News

Cox seeks privacy

8/08/2004 8:00 PM Eastern

Wall Street might not have Cox Communications Inc. to kick around anymore.

After years of frustration with its sagging stock price, Cox Enterprises Inc. — the private holding company that includes MSO Cox Communications Inc. — last week proposed a $7.9 billion buyout of the remaining shares it doesn't already own in the Atlanta-based MSO, with plans to take it private.

CEI, which owns 78 radio stations, 15 television stations, and 17 daily and 25 non-daily newspapers across the country, including its flagship Atlanta Journal-Constitution, would offer each shareholder $32 apiece for the Cox Communications common stock, a 16% premium over the stock's closing price of $27.58 each on July 30, the last trading day before the announcement.

Short-Term Bounce
Other than Cox's own stock price, the Cox Enterprises buyout offer didn't have much lingering impact on cable stocks.
Stock Price 7/30 Stock Price 8/02 Stock Price 8/05 % Change
Source: NASDAQ Web site
Cox $27.58 $33.16 $33.25 20.6
Comcast $26.80 $27.97 $27.25 1.7
Cablevision $17.47 $19.34 $17.66 1.1
Time Warner $16.65 $16.81 $16.64 -0.1
Charter $3.09 $3.15 $2.96 -4.2
Insight $8.80 $8.94 $8.80 0
Mediacom $6.57 $6.80 $6.75 2.7

While that offer will likely have to be raised — Cox Communications stock rose 20.6% or $5.67 per share between last Monday and Thursday to $33.25 apiece — officials at CEI were giving no indications that an amended offer would come soon.

“We think the offer is fair,” said CEI spokesman Bob Jimenez.

“Our proposal represents an excellent opportunity for [Cox Communications] shareholders, giving them the ability to receive a meaningful premium to recent trading values,” Cox Enterprises chairman James Kennedy said in a statement.

“For CEI, this is a chance to make a substantial additional investment in an asset we know well. An increasingly competitive environment convinces us that future investments in the cable industry are best made through a private company structure.”

MINOR HASSLES

While that may be the official reason why CEI decided to make the offer, most analysts saw the move as an example of Cox's frustration over Wall Street's inability to look past what it sees as minor competitive issues.

Cox Communications had been the gold standard against which practically every cable company was measured. With a strong management team with lengthy experience in cable — its top 11 executives have spent an average of more than 17 years at the MSO — Cox has consistently outperformed its peers.

But despite its strong operational results — Cox has reported double-digit pro forma operating cash flow increases for 16 consecutive quarters, and was one of the first MSOs to report free cash flow (cash flow after interest payments and capital expenditures are made) — its stock has performed poorly.

Prior to the run-up last week, Cox's stock was 25% off its Jan. 2 price of $34.49 per share and 36% below its 52-week high of $36.95. Even with the recent increase in the stock price, Cox shares are still 11% below the company's 52-week high.

Cox Communications would say little about the offering, except that it has forwarded the CEI proposal to its board for evaluation.

But there is little doubt that the company believes its shares are vastly undervalued.

In an interview a few days prior to the Aug. 2 announcement, Cox Communications CEO Jim Robbins said that a combination of Cablevision Systems Corp.'s discount pricing plan (where it is offering new customers a package of video, voice and data for $90 per month) and announcements by several telephone companies that they will drop prices and significantly invest in fiber to the home have dragged down the cable sector.

“I think all these things are making [people] in the analyst community and Wall Street nervous,” Robbins said. “Has it been overdone? Yeah, I think it's been overdone. When does it end? I don't know.

“But I think at $28 per share, or wherever we are, I think we're a good value. A really good value.”

EXASPERATION

Robbins has expressed his exasperation on more than one occasion. At the National Show in May, he said on a CEO panel that Comcast Corp.'s bid for The Walt Disney Co. “hurt all of us.” (The bid was dropped in April.)

“Cox management has obviously been very frustrated for awhile,” said Oppenheimer & Co. cable and satellite analyst Tom Eagan. “They've gotten to the point where they feel it may not be worth it to maintain Cox as a public company at these levels.”

While most analysts believe CEI will increase its offer, they are split as to how high it will go. Most, however, believe that the ceiling is likely around $38 per share.

“We believe it is unlikely that CEI started this process without expecting to pay more than their initial price, especially as they have to clear the transaction through a special [independent director] committee,” Fulcrum Global Partners analyst Richard Greenfield wrote in a research note.

Sanford Bernstein & Co. cable analyst Craig Moffett did not want to speculate as to what the ultimate price would be, but said that both CEI and Cox Communications will have to tread carefully over the next few weeks.

“The independent committee of directors has to walk a fine line,” Moffett said. “On the one hand, they want to make sure they are maximizing value for shareholders and not selling it for less than fair value. On the other hand, there is no prospect of getting a second bidder; it's not like they can get an auction started.

“If they push too hard and Cox Enterprises walks away, then they expose themselves to potential litigation for having squandering a $5 to $6 potential premium.”

The Cox family, which owns 62% of Cox Communications stock and 73% of the vote, has stated that it's not interested in selling its stake.

Already, some shareholder groups have expressed their displeasure with the offer.

In an Aug. 5 filing with the Securities and Exchange Commission, Cox Communications said that nine class-action shareholder lawsuits have been filed against the company since the announcement on Aug. 2, claiming Cox has breached its fiduciary duty to shareholders.

NO SHAREHOLDER VOTE

According to the deal, Cox Communications will appoint a special committee of independent directors to evaluate the proposal. If an agreement is reached, Cox Communications will not have to receive approval from shareholders to complete the transaction.

Citigroup Global Markets and Lehman Bros. Inc. are serving as CEI's financial advisers and have committed to $7.9 billion to fund the tender offer, under a $10 billion total funding commitment. The remaining $2.1 billion will be used to refinance existing debt at CEI and for working capital and other corporate purposes.

While taking Cox Communications private will remove a potent deal currency from the MSO's arsenal, the poor performance of the cable sector has made that less of a concern.

Cox, once thought to be one of the front-runners to acquire Adelphia Communications Corp., has recently said it is not interested in a deal. With plans to take Cox Communications private, an Adelphia deal is unlikely.

While not having a deal currency could make it difficult to do a deal, Moffett said that wouldn't necessarily take Cox out of the running for Adelphia.

“Had Cox tried to buy Adelphia as a public company, they would have been pilloried by shareholders,” Moffett said. “Now you can argue that with Cox as a private company, they can do whatever they want.”

Aside from a deal currency, public stock also provides quick access to capital markets, an advantage that is not as pressing as it once was.

Cox has essentially completed its rebuild program and has been generating significant free cash flow (cash flow after interest payments and capital expenditures are made) this year. In the second quarter, Cox said it generated about $155.3 million of free cash flow and expected to report positive free cash flow for the full year.

EXEC EXIT OPTION?

Taking Cox private could also present an exit opportunity for some Cox executives. Robbins, 62, has not indicated that he wants to leave, but based on the offering price and the 1.5 million shares of Class A common stock he beneficially owns, a buyout could bring a lucrative payday for the CEO.

Moffett said the buyout could provide an exit path for Robbins, but he didn't believe the CEO would take it. Cox Communications has said that the deal would have no effect on its management team.

“Even if he does have a big windfall, there is likely to be a transition contract that calls for him to stay through some transition period,” Moffett said.

Moffett also doubted that chief financial officer Jimmy Hayes would leave after the company goes private. While Moffett said being CFO of a private company is less prestigious than holding the same title at a public company, it does have its advantages.

“It's not like dealing with Cox's share price has made it easy for Jimmy Hayes to get up every morning either,” Moffett said.

Linda Moss contributed to this report.

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