Rogers Communications Inc. has increased its common equity stake in Cogeco Cable Inc. to 30 per cent, reviving speculation that Canada's largest cable TV provider might one day take over the smaller industry player.
The Toronto cable, cellular phone and media company reported yesterday that it had purchased three million subordinate voting shares of Cogeco Cable from a group of unidentified investors. The shares, valued at about $34-million, will be acquired in exchange for 2.7 million of Rogers' class B non-voting shares.
The investment boosts Rogers' subordinate voting stake to 7.2 million shares, 30 per cent of the share class or about a 4-per-cent voting stake in the Montreal-based cable company.
Rogers owns an additional 2.7 million subordinate voting shares in Montreal parent Cogeco Inc., representing about 5 per cent of voting control.
Rogers officials insisted that the transaction was made for investment purposes only. But industry analysts agreed that the stock purchase positions Rogers for an eventual takeover of the smaller company, speculation that has dogged Cogeco Cable for the past three years.
"It should come as no surprise that companies like Rogers, for the right price, will expand their cable operations," said Brahm Eiley, president of Toronto's Convergence Consulting Group Ltd. "We are in a mature market and living in difficult times. We are going to see further consolidation in this industry. It is inevitable."
Cogeco Cable's subordinate voting shares rallied on the news, rising $1 or 10 per cent to $11 on the Toronto Stock Exchange. Stock in Cogeco Inc., owner of an 87-per-cent voting position in the cable company, was up $1.20 to $11.80 on the TSX. Rogers shares were down 14 cents to $13.36.
The Rogers investment comes at a turning point in the cable sector. Operators are under pressure to cut costs and increase margins. The rival telecom sector continues to compete aggressively for market share in a number of services, including high-speed Internet access and, increasingly, for core TV revenue. Several cable players, including Rogers and Cogeco Cable, have a long-term interest in offering local telephone service, a competitive response that may require enormous capital.
Rogers and Cogeco Cable's operations are a strategic fit. The bulk of Rogers' 2.3 million basic cable subscribers live in and around Toronto. About 70 per cent of Cogeco Cable's 840,000 customers reside in neighbouring Ontario cities and towns, including Hamilton, St. Catharines and Kingston. About 240,000 of the company's customers live in rural Quebec.
"Vertical integration is where people are getting the most bang for their buck in a relatively low-growth environment," a Toronto communications analyst said. "You have to look at cost savings and benefits in scale and scope. Cable is very capital intensive. There's lots of benefits from buying properties in the same region."
In addition, the stock purchase puts Rogers subordinate voting interest closer to a watershed 33.3-per-cent stake and significant "bargaining power," another industry analyst said. According to the Canada Corporations Business Act, a two-thirds majority of shares must be voted in favour to pass a series of special resolutions, including the approval of takeover bids.
But any Rogers takeover would hinge on the support of the Audet family. Gestion Audem Inc., a company owned by Henri Audet, chairman emeritus of Cogeco Inc. and Cogeco Cable, controls a 72-per-cent stake in Cogeco Inc.
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