After two years of pursuit, Cogeco Communications Inc. has struck a $1.8-billion ($1.4-billion U.S.) deal to acquire the remainder of the MetroCast cable assets, making a bigger bet on its U.S. strategy in mid-sized markets where it sees room to grow.
Cogeco is also bringing in a heavy-hitting minority partner in the Caisse de dépôt et placement du Québec, which it said Monday will take a 21-per-cent stake in the company's U.S. cable business in exchange for putting up $315-million (U.S.) of the MetroCast purchase price.
Montreal-based Cogeco first acquired MetroCast's Connecticut cable operations for $200-million in 2015, a time when its other assets in New Hampshire, Maine, Pennsylvania, Maryland and Virginia were not for sale. But Cogeco chief executive officer Louis Audet said in an interview he stayed in touch with MetroCast's family-controlled privately held owner, Harron Communications LP, and eventually convinced them to sell.
He was eager to buy, he says, because MetroCast serves mainly smaller cities with populations of about 50,000, where he believes Cogeco can win customers and grow at a rate of 6 to 7 per cent a year, much faster than growth of about 3 per cent back in its Canadian cable markets.
"It is clear that these markets, which the established phone companies consider as secondary markets, are markets where we do very well," Mr. Audet said of the competition from U.S. telephone operators, which he says have "neglected" these "tier two" cities.
Cogeco says telcos have only built fibre-optic service – which can deliver faster Internet speeds and television service – in about 8 per cent of the MetroCast service area and most of the competition for TV customers comes from satellite options. Cogeco faces tougher competition in Canada, where its main rival BCE Inc. has invested more in fibre and has an appealing TV product.
"The [MetroCast] networks are in very good condition, but the prior owner did not stress bundles or marketing," Mr. Audet said, adding, "It provides us with a great opportunity to increase penetration – not only on the residential side but also on the commercial side."
The potential for growth was enough to interest the Caisse, which Mr. Audet said had previously spoken to Cogeco of its interest in pursuing the U.S. cable market.
The MetroCast assets will build on Cogeco's existing foray into the U.S., which began in 2012 with the $1.36-billion purchase of Quincy, Mass.-headquartered Atlantic Broadband.
That move came shortly after a failed entry into the Portuguese market and at the time, investors questioned Cogeco's ability to execute an international strategy.
But Monday's news that its Atlantic Broadband subsidiary would acquire the MetroCast operations from Harron was better received, with Cogeco's shares initially gaining about 2.5 per cent when markets opened.
MetroCast is a "very good asset" with solid networks, said Macquarie Capital Markets Canada analyst Greg MacDonald. With about 233,000 television, Internet and home phone customers, it will increase Cogeco's U.S. operations by close to 40 per cent to 835,000 subscribers.
The price paid is high, he said, noting that even with $310-million in tax benefits that Cogeco expects to realize with the transaction, the purchase price is more than nine times the $121-million MetroCast is forecast to report in EBITDA in 2017 (EBITDA means earnings before interest, taxes, depreciation and amortization).
That's notable, Mr. MacDonald said, because Cogeco's stock itself is only trading at 6.4 times EBITDA.
But the Caisse's involvement is a positive development, he said, as it "lowers leverage risk and adds credibility to the deal and U.S. strategy overall."
Cogeco says it will use debt issued by Atlantic Broadband to fund the rest of the purchase price. The deal requires regulatory approvals and Cogeco says it expects it to close in January, 2018.
Some have speculated that Cogeco's U.S. business could itself become an acquisition target, but Mr. Audet said Monday he has no plans to sell and hopes to eventually acquire more cable operations south of the border.
First, he said, Cogeco will focus on maintaining its investment-grade status by getting its debt leverage back under control. After the deal closes, its debt will be 3.6 times EBITDA and the company said it hopes to get that down to 3.0 times within 18 months.
"As soon as we get that in place of course we're ready for more [acquisitions], whether they're tuck-in or a bit larger," Mr. Audet said.