
Accretive / (Dilutive) Dilutive Accretive Accretive Accretive Dilutive Dilutive
Included Pre-Tax Synergies 1,900.00 1,900.00 1,900.00 1,900.00 1,900.00 1,900.00
Additional Pre-Tax Synergies to Breakeven 4,302.34 5,416.17- 4,448.07- 1,252.17- 1,598.11 3,295.35
Required Synergies to Breakevern / (Cushion) 6,202.34 3,516.17- 2,548.07- 647.83 3,498.11 5,195.35
Projection Period
39
As observable from the analysis above, the respective transaction cannot be named as fully dilutive or accretive, due to the reason that Time Warner Cable Inc. is a very leveraged
company, and Comcast Corporation will have to pay off the debt outstanding, therefore as the debt payments are not very significant (years 2014-2016) the transaction is accretive,
but as the debt payments are getting bigger the transaction becomes dilutive.
After preparing pro-forma financial statements of the created entity through the acquisition of Time Warner Cable Inc. by Comcast Corporation, the next and last analysis need to be
made, that includes all the relevant data regarding the respective transaction – the Merger Consequences Analysis.
The analysis can be observed on the following pages.
Comcast Corporation Acquisition of Time Warner Cable Inc.Merger Consequences Analysis($ in millions, fiscal year ending December 31)
Financing Structure & Operating Scenarios Synergies Cash from Balance Sheet Available for Debt RepaymentFinancing Structure: Structure 1 Revenue: - Comcast Corporation 100%
Operating Scenario (CMCSA): Base Cost Saving: 1,500.00 Time Warner Cable Inc. 100%
Operating Scenario (TWC): Base Capex: 400.00 Pro Forma 100%
Transaction Summary
% of Total % of Total
Amount Sources 30/09/2013 Cumulative Pricing Amount Uses
Revolving Credit Facility - - - - L+425 bps Purchase Time Warner Cable Inc. 45,247.8 65.38%
Term Loan A - - - - NA Repay Existing Debt 23,285.0 33.65%
Term Loan B - 0.0% - - L+425 bps Tender / Call Premiums 15.0 0.02%
Term Loan C - - - - NA Financing Fees 628.9 0.91%
2nd Lien - - - - NA Other Fees and Expenses 29.9 0.04%
Senior Notes 23,958.9 34.6% 3.0 3.0 8.50%
Senior Subordinated Notes - 0.0% - 3.0 9.50%
Issuance of Common Stock 45,247.8 65.4% 5.6 8.6
Cash on Hand - 0.0% - 8.6
Other - 8.6
Total Sources 69,206.7 100.0% 8.6 8.6 Total Uses 69,206.7 100.00%
Multiple of EBITDA
Sources of Funds Uses of Funds
Transaction Summary
Time Warner Cable Inc. Current Share Price 152.9 Stock Consideration for Equity 100%
Offer Price per Share 158.8 Transaction Debt Raised 23,958.89
Premium Paid 5.91 % of Time Warner Cable Inc. Enterprise Value 35.9%
Comcast Corporation Current Share Price 53.19 Acquisition Type Stock
Exchange Ratio 2.986
Year 1 Synergies 1,900.00
Offer Price per Share 158.8 Financing Structure Structure 1
Fully Diluted Shares 284.9 Operating Scenario Base
Equity Purchase Price 45,247.8 Cash Flow Sweep Base
Cash Balance Base
Plus: Existing Net Debt 23,285.0 Average Interest Structure 1
Enterprise Value 68,532.8 Financing Fees Structure 1
Acquisition Structure & Synergies
OptionsPurchase Price
Premium Paid & Exchange Rario
40
Pro Forma Financial SummaryPro Forma 1 2 3 4 5
2013 2014 2015 2016 2017 2018
Sales 91,101.64 101,274.56 112,086.40 123,537.16 135,626.84 148,355.45
% growth 5.9% 11.2% 10.7% 10.2% 9.8% 9.4%
Gross Profit 55,120.51 65,423.67 72,682.20 80,398.13 88,571.45 97,202.17
% margin 60.5% 64.6% 64.8% 65.1% 65.3% 65.5%
EBITDA 23,829.31 34,132.16 37,719.40 41,512.74 45,512.18 49,717.74
% margin 26.2% 33.7% 33.7% 33.6% 33.6% 33.5%
Interest Expense 4,226.28 4,226.28 4,226.28 4,226.28 4,226.28 4,304.90
Net Income 8,987.9 10,839.5 12,439.0 14,154.3 15,988.5 17,893.5
% margin 9.9% 10.7% 11.1% 11.5% 11.8% 12.1%
Fully Diluted Shares 2,988.76 3,079.02 3,079.02 3,079.02 3,079.02 3,079.02
Diluted EPS 3.01 3.52 4.04 4.60 5.19 5.81
Cash Flow from Operating Activities 24,263.50 29,066.04 32,048.80 35,173.66 38,387.85 38,387.85
Less: Capital Expenditures 17,216.68 19,054.69 21,001.32 23,056.56 25,220.43 25,220.43
Free Cash Flow 7,046.83 10,011.35 11,047.48 12,117.09 13,167.43 13,167.43
Senior Secured Debt - 29,867.18 24,439.00 24,439.00 24,439.00 24,439.00
Senior Debt 91,810.89 98,456.07 93,027.89 93,027.89 93,027.89 93,027.89
Total Debt 91,810.89 98,456.07 93,027.89 93,027.89 93,027.89 93,027.89
Cash & Equivalents 2,243.00 9,289.83 19,301.18 30,348.66 42,465.75 55,633.18
Credit StatisticsComcast Corporation Pro Forma 1 2 3 4 5
2013 2013 2014 2015 2016 2017 2018
EBITDA / Interest Expense 8.78 5.64 8.08 8.92 9.82 10.77 11.55
(EBITDA - Capex) / Interest Expense 2.10 1.56 3.57 3.96 4.37 4.80 5.69
Senior Secured Debt / EBITDA - - 0.88 0.65 0.59 0.54 0.49
Senior Debt / EBITDA 2.17 3.85 2.88 2.47 2.24 2.04 1.87
Net Debt / EBITDA 2.08 3.95 3.16 2.98 2.97 2.98 2.99
Debt / Total Capitalization 46.8% 48.9% 48.4% 45.6% 44.1% 42.6% 40.9%
Accretion / (Dilution) Analysis
Comcast Corporation Standalone Diluted EPS 2.98 5.00 5.94 7.41 8.86 10.08
Time Warner Cable Inc. Standalone EPS - 8.03 19.88 10.75 11.01 11.20 11.32
Pro Forma Combined Diluted EPS 2.04 6.14 6.88 7.67 8.52 9.39
Accretion / (Dilution) - $ - 0.94 1.14 0.94 0.26 - 0.34 - 0.70
Accretion / (Dilution) - % -31.4% 22.9% 15.8% 3.6% -3.8% -6.9%
Accretive / Dilutive Dilutive Accretive Accretive Accretive Dilutive Dilutive
Breakeven Pre-Tax Synergies / (Cushion) 6,202.34 - 3,516.17 - 2,548.07 647.83 3,498.11 5,195.35
41
Valuation SummaryTarget Acquier
Company Name Time Warner Cable Inc. Comcast Corporation
Ticker TWC CMCSA
Current Share Price 15/06/2014 152.9 53.2
Premium to Current Share Price 5.91 -
Offer Price per Share 158.82 -
Fully Diluted Shares 284.90 2,228.33
Equity Value 45,247.8 118,525.1
Plus: Total Debt 23,285.00 44,567.00
Plus: Preferred Equity - -
Plus: Noncontrolling Interest - -
Less: Cash and Equivalents 1,838.0 1,718.0
Enterprise Value 66,694.8 161,374.1
Transaction Multiples
Metric Multiple Metric Miltiple
Enterprise Value / LTM EBITDA 7,739.00 8.62 22,523.00 7.16
Enterprise Value / 2014E EBITDA 3,125.28 21.34 15,362.86 10.50
Enterprise Value / 2015E EBITDA 8,056.70 8.28 19,919.00 8.10
Equity Value / 2014E Net Income - 2,288.24 - 19.77 6,367.92 18.61
Equity Value / 2015E Net Income 5,665.18 7.99 11,144.93 10.63
Pro Forma OwnershipShares Ownership
Existing Comcast Corporation Shareholders 2,228.33 72.4%
Former Time Warner Cable Inc. Shareholders 850.68 27.6%
Pro Forma Fully Diluted Shares 3,079.02 100.0%
Annual EPS Accretion / (Dilution) Sensitivity Analysis - Premium Paid
Offer Price Premium 2014 2015 2016 2017 2018
155.82 1.9% -55.4% 12.6% 11.3% 1.9% -3.7%
157.34 2.9% -55.6% 12.3% 11.0% 1.6% -3.9%
158.82 3.9% 0.0% 0.0% 0.0% 0.0% 0.0%
160.40 4.9% -55.8% 11.7% 10.5% 1.1% -4.4%
161.93 5.9% -55.9% 11.4% 10.2% 0.8% -4.7%
2015E EPS EPS Accretion / (Dilution) Sensitivity Analysis - Premium Paid & Consideration Mix% Stock Consideration Mix
Offer Price Premium 0% 25% 50% 75% 100%
155.82 1.9% 53.0% 39.7% 28.5% 19.0% 11.3%
157.34 2.9% 53.0% 39.8% 28.7% 19.2% 11.0%
158.82 3.9% 53.0% 39.7% 28.5% 19.0% 10.8%
160.40 4.9% 53.0% 39.6% 28.3% 18.7% 10.5%
161.93 5.9% 53.0% 39.5% 28.1% 18.5% 10.2%
Year
AcquierTarget
42
The detailed excel file with target company regression analysis can be obtained from the link in Appendix 8: Comcast Corporation Acquisition of Time Warner Cable Inc. Analysis Excel
File.
To conclude it can be argued that the acquisition of Time Warner Cable Inc. is a promising deal for Comcast Corporation, as it will generate high synergies for the pro-forma entity
according to the previous analyses, will increase the market share on the cable market that will make the entity not only the leading but almost a monopoly in the US market.
Moreover, this stock-for-stock transaction will benefit Time Warner Cable’s shareholders as they will own 23% of the new entity’s stocks, which are expected to increase in price after
the acquisition. In addition to that, the customers of Time Warner Cable Inc. and Comcast Corporation will benefit from the deal as well, due to the reason that the new entity will be
able to provide new technologies to the customers that did not have an access to, before. Furthermore, as Time Warner Cable Inc. has a strong cash generation projections, has the
leading market positions, and has a proven management team, it can be argued that the target is the good one and will provide benefits to the acquirer in the future. However, for
the acquisition in order to be successful the pro-forma entity should pay off all previous companies’ debts in order to have enough free cash flow for company’s operations.
43
Appendix:
Appendix 1: Target Company Input Excel File
Appendix 2: TWC Precedent Transactions Input Excel File
Appendix 3: TWC Precedent Transactions Analysis Output Excel File
Appendix 4: TWC Regression Analysis Excel File
Appendix 5: CMCSA Regression Analysis Excel File
Appendix 6: TWC Discounted Cash Flow Analysis Excel File
Appendix 7: TWC Leveraged Buyout Analysis Excel File
Appendix 8: Comcast Corporation Acquisition of Time Warner Cable Inc. Analysis Excel File
Bibliography:
Joshua Rosenbaum and Joshua Pearl, Investment Banking. Valuation, Leveraged Buyouts, and Mergers & Acquisitions. (May 2009).
Aswath Damodaran, Capital Expenditures by Sector (January 2014). http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/capex.html