Time Warner Cable 2007 Annual Report Download - page 100

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valuation model, and $1.857 billion in cash (the “TWC Redemption”). In addition, Comcast’s 4.7% interest in TWE
was redeemed in exchange for 100% of the equity interests of a subsidiary of TWE holding both cable systems
serving 162,000 basic video subscribers, with an estimated fair value of $630 million, as determined by
management using a DCF and market comparable valuation model, and $147 million in cash (the “TWE
Redemption” and, together with the TWC Redemption, the “Redemptions”). The DCF valuation model was
based upon the Company’s estimated future cash flows derived from its business plan and utilized a discount rate
consistent with the inherent risk in the business. The TWC Redemption was designed to qualify as a tax-free split-
off under section 355 of the Internal Revenue Code of 1986, as amended (the “Tax Code”). For accounting purposes,
the Redemptions were treated as an acquisition of Comcast’s minority interests in TWC and TWE and a disposition
of the cable systems that were transferred to Comcast. As of December 31, 2006, the purchase of the minority
interests resulted in a reduction of goodwill of $738 million related to the excess of the carrying value of the
Comcast minority interests over the total fair value of the Redemptions. In addition, the disposition of the cable
systems resulted in an after-tax gain of $945 million included in discontinued operations for the year ended
December 31, 2006, which is comprised of a $131 million pretax gain (calculated as the difference between the
carrying value of the systems acquired by Comcast in the Redemptions totaling $2.969 billion and the estimated fair
value of $3.100 billion) and a net tax benefit of $814 million, including the reversal of historical deferred tax
liabilities of $838 million that had existed on systems transferred to Comcast in the TWC Redemption.
Following the Redemptions and the Adelphia Acquisition, on July 31, 2006, TW NY and Comcast swapped
certain cable systems, most of which were acquired from Adelphia, each with an estimated value of $8.700 billion,
as determined by management using a DCF and market comparable valuation model, in order to enhance TWC’s
and Comcast’s respective geographic clusters of subscribers (the “Exchange” and, together with the Adelphia
Acquisition and the Redemptions, the “Transactions”), and TW NY paid Comcast $67 million for certain
adjustments related to the Exchange. The DCF valuation model was based upon estimated future cash flows
and utilized a discount rate consistent with the inherent risk in the business. The Exchange was accounted for as a
purchase of cable systems from Comcast and a sale of TW NY’s cable systems to Comcast. The systems exchanged
by TW NY included Urban Cable Works of Philadelphia, L.P. (“Urban Cable”) and systems acquired from
Adelphia. The Company did not record a gain or loss on systems TW NYacquired from Adelphia and transferred to
Comcast in the Exchange because such systems were recorded at fair value in the Adelphia Acquisition. The
Company did, however, record a pretax gain of $34 million ($20 million, net of tax) on the Exchange related to the
disposition of Urban Cable, which is included in discontinued operations for the year ended December 31, 2006.
The purchase price for each of the Adelphia Acquisition and the Exchange is as follows (in millions):
Cash consideration for the Adelphia Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,935
Fair value of equity consideration for the Adelphia Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500
Fair value of Urban Cable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,852
Other costs consist of (i) contractual closing adjustments totaling $56 million, (ii) $116 million of total
transaction costs and (iii) $55 million of transaction-related taxes.
95
TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)