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What's up between Cogeco and Rogers Add to ...

Back in 2007, Cogeco Cable raised capital with a pair of stock sales.

Rogers Communications, a major shareholder in its Quebec-based rival for more than a decade, did not participate in either of those equity offerings, which raised a total of $346-million. (From Rogers' point of view, the company wasn't invited to participate, a point we'll come back to in a moment.)

The two financings diluted Rogers's stake in Cogeco Cable down to 20 per cent of the outstanding subordinated voting shares. One of the investment dealers took note of the fact that the country's biggest cable player suddenly had less of a key strategic holding than it had in the past.

Two years later, that dealer - and we're not sure who it is - was able to rectify the situation.

A handful of institutional investors - four or five - decided there are better places to invest their capital than Cogeco Cable, a stock that's returned a respectable 19 per cent over the past 12 months.

These institutions were sellers of Cogeco Cable and parent Cogeco, and a dealer was able to find a buyer for a massive block in Rogers.

With this purchase, Rogers moves back to owning 29.8 per cent of Cogeco Cable's subordinate voting shares and 20.2 of the equity. Rogers also announced that it bought 1.6 million subordinated shares of parent Cogeco, and now holds 33.6 per cent of the parent company's subordinate shares and approximately 29.9 per cent of the equity. It's worth noting that Rogers was able to buy at substantially below the price that Cogeco Cable commanded when it sold stock back in 2007

All of this is interesting colour, but invites the question, what happens next?

Make no mistake: Rogers would very much like to take over Cogeco Cable. Thursday's purchases are part of a classic creeping takeover. The line from Rogers on this latest bout of activity is the same one the company has trotted out in the past: These holdings are for "investment purposes." However, Rogers "reserves the right to acquire additional shares of Cogeco or Cogeco Cable."

Much the same language was used around Rogers' stake in Ontario rival Maclean Hunter before a hostile takeover was launched in 1994.

Now, here's where Cogeco's attitude towards Rogers comes into play.

Unlike Maclean Hunter, which had no controlling shareholder, Cogeco and Cogeco Cable are controlled by the Audet family, through a dual share structure. The Audets don't much care how many subordinated voting shares their Ontario rival owns. They ignored Ted Rogers' overtures, and now they are ignoring his son Edward Rogers, who oversees long-term strategic issues such as acquisitions from his deputy chairman's perch.

The fact that the Audet clan sold stock back in 2007 and didn't bother to offer a pro rata stake to Rogers speaks volumes about the relationship. There will be no union of these two companies until the Audet family decides it wants to sell, and there's no way to predict when that happens.

Talk to executives at Rogers these days, and there is no sense a takeover is in the works. CEO Nadir Mohamed simply got a heads-up on a big block of Cogeco stock, and with the board's backing, Rogers stepped up.

Yet Cogeco Cable's stock price spiked on news of the purchases, and National Bank Financial analyst Greg MacDonald said in a note: "With the stock up 7 per cent, the market is concluding that this transaction brings Rogers closer to acquiring Cogeco outright."

"This is technically true, though we would not assume a transaction is imminent," said Mr. MacDonald, with a voice of realism that echoes what's being said in the hallways at Rogers.

"Once the market correctly concludes that the controlling shareholder (Audet family) is not a seller, the stock will likely settle back down," said Mr. MacDonald. "Traders may want to take advantage of this conjuncture and take profits."

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