Cogeco Communications Inc. has struck a deal to acquire Quebec-based cable company DERYtelecom for $405-million, a move Cogeco’s chief executive said proves its capacity to grow into an even larger regional player in the telecom business.
The deal comes amid a $11.1-billion hostile bid for Cogeco Communications and its parent company, Cogeco Inc., by Rogers Communications Inc. and New York-based cable company Altice USA Inc.
The unsolicited offer – which has been rejected by the boards of the Cogeco companies and their controlling shareholders, the Audet family – raised questions about the Montreal-based cable company’s growth prospects in a capital-intensive industry dominated by larger rivals.
Cogeco CEO Philippe Jetté said Wednesday the acquisition of DERYtelecom "demonstrates once again our ability to execute on our growth strategy by sourcing compelling transactions, thanks to the strong relationships we have cultivated with owners of cable companies.
“When those owners choose to sell we are the preferred acquirer,” he added.
Mr. Jetté laid out Cogeco’s growth strategy in an interview with The Globe and Mail last month, saying it could easily do another billion-dollar acquisition in the United States, a “highly fragmented” market it entered in 2012 through its US$1.36-billion purchase of Atlantic Broadband.
Cogeco has also committed to invest $1-billion over the next four years to expand and upgrade its cable networks in Ontario and Quebec, and is looking to enter the wireless market in Canada if the Canadian Radio-television and Telecommunications Commission forces the current national carriers to open up their networks to resellers.
Cogeco, the second-largest cable company in Quebec after Videotron, said it began discussions with third-ranked DERYtelecom more than a year ago. The sale was not part of an auction process; similar to its acquisition of U.S.-based Metrocast in 2018, Cogeco struck a deal through a one-on-one transaction, the company said.
“The acquisition of DERYtelecom is a strong strategic fit because it expands our footprint, and it comes at an attractive valuation because we believe there is upside through the rollout of new products such as IPTV [internet protocol television] and faster internet that will be attractive to DERYtelecom customers,” Mr. Jetté said in an e-mail to The Globe.
The deal will also provide an opportunity for Cogeco to further expand its services in rural areas, including through government funding already awarded to DERYtelecom, the company said in a statement.
RBC analyst Drew McReynolds said he expected Cogeco’s next acquisition to be in the U.S. broadband market, but called the DERYtelecom deal “highly complementary” to Cogeco’s Canadian broadband business, “given the adjacency to the Quebec footprint, similar telecom offerings, the realization of synergies and the potential for rural extension.”
TD analyst Vince Valentini, meanwhile, said Cogeco should instead be looking to surface value for its shareholders, such as by spinning out Atlantic Broadband via an initial public offering.
“This relatively small acquisition at a premium valuation is not the type of shareholder-friendly initiative that we would expect Cogeco to put forward as an alternate course of action to accepting a $150 [a share] takeover offer,” Mr. Valentini said in a note to clients.
Altice and Toronto-based Rogers sweetened their bid for the Cogeco companies on Sunday and set a deadline of Nov. 18, when the offer will expire if the suitors don’t see a path forward. The proposed deal would see Altice, the fourth-largest cable company in the U.S., acquire Atlantic Broadband, while Rogers would snap up Cogeco’s Canadian operations. The acquisition cannot go through without the support of the Audets, who control both Cogeco companies through multiple voting shares and have repeatedly stated their shares are not for sale.
DERYtelecom offers internet, television and telephone services to about 100,000 customers in more than 200 municipalities across the province.
The Saguenay, Que.-based company had $105-million in revenue and $44-million in EBITDA (earnings before interest, taxes, depreciation and amortization) in its most recent fiscal year, which ended Aug. 31, Cogeco said.
Cogeco will pay for the acquisition through a combination of cash and debt. The deal is subject to regulatory approvals and is expected to close by the second quarter of fiscal 2021.
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Alexandra Posadzki