Radio, Peer 1, doing just fine; wireless still a maybe
MONTREAL – Louis Audet doesn’t like to discuss politics, no matter how many times he’s asked to by journalists, but Donald Trump and the Republican Party have been good for the Cogeco CEO’s business.
The corporate tax cut passed by the U.S. government recently will result in an estimated $89 million in reduced income taxes to be paid by its growing U.S. subsidiary Atlantic Broadband. And the company expects to pay only minimal U.S. taxes (about $10 million total) until 2025, Audet said.
Chief Financial Officer Patrice Ouimet said the $89-million savings is a one-time non-cash benefit, but that the long-term tax savings would be significantly more than that. He didn’t want to put even a ballpark figure on it because of how far into the future he’d be looking, but a back-of-the-envelope calculation based on Atlantic Broadband’s earnings suggests it could be a savings of about $50 million a year without counting interest, amortization or other tax breaks.
With the acquisition of Harron Communications (Metrocast), Atlantic Broadband now represents 35% of Cogeco Communications’ earnings. Its Canadian cable operations have dropped to 57%.
Audet said he expects that revenue from its U.S. operations “could eventually be higher than Canada.”
But the U.S. buying spree has put Cogeco in high debt — 3.6 times earnings before interest, taxes, depreciation and amortization — and so the company wants to focus on de-leveraging over the next year. That won’t be easy, even with the tax break. Cogeco’s first-quarter earnings report issued Wednesday showed its EBITDA down 1.9% “primarily as a result of foreign exchange variations, non-recurring operating expenses and from market pressure in the media activities.”
Atlantic Broadband also plans to increase its capital expenditures in 2018, and may look at other acquisitions in non-metropolitan areas.
When it came to other assets, the kind some financial analysts like to call “non-core”, Audet said the company isn’t looking to its Cogeco Media radio network or Peer 1 data services segment.
“Yes it’s more difficult than expected, but we’re not in a selling mode.” – Louis Audet, Cogeco
“We’ve almost stabilized our decline,” Audet said of Peer 1. “Yes it’s more difficult than expected, but we’re not in a selling mode.”
There’s also always the possibility that Cogeco might finally jump into the wireless services market (something the CEO is asked about every single time he’s in a public forum), a possibility Audet seemed more open to this year in light of the Canadian government’s review of Wi-Fi-based service providers.
Audet said several roadblocks remain in place that must be at least be partly taken down for Cogeco to set up a wireless service: better conditions for mobile virtual networks, more “reasonable” regulated wholesale roaming rates, and smaller spectrum licence areas that would allow Cogeco to match the footprint of its wireline network.
Audet gave the example of Toronto, where the proposed licence area for the upcoming 600 MHz auction comprises 10 million people in southern Ontario. For Cogeco, which serves the Niagara peninsula and areas like Peterborough and Oakville, but not Toronto itself, trying to compete for such a licence would be “suicide”, Audet said.
“We’re not going to start competing with all the guys in Toronto who have wireline.”
Meanwhile, recent reports of Rogers Communications considering divestment of some of its own non-core assets, including its stake of about a third in Cogeco Inc., hasn’t seemed to worry Cogeco’s senior management. “I think for them it’s capital that’s asleep,” Audet said. “I don’t think it would be the best use of capital for them. (But) they don’t talk to us, we’re not their confidant.”
Asked about the possibility of buying the shares back, Audet said the company’s available funds are already committed in the short term and “we’re not in a position to do it. Really, this hasn’t been our priority.”
Though Cogeco has been active in U.S. acquisitions, Audet said the Canadian market hasn’t changed and the opportunities for acquisitions are just about non-existent at this point. “The families in this business have no intention of selling,” he said.
Like other television providers, Cogeco is facing increasing pressure from broadcasters looking to increase their wholesale rates, with programming costs increasing 10% a year. However, while that pressure has led to decisions such as Videotron removing AMC, as we reported this week, Audet said the problem is more acute for its U.S. cable operators.
“Our affiliation agreements are much more restrictive in the U.S.,” he said. “In December, we had to make a number of difficult decisions, about who we keep and who we don’t keep.” Nevertheless, he said Atlantic Broadband has managed to introduce more flexible packages, including packages without expensive sports channels, “that are margin-neutral for us.”
Cogeco’s radio broadcasting operations almost went without any discussion at Audet’s meeting with journalists on Thursday. Its network hasn’t changed in any significant way in the past five years, and it remains a market leader in Montreal and Quebec City, though behind Bell Media overall in Quebec. “The markets are tough. Otherwise we’re quite pleased,” Audet said.
But Cogeco may be called upon to help a radio station it doesn’t own.
Asked by an activist shareholder during the company’s annual meeting Thursday about Montreal community station CIBL 101.5, to which Cogeco offered $375,000 over three years in 2016 to help relieve its debt, Cogeco Media president Richard Lachance said he spoke with the station on Wednesday, and that Cogeco is willing to help it transition to a more sustainable business model. Last week, the station laid off all its 13 employees and cancelled its programming because it could no longer afford it.
Lachance told Cartt.ca that he’s open to sitting down with CIBL and offering more financial aid, but not if it’s going to disappear in a year. “They need a business plan that makes sense,” he said, noting questionable financial decisions such as a storefront studio space in the heart of downtown Montreal’s cultural district, and its subscription to Numeris ratings (which have shown a virtually non-existent audience).
Lachance also said the company is looking at activating HD Radio on its transmitters in Montreal, most of which were recently replaced.
Bell, Rogers and others have been rebroadcasting AM stations on FM HD subchannels, and while Cogeco has an AM traffic station in Montreal, Lachance said the company has not decided on its HD Radio plans, suggesting demand for HD Radio has not been very high.
Photo from today's Cogeco AGM by Steve Faguy
