Cogeco to pay $1.36 billion for Atlantic Broadband; shares dive

TORONTO Wed Jul 18, 2012 3:31pm EDT

TORONTO (Reuters) - Cogeco Cable Inc, a Canadian company that serves mostly rural customers in Ontario and Quebec, said on Wednesday it will pay $1.36 billion to buy U.S. cable operator Atlantic Broadband in a move aimed at gaining a foothold in the larger U.S. market.

The proposed deal, however, quickly triggered a 15 percent decline in Cogeco's share price, with investors skeptical of Cogeco's success in foreign deals following an unsuccessful foray into Europe.

In February, Cogeco sold its struggling Portuguese cable unit, Cabovisao, at roughly one-tenth the price it paid for it in 2006. Cogeco was unable to weather a harsh pricing war and the broader economic malaise in the country.

Montreal-based Cogeco, which provides cable-TV, high-speed Internet and telephone services, said the Atlantic Broadband acquisition will give it sizable opportunities for growth.

Atlantic Broadband is owned by private equity firms ABRY Partners and Oak Hill Capital Partners and has operations that service about 250,000 customers in Pennsylvania, Maryland, Florida, Delaware and South Carolina.

"This acquisition marks an attractive entry point into the U.S. market for Cogeco Cable," said Chief Executive Louis Audet.

Analysts, though, sounded dubious on a hastily arranged conference call in which Audet and other executives had to fend off tough questions about the price being offered, Cogeco's ability to succeed outside its home market, and Atlantic Broadband's growth prospects.

RBC Capital Markets analyst Drew McReynolds warned that the deal results in "increased execution risk" for Cogeco and could force the company to take its eye off the ball in Canada.

"Furthermore, we see excess free cash flow now largely allocated to debt repayment, rather than dividend increases, over the next few years," he wrote in a note to clients.

CASH AND DEBT

Cogeco said it would finance the deal with a combination of cash and debt. It plans to use $150 million in cash, along with $550 million of a $750 million credit facility to fund the deal. Bank of America Merrill Lynch is also arranging a $660 million committed debt facility.

In a research note, RBC Capital Markets bond analyst Andrew Calder said one of the main reasons behind RBC's hesitation to upgrade Cogeco Cable's bonds was "the potential for another off-the-radar or off-strategy acquisition".

"Investors have long memories and Cogeco recently divested the unsuccessful Cabovisao asset in Portugal," he said. "Now ... 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 favorable this time around."

Cogeco Cable's share price fell 15.3 percent to C$37.70 on the Toronto Stock Exchange after the deal was announced on Wednesday morning. Shares of its parent, Cogeco Inc, fell 13 percent to C$37.

In a note to clients, Canaccord Genuity analyst Dvai Ghose said the sell-off in Cogeco shares might also be prompted by some investor concerns that Cogeco may have to issue equity to reduce its debt load further down the road.

Ghose said the offer values Atlantic Broadband at 8.3 times its estimates 2013 earnings before interest, taxes, depreciation and amortization (EBITDA). That, he noted, is well in excess of Cogeco Cable's own enterprise value of five times estimated fiscal 2013 EBITDA.

Canada's largest mobile phone company, Rogers Communications Inc, which owns significant interests in both Cogeco Inc and subsidiary Cogeco Cable, declined to comment on the proposed deal. Rogers shares were down less than 1 percent at C$37.70 on Wednesday afternoon.

CANADA SATURATED

"There is room for further U.S. growth, either through an increase in penetration ... or through tuck-in acquisitions, a number of which are available in the United States, in contrast to Canada, where the consolidation is essentially over," Audet said on the conference call.

Cogeco Cable warned last week that its Canadian business would slow as tough competition makes it more difficult to sign up customers. It cut its customer growth forecasts by 10 percent as it lost television customers and recorded slower growth in Internet and telephone services.

Larger rivals such as BCE Inc and Quebecor Inc operate in the same markets and are expanding into Cogeco's rural heartland.

Audet said Atlantic's low penetration rate - the number of customers divided by the number of homes it would be possible to service in existing markets - means it has promising growth potential.

"This transaction at this stage is not about synergies. It's about establishing a healthy, promising base from which to grow in the United States," he said.

The deal, expected to close before the end of the year, will expand Cogeco's client base to more than 1.1 million basic video customers across Canada and the United States. Gleacher and Co acted as Cogeco's financial advisor on the deal, which still must win antitrust and other regulatory approvals.

($1=$1.01 Canadian)

(Reporting by Alastair Sharp and Euan Rocha; Editing by Peter Galloway)

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