TEXT - S&P may cut Cogeco Cable Inc rating

Fri Dec 21, 2012 10:13am EST

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Overview
     -- Montreal-based cable services provider Cogeco Cable Inc. has entered 
into an agreement to acquire Vancouver-based data center services provider 
Peer 1 Networks Enterprises Inc. (not rated).
     -- The C$634 million purchase will raise Cogeco Cable's pro forma 
adjusted debt-to-EBITDA ratio to the high-3x area. 
     -- As a result, we are placing our 'BB+' long-term corporate credit 
rating on Cogeco Cable on CreditWatch with negative implications.
     -- The CreditWatch placement reflects the company's higher debt leverage 
and our concerns about its ability to reduce debt leverage to our 3.5x target 
in the near term.

Rating Action
On Dec. 21, 2012, Standard & Poor's Ratings Services placed its ratings on 
Montreal-based cable services provider Cogeco Cable Inc. and its subsidiaries, 
including its 'BB+' long-term corporate credit rating on the company, on 
CreditWatch with negative implications. 

This CreditWatch placement follows Cogeco Cable's announcement today that it 
has entered into an agreement to acquire Vancouver-based data center services 
provider Peer 1 Network Enterprises Inc. (not rated) for C$634 million; the 
price includes the assumption of about C$109 million in debt. The purchase 
price represents a valuation of about 15x annualized run-rate EBITDA of US$43 
million for Peer 1 based on results from the three months ended Sept. 30, 
2012. We understand that Cogeco Cable has secured C$625 million of committed 
bank financing to fund the purchase. The transaction is subject to Peer 1 
shareholder and regulatory approvals, and we expect it to close by early 
February 2013.

Peer 1 is an Internet infrastructure provider, delivering managed, dedicated, 
co-location and network services through 19 data centers and 21 
points-of-presence located in 14 cities across North America and Europe, 
connected together by its own Internet protocol backbone network. The 
company's services are designed to enable its customers to focus on their 
businesses rather than the complexities of maintaining or expanding their 
Internet infrastructure. Peer 1's principal target market is small and midsize 
businesses whose activities increasingly depend on the Internet. The company 
has a customer base of more than 10,000 businesses and derives the vast 
majority (78%) of its revenue from managed and dedicated hosting services.

Rationale
Standard & Poor's views the Peer 1 purchase as having a neutral overall impact 
on Cogeco Cable's "satisfactory" business risk profile. We view the 
acquisition as consistent with the company's focus on evolving its business 
telecom operations, which in our opinion have higher growth prospects than the 
company's residential cable operations, which are facing increased competition 
and market maturity. We estimate that, on a pro forma basis, Peer 1 will 
represent about 10% of Cogeco Cable's consolidated revenue, while the 
company's combined business telecom operations could represent close to 17% of 
consolidated pro forma revenue with mid-teen-percent revenue growth potential 
in the next couple of years. Although Peer 1's profitability (at 27.5% EBITDA 
margin for the three months ended Sept. 30) is substantially lower than that 
of both Cogeco Cable's residential cable and commercial telecom operations, we 
believe profitability and return on capital should improve as data center 
utilization rates at existing sites increase and additional capacity is 
created at modest incremental investment. More notably, we expect the 
acquisition to improve Cogeco Cable's scale and scope in the fast-growing data 
center business, an aspect that, in our opinion, is critical to the division's 
long-term viability and success. 

Financially, the acquisition will increase Cogeco Cable's adjusted 
debt-to-EBITDA ratio to the high-3x from about 3x pro forma the recently 
completed C$1.4 billion debt-funded purchase of U.S.-based cable provider 
Atlantic Broadband LLC (B+/Watch Pos/--). We view this level of debt leverage 
to be high for the ratings and greater than our publicly articulated downgrade 
threshold of 3.5x for Cogeco Cable. While we expect some deleveraging from 
EBITDA growth and possibly modest debt reduction in the medium term from 
excess cash flow, we remain concerned about the company's ability and 
willingness to deleverage to our target credit ratios on as sustained basis 
given its acquisitive growth agenda.  

Cogeco Cable is the second-largest cable operator in the provinces of Ontario 
and Quebec in terms of basic cable TV subscribers. The company offers analog 
and digital cable TV, high-speed Internet, and digital telephony services to 
more than 1.6 million households, typically in midsize urban communities. The 
company also provides data connectivity and co-location services to business 
customers. On Nov. 30, 2012, Cogeco Cable completed the C$1.4 billion purchase 
of U.S.-based Atlantic Broadband, a midsize cable system operator serving 
approximately 250,000 basic subscribers.

CreditWatch
The CreditWatch negative placement indicates that we could either affirm or 
lower the ratings on Cogeco Cable in the near future. Standard & Poor's will 
likely resolve this CreditWatch once it has evaluated the company's future 
capital allocation plan, specifically its ability and willingness to reduce 
leverage to below our 3.5x target on a sustained basis. In addition to the 
company's near-to-medium term growth plans, we will also assess Cogeco Cable's 
liquidity position given the increased scale and scope of operations and large 
drawdown on its bank facilities to fund two large acquisitions. Given the 
possibility of additional senior secured debt at Cogeco Cable to support the 
Peer 1 purchase, our review will also assess the impact, if any, on the '1' 
recovery rating of the company's senior secured debt.

Related Criteria And Research
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Cogeco Cable Inc.
Ratings Placed On CreditWatch/Recovery Rating Unchanged
                           To                      From
Corporate credit rating    BB+/Watch Neg/--        BB+/Stable/--
Senior secured debt        BBB/Watch Neg           BBB
 Recovery rating           1                       1
FILED UNDER:
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