Cogeco Communications Inc. is making a bigger bet on its U.S. strategy, looking for subscriber growth in mid-sized markets with a $1.4-billion (U.S.) deal to acquire the remainder of the MetroCast brand of cable assets it does not already own.
Montreal-based Cogeco, which has been in pursuit of the MetroCast assets for two years, is also bringing in a heavy-hitting minority partner in the Caisse de dépôt et placement du Québec, which it said Monday will take a 21-per-cent stake in the company’s U.S. cable business in exchange for putting up $315-million of the MetroCast purchase price.
Faced with slowing growth and a limited service footprint at home in Canada – it operates in parts of Quebec and Ontario – Cogeco is looking for momentum in the United States, where there are still more family-owned, independent cable operators left to buy. It sees opportunity in smaller U.S. cities, where it believes it can take on less aggressive telephone company competitors to snap up new TV and Internet customers in both the residential and business markets.
Cogeco first acquired MetroCast’s Connecticut cable operations for $200-million in 2015, a time when its other assets in New Hampshire, Maine, Pennsylvania, Maryland and Virginia were not for sale. But Cogeco chief executive officer Louis Audet said in an interview he stayed in touch with MetroCast’s family-controlled privately held owner, Harron Communications LP, and eventually convinced them to sell.
He was eager to buy, he says, because MetroCast serves mainly smaller cities with populations of about 50,000, where he believes Cogeco can win customers and grow at a rate of 6 per cent to 7 per cent a year, much faster than growth of about 3 per cent back in its Canadian cable markets.
“It is clear that these markets, which the established phone companies consider as secondary markets, are markets where we do very well,” Mr. Audet said of the competition from U.S. telephone operators, which he says have “neglected” these “tier two” cities.
Cogeco says telcos have only built fibre-optic service – which can deliver faster Internet speeds and television service – in about 8 per cent of the MetroCast service area and most of the competition for TV customers comes from satellite options.
Montreal-based Cogeco faces tougher competition in Canada, where its main rival, BCE Inc., has invested more in fibre and has an appealing IPTV (Internet protocol television) product. A company spokeswoman said on Monday that an IPTV alternative to cable was available in 48 per cent of Cogeco’s Canadian footprint as of the end of February.
“The [MetroCast] networks are in very good condition, but the prior owner did not stress bundles or marketing,” Mr. Audet said, adding, “It provides us with a great opportunity to increase penetration – not only on the residential side but also on the commercial side.”
Some have speculated that Cogeco’s U.S. business could itself become an acquisition target, but Mr. Audet said on Monday he has no plans to sell and hopes to eventually acquire more cable operations south of the border.
First, he said, Cogeco will focus on maintaining its investment-grade status by getting its debt leverage back under control. After the deal closes, its debt will be 3.6 times EBITDA and the company said it hopes to get that down to 3.0 times within 18 months.
“As soon as we get that in place, of course, we’re ready for more [acquisitions], whether they’re tuck-in or a bit larger,” Mr. Audet said.
The potential for growth was enough to interest the Caisse in the MetroCast deal. The Caisse, which is Canada’s second-largest pension fund, had previously spoken to Cogeco of its interest in pursuing the U.S. cable market, Mr. Audet said.
The MetroCast assets will build on Cogeco’s existing foray into the United States, which began in 2012 with the $1.36-billion purchase of Quincy, Mass.-headquartered Atlantic Broadband. That move came shortly after a failed entry into the Portuguese market and at the time, investors questioned Cogeco’s ability to execute an international strategy.
But Monday’s news that its Atlantic Broadband subsidiary would acquire the MetroCast operations from Harron was better received, with Cogeco’s shares gaining 2.9 per cent to close up $2.29 (Canadian) at $82.09. MetroCast is a “very good asset” with solid networks, said Macquarie Capital Markets Canada analyst Greg MacDonald. With about 233,000 television, Internet and home-phone customers, it will increase Cogeco’s U.S. operations by close to 40 per cent to 835,000 subscribers.
The price paid is high, he said, noting that even with $310-million (U.S.) in tax benefits that Cogeco expects to realize with the transaction, the purchase price is more than nine times the $121-million MetroCast is forecast to report in EBITDA in 2017 (EBITDA means earnings before interest, taxes, depreciation and amortization).
That’s notable, Mr. MacDonald said, because Cogeco’s stock itself is only trading at 6.4 times EBITDA.
But the Caisse’s involvement is a positive development, he said, as it “lowers leverage risk and adds credibility to the deal and U.S. strategy over all.”
Cogeco says it will use debt issued by Atlantic Broadband to fund the rest of the purchase price. The deal requires regulatory approvals and Cogeco says it expects it to close in January, 2018.Report Typo/Error