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Cogeco pinched as Portuguese customers pull the plug

Cogeco Cable Inc. President and CEO Louis Audet addresses the Montreal-based cable and internet company's 2004 annual general meeting.

J.P. Moczulski/CP

As policy makers rush to contain the euro zone's burgeoning debt crisis, the deteriorating economic situation has claimed an unlikely Canadian victim.

In struggling Portugal, where the debt-strapped government is increasing taxes and reducing benefits, citizens are re-evaluating their finances and cutting back drastically on discretionary spending. One of the first things to go, it seems, has been their high-end TV packages with Cabovisao SA, a Portuguese cable provider.

Montreal-based Cogeco Inc. , in a rare international move for a Canadian telecom company, acquired Cabovisao in a bold $660-million bid in 2006. But the worsening situation for ordinary people in Portugal has turned a growing headache into a stinging loss for Cogeco, which on Thursday announced it had written off its Portuguese investment, resulting in a $56.7-million third-quarter loss.

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The company said it is unrealistic to expect subscriber growth in Portugal in the near-term, as its telecom rivals slash prices in an attempt to retain customers.

"You now have customers squarely opting out of [cable TV]" said Louis Audet, Cogeco's president and chief executive officer. "These are economic circumstances that we have not, nor has anyone here, witnessed in North America. These are very unique to the circumstances in Portugal."

Mr. Audet's decision to enter Portugal was a controversial one with investors, who feared that it would distract the company and dilute the results from its strong Canadian operations. Indeed, the company increased its dividend on Wednesday by 18 per cent to 80 cents, because the results from its domestic unit were good.

Adjusted profit, which excluded the writedown in Portugal, was $16-million or 96 cents a share, compared with $10.7-million or 64 cents a year earlier. But the earnings did take on a theme that has become achingly familiar for investors: While Cogeco's Canadian operations continue to generate lots of revenue and pick up more subscribers, fierce competition and subscriber losses in Portugual have remained a huge drag.

Analysts have been bullish on Cogeco for some time. Unlike rivals such as Shaw Communications Inc., which is facing TV competition from Telus Corp., Cogeco has fewer competitors in its mainly rural and suburban markets in Ontario and Quebec. As a result, it beat expectations in the quarter, gained more subscribers in Canada than expected, and actually put through price increases.

The company also offered rosy financial guidance for 2012.

The good news, though, was slightly overshadowed by questions about what the troubles in Portugal might mean for Cogeco's future there - whether the company should stay the course, sell the asset, or dig deeper to make more foreign acquisitions.

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Scotia Capital analyst Jeff Fan veered more toward the negative view of Cogeco's overseas venture.

"We hope this paves the way for a sale," he wrote in a note to investors, "as Portugal is still cash-flow negative and dilutes the strong Canadian results."

Greg MacDonald of Macquarie Securities, on the other hand, wrote that the "second major writeoff introduces the question of whether further European acquisitions are in the cards."

Cogeco (CGO)

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