MONTREAL – Louis Audet knew what was coming – and Friday’s Cogeco Cable conference call to explain the company’s $658 million purchase was set up as best he could to assuage the fears of investors.
Financial analysts who follow the company had been warning Audet for the better part of a year that they thought the European expansion strategy Cogeco was pursuing was a bad idea – and once Friday’s deal to buy Portuguese cable outfit Cabovisao was announced, the markets responded by pummeling the cable company’s stock price. It ended Friday at $24.36, down 16.9% on the day. Parent company Cogeco Inc. shares dropped by 16.7% to $22.50.
"Cogeco Cable’s financial profile will be materially weakened… with consolidated total debt-to-EBITDA expected to increase to approximately 4.9 times from its current 3.2 times and cash flow-to-total debt would weaken to 0.14 times from 0.24 times," said Dominion Bond Rating Service in a Friday release.
"An acquisition outside of Cogeco Cable’s incumbent market limits the degree of potential synergies and is a departure from its historical acquisition strategy. DBRS believes this international diversification increases the overall business profile of Cogeco Cable.
"The acquisition price represents approximately 10.6 times EBITDA purchase multiple… or approximately Cdn$2,500 per basic subscriber (approximately Cdn$1,060 per revenue-generating unit). DBRS notes the purchase multiple appears reasonable when considering other western European transactions, potential growth opportunities, and a monthly average revenue per user (ARPU) of Cdn$57 (which is comparable to Cogeco Cable’s Canadian operations)," continues the DBRS release.
"Given the increase in both business and financial risk, the ratings will likely be downgraded by one or two notches, dependent on the long-term capital structure and the future capital needs of Cabovisão."
No matter, really. Audet’s family owns control of the majority of the shares of Cogeco and Cogeco Cable and the CEO was adamant during the call that this is a great opportunity.
Audet and his CFO Pierre Gagne came well-prepared with a detailed PowerPoint explanation of the deal itself and the Portuguese market overall. For example, personal computer penetration in the country is at 41% and growing – well back of the 55% average in the rest of the EU, says the Cogeco presentation. Portugal has some catching up to do, they said.
Cabovisao is a recently-built, 750 MHz network covering under-penetrated areas of Portugal (mostly beyond the capital of Lisbon) ready for growth in video and Internet. The company is "the foremost provider of triple play offerings in the country," said Audet, and the only one that provides voice, video and data on one wire into the home – and on one bill. It passes over 820,000 homes but has just 263,915 basic subscribers, so there is work to be done on the penetration front.
Boosting penetration won’t be as expensive as it is in North America, Audet pointed out, because in Portugal, Cabovisao passes 126 homes per route km while Cogeco in Canada passes just 64/rkm.
Plus, he added: "There’s very little satellite competition in Portugal. It’s miniscule." And, in 40% of its market, there is no video competition from Portugal Telecom, the strong incumbent which also owns the competing cable company (TV Cabo) and competes with Cabovisao in the other 60%.
Audet acknowledged that North American telecom companies have generally not fared well when moving out of their element overseas (such as Cable Satisfaction International, which built Cabovisao and subsequently went bankrupt in 2003) but after over 30 minutes of questioning, he urged the analysts on the call (reporters were only allowed to listen), to look at the numbers only and let their fears go.
"We operate on fact," he said. "I urge everyone to consider the facts and set emotions aside," and then the opportunity is more clearly seen, he explained. "We are confident we will create value for our shareholders."
An as-yet-to-be-named Cogeco manager will move to Portugal to run the company, added Audet. While the company has not said who that will be, its Ontario vice-president, Gaston Germain, has international experience with Cogeco, having led up its international division (a partnership with engineering firm SNC Lavalin) in the late 1990s, early 2000s and he may be a candidate.
