MONTREAL –- Cogeco Communications announced this morning it will purchase rural cable/telco/ISP DeryTelecom for $405 million.
Based in Saguenay, DeryTelecom offers internet, television, and telephony services to approximately 100,000 customers in over 200 municipalities across several regions in Quebec, including Estrie, Lanaudière, Montérégie and the Laurentians. Revenue and adjusted EBITDA for the fiscal year ended August 31, 2020 are estimated to be $105 million and $44 million, respectively, reads the Cogeco press release.
Cartt.ca featured the company in 2017. It was established by Gilles Déry, a TV salesman, in 1954. Back then, over-the-air TV reception wasn’t very good in regions which feature mountains, or just hills sometimes, or are just too far away from the transmission towers. So, to help sell televisions. Déry got into the cable business to deliver the signal and it eventually became his entire business. DeryTelecom (formerly Video Dery), is the third-largest cableco in Quebec.
“The acquisition of DeryTelecom is a strong strategic fit which will allow Cogeco Connexion to increase its presence in areas that are adjacent to its Quebec footprint and to build on the long history of mutual respect, collaboration and friendship between the two companies,” said Philippe Jetté, president and CEO of Cogeco Communications in the release. “Our proven track-record in the successful integration of regional cable businesses, having acquired five companies in the U.S. and Canada over the past five years alone, demonstrates our commitment to bring superior connectivity to regional and rural communities.”
“As a Quebec-based company which is committed to its employees and its regional communities and with a history similar to ours, Cogeco presented itself as the best possible partner for us. This new beginning bodes well for the future of DeryTelecom, its clients and employees,” said Bryan Godbout, president and general manager of DeryTelecom, in the Cogeco release.
“We are excited at the prospect of adding the DeryTelecom customers, employees and networks into the Cogeco Connexion fold,” added Frédéric Perron, president of Cogeco Connexion. “DeryTelecom’s customer base and networks are complementary to those of Cogeco Connexion and we know that together, bolstered by the core values that we share, we can augment the service offering, increase the customer base and deliver superior revenue growth.”
Cogeco says it hopes leverage its product and sales expertise to add to DeryTelecom’s service offering, increase its customer base and “deliver superior revenue growth.”
Cogeco noted also annual synergies of approximately $3 million can be realized gradually over the first year as operations are integrated and this will allow the company further expand its rural footprint through network extensions, helped by government funding programs, of which some were already awarded to DeryTelecom, such as this one we wrote of this week.
“As the transaction will be executed essentially through an asset purchase, Cogeco Connexion expects to realize tax benefits with a present value of approximately $40 million. These benefits are due to the tax amortization of tangible and intangible assets which are both stepped up to current market value in an asset purchase transaction. The transaction represents an acquisition multiple of 7.8x EBITDA, accounting for the projected synergies and tax benefits,” continues the press release.
“The purchase price will be financed with a combination of cash on hand and Cogeco’s term revolving facility. The transaction is subject to regulatory approvals under the Competition Act along with other customary closing conditions and is expected to close no later than the second quarter of the fiscal year 2021.”
Bay Street had a mixed reaction to the deal. “We believe the transaction makes sense, particularly at the aforementioned valuation, given the low exposure to FTTP and likely upside to internet penetration,” wrote Canaccord Genuity analyst Aravinda Galappatthige in a note to investors. “With DeryTelecom’s internet penetration being below 50% and the ability to further increase capacity and also enhance sales efforts under Cogeco, there is likely meaningful upside to subs. Management has also cited the prospect of further footprint expansion through network extensions supported by government funded programmes due to its rural locality.”
TD Securities analyst Vince Valentini had different thoughts, calling the impact of the purchase “slightly negative” and referenced the interest Altice and Rogers have in Cogeco. “To be clear, this relatively small acquisition at a premium valuation is not the type of shareholder-friendly initiative that we would expect Cogeco to put forward as an alternate course of action to accepting a $150 takeover offer. We hope to see more initiatives in the near-term, such as ABB IPO [Atlantic Broadband intial public offereing] or holdco collapse. We also think this deal will have no impact on the interest in CCA/CGO from Altice/Rogers.
Both analysts have a “buy” rating for Cogeco shares, which dipped 1.9% during Wednesday’s trading.
