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Enron Mail |
Since the case asked us to evaluate this from Munro's point of view, it is
his job to examine the potential the deals in the best interest of Time's shareholders. Therefore, in my opinion we will have to incorporate the after-tax value to the Time shareholder as one piece of the puzzle. The difficulty with the tax implications to the shareholder is that we do not know the average shareholder's cost basis. It should just be a mention in our memo. As I mention in a previous e-mail, there is no tax implication to the corporation except for the leverage and tax shield. Unless we completely recreate the DCF I don't think we can accurately quantify the tax shield advantage especially since we don't know how the additional leverage will alter the WACC, i.e. what is the optimal WACC of the combined company. Another complication is the difficulty in recreating the DCF is the timing and tax implications of the asset sales which we know to be around $3.5 billion. Our professor doesn't seem to require any advanced calculations. We are probably all right with some approximations. ********************************************** Mark D. Guinney, CFA Consultant Watson Wyatt Investment Consulting 345 California Street, Ste. 1400 San Francisco, CA 94104 (415) 733-4487 ph. (415) 733-4190 fax ____________________Reply Separator____________________ Subject: Re: Time Warner Author: "Dylan Windham" <SMTP:dwindham@uclink4.berkeley.edu< Date: 04/29/2001 12:29 AM Jeff: I have been looking at your numbers and I have a few questions. 1). If we look at this from the stand point of the Time shareholder's, we do not really need to worry about the make-up of Time-Paramount after the merger. Since this is an all cash deal, the purchase price will be given to Time's shareholders. This amount needs to be above the DCF of the Time-Warner deal for us to suggest it. 2). As for the taxes maybe Mark can shed some light on the issue. During the acquisition phase the only taxes that will be paid will be the capital gains paid by Time Shareholders. Paramount will not pay taxes on the purchase. Paramount's tax position will improve due to the increased debt payments. Looking at it from Time shareholder's we really don't care do we? Maybe I am wrong. Otherwise everything looked good. I like the common sized balance sheet. I should be home all day tomorrow. Call me at 925-362-0210 and let me know how I can pitch in. Dylan At 08:55 PM 4/28/01 -0500, Jeff.Dasovich@enron.com wrote: <OK Gang: < <Well, I've been crunching numbers all day, and haven't yet gotten to the <writing. I've attached Dylan's original responses for reference. Figure <it'll be a memo from Time's CEO to the Time Board. < <I've leaving now for Mendocino, but will be back early tomorrow to finish <this up. Please check out the spreadsheet. < <The case is sort of confusing?how do Time's analysts value Time at <$189-212, when they're trading at 109 the day before the announcement of <the deal with Warner. That doesn't jive. Are they saying that, absent <synergies, the combined Time/Warner is worth the enterprise value of Time <at 189-212 plus the enterprise value of Warner at $63-71 (again, the <analysts valuation)? That just seems ridiculous, give where they're <trading. < <Anyway, here's where my analysis is heading----tell me if I'm smoking <crack. < <The deal isn't really $175 per share. It's $175 LESS the taxes that will <have to paid (since it's a purchase deal) PLUS the value of the tax shield <created by the net increase of $8.9B in new debt that Paramount will take <on. Does this seem right? Could folks look at my spreadsheet? I've got <it conceptually set up, but I'm not quite sure how to calculate the taxes <paid under the purchase method or the value of the tax shield (assuming <that this is correct. If I'm just completely out of it with this angle, <just let me know. In any case, seems that there's some value in the <tax-free (Time-Warner) versus the taxable (Time-Paramount) deals. <Presumably, we could take the total enterprise value of Time-Warner <(nontaxed) and compared it to the total enterprise of Paramount-Time <(taxed) and compare the two. I've got a hunch that the Time-Warner number <may win the day, but I haven't gotten that far in the crunching yet. < <In any case, I'll be back around Noon tomorrow and will crank the puppy <out. < <Best, <Jeff < <(See attached file: Timewar_Jeff Calculations.xls)(See attached file: <TimeWarner.doc)
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