Shareholders wary of Cogeco move
Stocks dip 15% after company announces Boston-area purchase
TORONTO – With limited options for growth at home, Cogeco Cable Inc. is once again venturing abroad, entering Wednesday into a definitive agreement to buy U.S. provider Atlantic Broadband Inc. for $1.36 billion.
But with the cable company’s fingers already burned once outside Canada, the surprise foray had investors in flight.
Shares in the country’s fourth-largest cable operator dropped 15 per cent after the TV and Internet provider announced the largely debtfinanced deal for Atlantic Broadband, a mid-size provider based just outside of Boston.
Stockholders could be forgiven for their reservations.
It has been four months and change since Cogeco divested of Portuguese cable subsidiary Cabovisao, a distant business that for years struggled to grow.
Amid the spiralling EU debt crisis and faltering Portuguese economy last year, Cogeco wrote down the unit completely in July. In February, Cabovisao was sold for about $60 million, a fraction of the $660 million Cogeco paid for Cabovisao in 2006.
Montreal-based Cogeco is sticking closer to home this time, pur- chasing the 14th-biggest television, Internet and home-phone provider in the United States with more than 250,000 basic TV subscribers on systems located from western Pennsylvania down the Eastern Seaboard to Miami.
Once the deal closes this year, total basic subscribers for Cogeco will top 1.1 million, a figure that compares with 2.28 million at larger Canadian peer Rogers Communications Inc. and 2.1 million at phone competitor Bell Canada Inc.
On a conference call with skeptical analysts wary of the last foreign venture, chief executive Louis Audet outlined the differences between the Portuguese misadventure and the current agreement.
“The systems are situated close to home, in the same time zones. The competitive climate is typical of what exists in non-large urban markets,” he said.
They are the same kinds of markets – small outlier cities and towns – that Cogeco is used to, with its Canadian operations spread across a footprint from Windsor, Ont., east through Quebec.
The executive also described the U.S. viewer, hooked for decades on cable, as a far more stable sort compared with fickle Europeans now coping with more severe economic conditions.
“It’s a market that behaves, from a sales (and) margin standpoint, a lot like the Canadian market,” Audet said. “I respect the worry, but in this case, you couldn’t be closer to home.”
Further acquisitions in the U.S. are possible, even probable, he added.
Audet characterized the deal as the company’s “first step into the United States.” Cogeco could seek future “tuck-in acquisitions, a number of which are available in the United States in contrast to Canada where the consolidation is essentially over,” he said.
Indeed, as this country’s television-distribution market has integrated under a handful of providers, Cogeco itself has been a longrumoured takeout target for larger operators, especially Rogers.
Rogers is the incumbent operator in virtually every market in Ontario neighbouring the smaller cable firm. The Toronto-based giant also owns 32 per cent of Cogeco’s common shares, though the Audet family remains the controlling voteholder.
Audet has repeatedly said he is not a seller and the Atlantic acquisition reinforces that point.
About $150 million of cash on hand is being used to finance the bid, while $550 million has been drawn down from a credit facility. A new $660-million loan arranged through Atlantic Broadband, whose private equity owners, ABRY Partners and Oak Hill Capital Partners, were seeking a sale, will also be tapped.
“This transaction is about establishing a healthy, promising base in the United States,” Audet said.