Cogeco to pay $1.36 billion for Atlantic Broadband; shares dive
(Reuters) - Cogeco Cable Inc, a Canadian company that serves mostly rural customers in Ontario and Quebec, said on Wednesday it will pay $1.36 billion to buy U.S. cable operator Atlantic Broadband in a move aimed at gaining a foothold in the larger U.S. market.
The deal, however, quickly triggered a 15 percent decline in Cogeco's share price, with investors skeptical of Cogeco's success in foreign deals following an unsuccessful foray into Europe.
In February, Cogeco sold its struggling Portuguese cable unit, Cabovisao, at roughly one-tenth the price it paid for it in 2006. Cogeco was unable to weather a harsh pricing war and the broader economic malaise in the country.
Montreal-based Cogeco, which provides cable-TV, high-speed Internet and telephone services, said the Atlantic Broadband acquisition will give it sizable opportunities for growth.
Atlantic Broadband is owned by private equity firms ABRY Partners and Oak Hill Capital Partners and has operations that service about 250,000 customers in Pennsylvania, Maryland, Florida, Delaware and South Carolina.
"This acquisition marks an attractive entry point into the U.S. market for Cogeco Cable," said Chief Executive Louis Audet.
Analysts, though, sounded dubious on a hastily arranged conference call in which Audet and other executives had to fend off tough questions about the price being offered, Cogeco's ability to succeed outside its home market, and Atlantic Broadband's growth prospects.
CASH AND DEBT
Cogeco said it would finance the deal with a combination of cash and debt. Cogeco plans to use $150 million in cash, along with $550 million of a $750 million credit facility to fund the deal. Bank of America Merrill Lynch is also arranging a $660 million committed debt facility to fund the deal.
In a note to clients, Canaccord Genuity analyst Dvai Ghose said the sell-off in Cogeco shares might also be prompted by some investor concerns that Cogeco may have to issue equity to reduce its debt load further down the road.
Cogeco Cable's share price fell 15.5 percent to C$37.60 on the Toronto Stock Exchange after the deal was announced on Wednesday morning. Shares of its parent Cogeco Inc fell 11.6 percent to C$37.50.
Ghose said the offer values Atlantic Broadband at 8.3 times its estimates 2013 earnings before interest, taxes, depreciation and amortization (EBITDA). That he noted is well in excess of Cogeco Cable's own enterprise value of five times estimated fiscal 2013 EBITDA.
Canada's largest mobile phone company, Rogers Communications Inc, which owns significant interests in both Cogeco Inc and subsidiary Cogeco Cable, could not be immediately reached for comment on the proposed deal.
"There is room for further U.S. growth, either through an increase in penetration ... or through tuck-in acquisitions, a number of which are available in the United States, in contrast to Canada, where the consolidation is essentially over," Audet said on the conference call.
Cogeco Cable warned last week that its Canadian business would slow as tough competition makes it more difficult to sign up customers. It cut its customer growth forecasts by 10 percent as it lost television customers and recorded slower growth in Internet and telephone services.
Larger rivals such as BCE Inc and Quebecor Inc operate in the same markets and are expanding into Cogeco's rural heartland.
Audet said Atlantic's low penetration rate - the number of customers divided by the number of homes it would be possible to service in existing markets - means it has promising growth potential.
"This transaction at this stage is not about synergies. It's about establishing a healthy, promising base from which to grow in the United States," he said.
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