The first rule of mergers and acquisitions is probably don't blindside your investors. With apologies to Warren Buffett, the second rule is probably remember rule number one.
So then what to make of Cogeco Cable Inc.'s huge $1.4-billion foray into the U.S., not long after chief executive Louis Audet went on record saying that the company considers "itself a Canadian company." But outside of Quebec, Cogeco lacked scale. Even in going to Western Canada, he pointed out to The Globe and Mail's Rita Trichur "you'd better have a certain-size business." Priorities, he said, were adding to data centres and updating Cogeco's fibre optic network. He stressed the health of the balance sheet.
The implication was pretty clear. Cogeco would be staying close to home. And that was what investors wanted.
Finally, after a messy foray in Portugal with an expansion gone awry, investors thought they knew what they were getting in Cogeco – a small player with a solid balance sheet that would pay out predictable dividends until it was one day sold at a handsome premium to one of Canada's larger cable companies.
Then Mr. Audet goes and buys a lower-tier cable player in an arguably tougher market than Canada – the United States. Investors are less than impressed, feel understandably shocked, and the stock is getting hammered. There are no synergies. Worse, the deal is hugely dilutive. According to Desjardins, Cogeco is paying 8.3 times enterprise value to estimated earnings before interest, taxes, depreciation and amortization. Cogeco traded at five times. Ouch.
The deal adds regulatory risk and new competitors, and saps the capital that Cogeco will need to keep its operations in Canada top notch, Desjardins points out.
"Rather than making acquisitions in new markets, we believe the company is better served returning the hard-earned cash it has earned in Canada to investors through dividends," Desjardins analyst Maher Yaghi said in a note.