BUSINESS

Cogeco acquiring Atlantic Broadband in US$1.36B deal to get into U.S. market

07/18/2012 10:51 EDT | Updated 09/17/2012 05:12 EDT
MONTREAL - Cogeco Cable Inc. will get a toehold in the U.S. market with a US$1.36-billion deal to buy a regional provider, the first big acquisition for Canada's fourth-largest cable TV company since its failed venture into Portugal.

The deal that will see Cogeco (TSX:CCA) purchase Atlantic Broadband sent the Montreal cable company's shares tumbling Wednesday on the Toronto Stock Exchange.

Shares closed down almost 15 per cent, or $6.60, to $37.90, as investors appeared to grow jittery about potential risks of another foreign acquisition after a disappointing performance in the European cable market. Shares in parent company Cogeco Inc. (TSX:CGO) dropped 13.5 per cent, or $5.74, to $36.66.

But Cogeco president and CEO Louis Audet was adamant there shouldn't be any concerns about the U.S. acquisition.

"This is an attractive entry point into the United States market," Audet said during a conference call with analysts to discuss the deal.

The acquisition will give Cogeco, which operates primarily in Ontario and Quebec, a presence in five eastern states stretching from Pennsylvania to Florida and a platform for expansion.

"There is room for further U.S. growth, either through an increase in penetration of all of the services or through tuck-in acquisitions, a number of which are available," Audet added.

Atlantic Broadband is the 14th-largest cable television system operator in the United States, with operations in Pennsylvania, Florida, Maryland, Delaware and South Carolina and 252,000 basic cable customers. The privately owned company also offers Internet and telephone services to residential and business customers.

Cogeco Cable has had trouble expanding beyond its Canadian base. An expansion into Europe through the purchase of a Portugal's Cabovisao turned into a money-losing proposition. Cogeco sold its Portuguese cable operation earlier this year for about $59 million after purchasing it for around $600 million in 2006.

When asked if shareholders should be concerned after the failed Portuguese acquisition, Audet said there shouldn't be any worry.

"I am sorry that people could imagine such concerns," he told analysts.

Audet noted there was little room for acquisitions left at home and said "consolidation is substantially over" in Canada.

But RBC Capital Markets analyst Andrew Calder said investors have long memories of the foray into Portugal and want better results with this venture closer to Cogeco's home base.

"We've been here before," Calder said in a research note. "Investors have long memories and Cogeco recently divested the unsuccessful Cabovisao asset in Portugal.

"Now, several months later, the company has announced another surprise acquisition in a new operating territory. Investors will be hoping that the competitive conditions and execution prove to be more favourable this time around."

Credit rating agency DBRS said it has placed Cogeco Cable's debt rating of BBB (low) under review with negative implications as a result of the U.S. acquisition.

DBRS said it's concerned about Cogeco's ability to compete effectively in the American market and its debt level.

"The rating action is also based on DBRS' concern that the acquisition would weaken Cogeco's financial risk profile beyond levels appropriate for the current rating category," DBRS said in a note.

The acquisition is expected to be financed by $150 million of cash on hand, $550 million of additional bank debt, and the assumption of $660 million of debt at Atlantic Broadband, DBRS said.

Desjardins Financial analyst Maher Yaghi said he would have preferred a dividend increase for shareholders, or the acquisition of a smaller cable company or data centre within Canada.

"Negative sentiment regarding the previous acquisition of Cabovisao in Portugal remains fresh in investors' minds," Yaghi said in a research note.

"Rather than making acquisitions in new markets, we believe the company is better served returning the hard-earned cash it has earned in Canada to investors through dividends.

"We have been arguing that Cogeco Cable needs to be more aggressive in improving its residential services in Canada to face coming competition from (Internet Protocol television)," he added.

The U.S. market has often been difficult for Canadian companies to crack.

Both Rogers (TSX:RCI.B) and Shaw (TSX:SJR.B) — now Canada's two largest cable companies — made attempts at different times several years ago, but later withdrew.

Audet said Atlantic Broadband's market is geographically and competitively similar to Cogeco's.

"What you have in the U.S. is a competitive market, but different actors in various markets. It's very fragmented."

Job losses at Atlantic Broadband aren't expected, with Cogeco saying it will absorb all of its employees.

The proposed deal will require several regulatory approvals, including from U.S. competition and telecommunications bodies.

Atlantic Broadband is currently owned by a fund managed by ABRY Partners and by Oak Hill Capital Partners, LP. Oak Hill Capital said it had no comment on the acquisition.