Louis Audet, President and Chief Executive Officer of Cogeco Cable, is shown in Toronto, On. in this file photo.NATHAN DENETTE
Cogeco Cable Inc. has announced a deal to buy U.S. cable company MetroCast Communications of Connecticut LLC for $200-million (U.S.), making good on its promise to look for U.S. acquisition opportunities.
Montreal-based Cogeco said Monday that its wholly-owned subsidiary Atlantic Broadband will purchase the assets of MetroCast Connecticut, which has about 23,000 TV customers, 22,000 Internet customers and 8,000 phone customers in eastern Connecticut.
Cogeco said it expects MetroCast Connecticut to have $45-million in revenue and $21-million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) this year.
Cogeco first bought Quincy, Mass.-headquartered Atlantic Broadband for $1.36-billion in 2012. Since that time, management has said Cogeco would pursue further "tuck-in" acquisitions south of the border if they made sense taking into account the company's debt leverage as well as the impact of foreign exchange.
"Once our debt-to-EBITDA ratio came down to the level we had committed to … we wanted to resume growth," Cogeco chief executive officer Louis Audet said in an interview. He added that he hopes to pursue a strategy in the United States similar to what the company once did in Canada, where the cable market is already more consolidated.
"From 1987 to 2001, we purchased small, medium and occasionally large cable companies [in Canada]. Every year we'd do one or two and it grew to become what it's become," he said. "So it's the same idea here: We wanted to establish a beachhead in the United States and that's what we did with Atlantic Broadband almost three years ago now. There are more small and medium cable systems to be consolidated there and we would like to take advantage of that growth opportunity."
The company said it plans to finance the deal through debt issued by Atlantic Broadband and expects the transaction to close in the third quarter of this year pending regulatory approvals.
Once the deal is approved and integration of the new asset is under way, "We can dig our heads up and look around once more," Mr. Audet said of the company's plans to make more U.S. cable acquisitions.
He said he sees growth potential in MetroCast Connecticut's geographic region due to lower penetration rates for cable-based television and Internet services compared with Cogeco's Canadian markets.
Macquarie Capital Markets Canada Ltd. analyst Greg MacDonald said Cogeco's experience with Atlantic Broadband to date lends some credibility to that strategy, but he added that "we suspect the potential for near-term cost synergies may be more relevant to the stock."
The company said the deal is valued at 7.5 times EBITDA on an adjusted basis, which takes into account "the tax benefit of amortizing intangible assets in an asset purchase."
Mr. MacDonald estimates the deal is valued at 9.5 times EBITDA on an unadjusted basis. Although the deal is relatively small – at just 4 per cent of Cogeco's current enterprise value – he said key positives are the low cost of financing as well as increased exposure to U.S. business at a time when the U.S. dollar is outperforming the Canadian dollar.
"The multiple paid is very much in line with recent multiples paid for small cable assets in the U.S.," Desjardins Securities Inc. analyst Maher Yaghi said, adding: "The acquired assets share the same billing, telephony and set-top box suppliers with Atlantic Broadband; hence, the integration should be easier than usual owing to these similar aspects."
Cogeco's U.S. business has been outperforming its Canadian operations on revenue growth. In a bid to stave off subscriber losses in Canada, Cogeco recently implemented a strategy it deployed with some success at Atlantic Broadband with the launch of the TiVo digital video recorder platform to Canadian customers.
Under pressure from Internet protocol television (IPTV) offerings being launched by telephone operators, many cable companies have been working on plans to offer their own IP-based platforms, which allow for increased interoperability between devices and more advanced PVR functions.
However, last year Cogeco wrote off a $32-million investment in an IPTV initiative and instead announced plans to roll out TiVo to Canadian subscribers.
Cogeco first launched TiVo with Atlantic Broadband subscribers in 2013 and it began offering the service in Canada last fall, starting with its Ontario market and expanding to Quebec customers in March.
Mr. Audet said the company also plans to offer TiVo to its new MetroCast Connecticut customers.