Investors punished Cogeco Cable Inc.'s stock yesterday to signal their disagreement with the company's surprise decision to spend $1.36-billion (U.S.) on U.S. cable provider Atlantic Broadband, so what should future pensioners make of the deal that Canada Pension Plan Investment Board struck just hours later for an even larger U.S. cable company?
First the Atlantic Broadband deal. In an investor presentation (which, on a side note, I can't help but notice is saved as a PowerPoint document on Cogeco's website titled "Project_Bruins"…), Cogeco says the deal represents a "unique" opportunity to enter the U.S. market.
Atlantic Broadband is the 14th largest cable provider in the U.S., its network has already received a significant amount of investment, and there is still plenty of room for it to further penetrate its existing markets (namely in Western Pennsylvania, Maryland, South Carolina and Miami Beach).
But Cogeco's investors lopped $6.60, nearly 15 per cent, off the company's stock price yesterday amid concerns from analysts and rating agencies. Trevor Bateman, an analyst at BMO, quickly compiled a list of eight reasons why the deal was a bad idea, including the increase in leverage and the distraction the deal will pose for Cogeco's management. In addition, he said he is "leery of Atlantic Broadband's small scale in the U.S. and its ability to compete in the hyper-competitive and structurally different market," adding that Cogeco "does not have a good track record successfully executing acquisitions outside of its Canadian geographic footprint."
That last criticism certainly couldn't be applied to CPPIB. Rather than venturing alone into foreign markets, the private equity arm of the pension plan tends to team up with funds it knows well who have a particular expertise. In this instance, it is partnering with European private equity firm BC Partners on the buyout of Cequel Communications Holdings LLC (which does business as Suddenlink Communications), the seventh biggest cable operator in the U.S.
Suddenlink's management is also participating. Collectively the buyers are investing just under $2-billion of equity and $500-million of debt into the company, and are taking on about $4-billion in existing liabilities.
Leverage is what private equity players have historically done best, and likely goes a ways towards explaining why private equity has played a large role in this industry. (The consortium is buying Suddenlink from Goldman Sachs Capital Partners, Quadrangle and Oaktree Capital Management. Cogeco is buying Atlantic Broadband from ABRY Partners and Oak Hill Capital Partners).
BC Partners has done sizable deals in Europe's cable industry, and CPPIB is hoping to make the most of that knowledge. The fact that Suddenlink's management team is staying was also a key factor.
"Cable is an industry we know well in both Europe and the United States, and epitomizes the defensive growth characteristics we typically seek in an investment," said BC Partners co-chairman Raymond Svider.
As for concerns about a hypercompetitive market – CPPIB claims to have an answer to that one. It says that Suddenlink operates outside of the major urban centres, in areas where it thinks the battle is a little less severe.
Private equity players – lured by the potential for stable cash flow from subscribers and potentially impressive profit margins – appear to have a decent track record of profitable deals in this sector. Goldman is believed to be more than doubling its money on its Suddenlink investment. And Suddenlink's management believes the new owners will be rewarded if they invest in the firm's infrastructure and technology – a strategy that would stretch the patience of a public company that had to answer to shareholders quarterly.
The track record of Canadian strategic players who venture abroad, on the other hand, is not stellar. Cogeco recently sold its ailing Portuguese business for about $59.3-million. It had paid $660-million six years ago. Rogers Communications and Shaw Communications both backed off attempts to enter the U.S.
It will be interesting to watch the relative success (or lack thereof) of these two deals play out. In the meantime, CPPIB's Andre Bourbonnais suggests the fund has no plans to do another deal in this sector for the time being. And the fact that two Canadian investors were involved in U.S. cable deals at the same time? He doesn't see a trend. It's "totally coincidental" he says.