The Montreal-based cable company is offering $3.85 in cash per share — 90 cents per share above Peer 1's closing price of $2.95 Thursday on the Toronto Stock Exchange and a 32 per cent premium on the average share price over 20 days.
Peer 1 (TSX:PIX) shares shot up nearly 30 per cent, or 88 cents, to $3.83 in midday trading Friday, while Cogeco Cable (TSX:CCA) stock slid $1.76, or 4.3 per cent, to $39.21.
The offer values Peer 1 Network's equity at $526 million on a fully diluted basis, while Cogeco says Peer 1 has an enterprise value of $635 million, after including other factors.
"There are compelling strategic, operational and financial reasons for this transaction," Cogeco chief executive Louis Audet told a conference call with analysts.
Among other things it increases the scale of Cogeco's existing large business enterprise business into the small- and medium-sized market which has "significant growth prospects."
"It (also) enlarges our footprint and builds on what we had already put together and it gives us access to a state of the art data centre platform across North America and starting in Europe," he added.
Maher Yaghi of Desjardins Capital Markets said the transaction will increase Cogeco's debt, making it less likely that its dividend will be increased in the short to medium term.
"Overall, we see the strategic rationale in acquiring PEER 1, as it should give Cogeco Cable an additional platform for growth in the lucrative SMB market," he wrote in a report.
He said the acquisition will also enhance the company's capabilities and potentially allow for revenue synergies, but not likely additional profits in the medium term.
Cogeco attempted unsuccessfully to expand into Europe several years ago but had to pull out after major losses with an acquisition in Portugal.
In July, Cogeco Cable Inc., Canada's fourth-largest cable TV company with operations in Quebec and southern Ontario, entered the U.S. market with a US$1.36-billion deal to buy regional cable company Atlantic Broadband.
Atlantic Broadband, headquartered in Quincy, Mass., is the 12th largest cable television system operator in the United States serving customers in western Pennsylvania, southern Florida, Maryland, Delaware and South Carolina.
The U.S. deal was Cogeco's first big acquisition since its failed venture into Portugal.
Audet described Peer 1 is a "leading business and technology service company with talented and committed employees and long-term customer relationships."
And he told analysts that the company's management team would be joining Cogeco.
"Operationally, we will be putting together the Cogeco data services and Peer 1 and we will be benefiting from significant experience in data centre design, building and management, which Peer 1 has perfected."
PEER 1, whose headquarters and primary network centres are in Vancouver, is an Internet infrastructure provider, specializing in managed hosting, dedicated servers, cloud services and colocation.
It earned $50 million in EBITDA on $168 million of revenues in fiscal 2013. About 78 per cent of its revenues are in hosting services, 16 per cent in colocation and six per cent in bandwidth.
"The acquisition of PEER 1 and combining it with Cogeco Cable's existing data centre capabilities, will increase the scale and scope by adding the capability to service an additional 10,000 businesses worldwide through 19 data centres and 21 points-of-presence across North America and Europe," Cogeco said in a release.
Peer 1's board of directors is supporting Cogeco's offer, subject to their right to consider and accept superior proposals. Cogeco will have a five-day right to match a superior proposal and, under some circumstances, will receive a $18.5-million termination fee if the deal isn't completed.
It needs to secure the support of two-thirds of Peer 1 shareholders and has locked up the backing from 62 per cent.
Cogeco said PEER 1's board received an opinion from RBC Capital Markets that described the offer as fair from a financial point of view.