With BCE deal quashed, Astral back on the open market

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The front-runner to buy Astral Media Inc. now may be the man who is believed to have lost out to BCE Inc. the first time around: Cogeco Inc. chief executive officer Louis Audet.

Unless BCE can successfully appeal the surprise decision by Canada's broadcast regulator to turn down its $3-billion takeover of Astral, the field is suddenly open for Mr. Audet and the Quebec-based cable company he controls to make another run.

Astral chief executive officer Ian Greenberg has no obvious successor, and the expectation is that he will still want to sell the company, which his family controls. But the list of other potential buyers is shorter than it was when Astral agreed to the $50-a-share offer in March, with Mr. Greenberg saying at the time that BCE was his preferred option for more than just price.

The CRTC's decision to block the deal is largely based on the size and market power that the merged company would have had. But Rogers Communications Inc. is close to as big as BCE, so would run the risk of the same regulatory opposition.

Quebecor Inc. is too big in Quebec to make the deal work from a competition perspective, and besides, just borrowed more than $1.3-billion to buy back shares in its media subsidiary from the Caisse de dépôt et placement du Québec – so it may not have the balance sheet to absorb another large deal.

That leaves Cogeco. Astral, in regulatory filings, has said there was another bidder fighting against BCE to the end, and the speculation has long centred on Mr. Audet's company.

"It almost falls into Cogeco's lap, and they were interested," said Ron Mayers, a Montreal-based alternative strategies-focused trader at Laurentian Bank, who has been a shareholder of Astral as the deal unfolded.

A bidder such as Cogeco might now be tempted to offer a little less than BCE did, knowing that there is less competition with the country's biggest communications company out of the running, and others potentially spooked by the CRTC decision.

Mr. Greenberg personally may have less leverage as well. The Greenberg family controls Astral, and drove a hard bargain in the BCE talks. During negotiations with BCE, he twice told the suitor that its bid was inadequate, and also demanded that BCE pay a higher price for his class-B shares than those traded in the market. Mr. Greenberg also went so far as to demand a special payout for himself, but that was ultimately voted down by shareholders.

However, Mr. Mayers said Astral would still demand a solid price. "You still have to pay a reasonable value, or they'll break it up" and sell the assets piece by piece.

"I don't think it's a fire sale," he said. "They are only getting better. Ian would just like to retire."

Helping Astral is the fact that it has announced steady growth numbers even since the BCE bid. Almost half of Astral's revenue comes from subscription revenues for its television channels, and it is well-positioned in the pay-TV market, which is highly attractive for media companies.

Astral also has a strong outdoor advertising business that contributes about $30-million each year in earnings before interest, taxes, depreciation and amortization, just shy of 10 per cent of the company's total EBITDA. It is a sector that BCE chief executive officer George Cope saw promise in, and at the time of the deal he said those assets were particularly important to him.

Astral's balance sheet is also solid. The company's net debt to EBITDA has come down and now stands at only 1.25 times.

Even so, in the short term the stock will fall, likely into the high $30 or low $40 range, say analysts and investors who follow Astral. It traded in the mid-$30s before the buyout offer, but it will likely be buoyed by speculation that sooner or later, the company will be sold.

Also, Astral is will get almost $3 a share in cash from the break fee that BCE must pay if the deal does not proceed. That should provide support, though as Canaccord Genuity analyst Dvai Ghose said in a note, "this is not much consolation."