Baruch College CUNY

Zicklin School of Business

Capital restructure

May. 11. 2016

Cinthia Cancho, Jinwoo Lee, Justin Lin, Richard Choi, Woongki Hong

TABLE OF CONTENT

Proposal Report

Proposal For the proposal of the group, I would like to focus on the financial structure aspect of the company, and propose changes to the financial structure in comparison to similar companies in the same industry. Along with using companies in the same industry to base my proposal on, I will also be using companies with the same cost of equity, cost of debt, and tax rates. For my proposal I’d like to focus on the cable industry, and in particular two companies Time Warner Cable (TWC) as well as Comcast (CMCSA). The average cost of capital for the cable industry comes in at 7.16%, with average (E/V) ratio of 66.84% (Stern). As for my proposal, I believe Comcast with a WACC of 9.31% compared to a competitor such as TWC with a WACC of 8.9% and more debt, can substantially lower their cost of capital with a more refined capital structure. A structure slightly more bias in debt compared to their old one, and take advantage of the lower debt rates, tax shield, and by not increasing their Re in large enough margins to effect the new WACC. By finding an optimal capital structure, to reduce WACC while maintaining financial risk without increasing equity costs. Time Warner Cable

Comcast

Overview Comcast is a global media and technology company in business since 1963. Comcast is the overall number one pay-tv provider in the US with an estimate of 27.7 million video subscribers for their cable division. The largest revenue generator is their cable division and provides services to 39 states and the district of Columbia. Its broadband Internet service has an estimate of 23 million subscribers and its XFINITY computer telephony service has an estimate of 11.5 million customers. In 2011 Comcast acquired NBC Universal from general electric company, which includes The Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Cable communications is provided under the brand Xfinity they provide tv, internet and home phone services. A general SWOT analysis shows that Comcast’s strength is being the number one competitor in the industry and they have a fast growing, high margin broadband Internet business. An opportunity is Innovation with their new X1 set top box that would completely change a viewers tv experience. X1 would include features such as video streaming, socials apps and work on voice command. A weakness is that they have a reputation for poor customer service , in previous years they have received an award for worst company in America. Also there a lot disputes with programmers and other possible partners. A current threat being faced is that people no longer want to have contracts with their cable subscriptions. They do not like commitment and it would like less expensive service. Another threat is that government regulations and laws can get in the way of acquisitions and the way Comcast operates. For example, in 2014 Comcast was working on a deal to acquire time warner which is one of their main competitors, the deal did was not made because the government did not allow it because they considered that Comcast would have too much power and control over the price of service.

Competition With the expansive outreach of its business, it is important for Comcast to maintain a competitive edge against its competitors. Comcast Corporation has two primary businesses, Comcast Cable and NBC Universal. These businesses consist of a wide array of services and content that has Comcast set foot in several industries and opens its doors to bigger competition. Comcast Cable under the Xfinity brand, is one of the largest in the Cable TV industry, with competitors such as Verizon Fios and Time Warner Cable. However, Comcast’s debt-to-equity ratio has been relatively low at around 1, nearly half that of the industry average (2.25 as of March 2016). Taking a look at a competitor such as Time Warner Cable shows a greater debt-to-equity ratio which means lower costs while providing similar services. Comcast’s presence in the Tech and Telecommunications industry will also have them compete against big firms such as Google and Skype, which continues to expand their reach over industries as well. In addition, the Cable TV industry as a whole is under a new threat with the rise of streaming providers such as Netflix and Hulu. Such services allow people to watch their favorite movies and TV shows anytime, giving customers more favorable control over content. As a result, there has already been a decline in households that watch cable television. Keeping these challenges

in mind, we feel that leveraging the corporation with debt and taking advantage of tax shields will allow them to lower costs and take on more projects. With a history of relatively low debt-to-equity ratio, Comcast has a lot of room to increase their debt and lower their costs without facing much financial risk. Proposal The initial idea comes from our advantage of debt to equity Ratio. As we mention, Comcast currently has debt-to-ratio of 1.06; while the industry has average debt-to-ratio of 2.25. Since we want to take advantage of it, we propose the company to issue 15 billion debt as conservative option and 25 billion as aggressive option with 10-year bond. Through the debt, the company will be able to have lower WACC, more tax deduction saved from more debt, and will have more capital to invest our company in order to gain more profit. Our goal from the proposal is reducing WACC (weighted average cost of capital) and increasing the interest shield saved. According to the WACC formula (RA= (E/V)RE + (D/V)RD(1-TC), We need to get accountable data to use for the formula. We use the equity, debt, and value of the company from the company’s income statement and balance sheet. We have chosen to use the 3-year-average cost of debt (interest expense/total debt) and the tax rate (Income tax expense/income before tax). For the cost of equity, we have used CAPM model. Especially, we have decided to use 10-year treasury risk free rate since we are going to take 10-year bond.

Current Conservative Aggressive

+ 15B Debt + 25B Debt

WACC 9.04% 8.66% 8.44%

Interest Shield $19,289.35m $24,489.85 $27,956.85

D/E 1.06 1.34 1.53

According to the result, we can project that WACC will be decreasing and interest shield will be increasing. Also, we will still have a lower D/E ratio than the industry (2.25) after all having additional debt. Capital Uses With the acquisition of new debt, there comes disadvantages and advantages with issuing new debt. Advantages include a reduction in tax expense from interest payments, benefits from high returns from investments funded by the newly acquired capital, and the lack of votings rights/ownership from debt holders. The disadvantages include the increase of financial risk from issuing new debt, by increasing the leverage of your company. With higher leverage investors will usually require higher returns. But we believe Comcast will not have to worry much at these disadvantages, especially in the rise of financial risk. Comcast is well below the industry average in leverage ratios, and have a generous amount of room to raise capital with debt, and not alarm investors with a negative signal.

Further indications that a company can raise capital through the issuance of debt, is a sight of constant EBIT. By having a constant EBIT investors will be reassured that the company will be able to uphold their periodic interest payments. Comcast not only shows a constant EBIT, but from the past 5 years Comcast have a generated a constant growth in EBIT, and in the last 5 years have grown 71%. This can signal to investors that Comcast can take on new debt while not taking on much risk, and at the same time make good investment decisions that have generated increased returns. Our sole purpose of increasing debt, is to not decrease WACC, but to raise capital through debt in order to make new acquisitions and investments. With the increase threat that Comcast faces from online streaming services such as Netflix, and Amazon. It is important for Comcast to invest capital in either acquiring already established streaming services like with what they did with their partnership in Hulu with Disney, and Fox. They can also inject investments into improving their already available small platform of steaming services, by providing more content with reduced costs. Comcast can also provide more capital to their venture funds, and invest and seek out huge returns from startup companies that focus on new technologies and businesses. Another use of the newly acquired capital can be used to buy back ownership in term of equity and shares outstanding, and slowly raise the needed capital through debt instead. With our current/future investments, and company emphasis on growth, we believe the company stock value is undervalued. Our team believes the intrinsic value is marginally higher than the current market price of our stock (62.64 closing price on Tuesday 5/10/16). A share buyback can also signal positive remarks to investors, in the company's management in its investment and future growth. Conclusion Comcast is currently a uncontested company in the cable industry, leading in all aspects of the industry. It is miles ahead of all their rivals, and our team believes it can take the advantage of their position in the industry, and further establish and grow their entity. By using new capital in debt, Comcast can decrease their total cost of capital, continue to make profitable investments, and secure itself from threats such as online streaming providers. All the while, Comcast does not have to problem the fear of financial risk, as they have a great leverage ratio compared to their investors. We believe the acquisition of this newly issued capital, will maintain and drive Comcast’s position in the world market.

References

1. http://www.reuters.com/article/us-twc-m-a-idUSKCN0XX23T 2. http://www.bloomberg.com/news/articles/2015-03-31/comcast-to-invest-4-billion-in-new-

company-with-cfo-angelakis 3. http://www.fool.com/investing/general/2016/05/09/att-and-verizons-5g-ambitions-are-

cables-worst-nig.aspx?source=yahoo-2&utm_campaign=article&utm_medium=feed&utm_source=yahoo-2

4. https://ycharts.com/companies/CMCSA/chart/#/?securities=include:true,id:CMCSA,,&calcs=id:net_income_annual,include:true,,&correlations=&zoom=5&startDate=&endDate=&format=real&recessions=false&chartView=&splitType=metric&scaleType=linear&securitylistName=&securitylistSecurityId=&securityGroup=

5. https://finance.yahoo.com/q/ks?s=CMCSA+Key+Statistics 6. http://www.ehow.com/how_7904413_calculate-unlevered-cost-capital.html 7. http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=CMCSA&Country=USA 8. http://thatswacc.com/ 9. http://pages.stern.nyu.edu/~igiddy/articles/wacc_tutorial.pdf 10. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.htm 11. http://www.valueline.com/Stocks/Highlights/A_Short_SWOT_Analysis_of_Comcast.aspx 12. https://www.sec.gov/Archives/edgar/data/902739/000119312515068526/d817352d10k.h

tm 13. http://finance.yahoo.com/news/chart-terrify-cable-tv-industry-152729787.html 14. http://business.comcast.com/tools/competitive-matrix 15. http://www.hoovers.com/company-information/cs/competition.comcast_corporation.42bb142511eab416.html