Cogeco Announces Plans to Buy Atlantic Broadband While Company Shares Drop

Canadian media and communications company Cogeco announced last Wednesday that it is planning to acquire US cable provider Atlantic Broadband for $1.36 billion.

Cogeco mostly serves customers in the rural areas of Quebec and Ontario, providing an array of services, including digital television, Internet access, and VoIP digital telephony. With the new acquisition, the Canadian company intends to penetrate the US market.

However, a previous unsuccessful business initiative in Europe has led investors to become skeptical of Cogeco's foreign deals. As a response, Coegco's share price has decreased by a whopping 15%, although the company's management is confident that the new acquisition will create important growth opportunities for the future.

Atlantic Broadband is currently owned by a group of private equity firms and provides services to a client base of roughly 25,000 in the rural areas of Maryland, Pennsylvania, Florida, South Carolina and Delaware. Cogeco chief executive Loius Audet has expressed his enthusiasm towards the purchase, stating that "this acquisition marks an attractive entry point into the U.S. market for Cogeco Cable."

RBC Capital Markets analyst Drew McReynolds retorted that this purchase actually creates an "increased execution risk" for Cogeco, which could cause it to lose its foothold in the Canadian market.

In a note addressing this very issue, McReynolds added that "we see excess free cash flow now largely allocated to debt repayment, rather than dividend increases, over the next few years."

As a response to criticism, several Cogeco executives, Audet included, quickly defended the management's position, over an arranged conference call. With regards to how they were going to finance the purchase, Audet revealed that Cogeco plans to utilize both cash and debt.

Industry analyst Andre Calder explained that the investors' skepticism is well-founded on previous similar forays into the European market. "Investors have long memories and Cogeco recently divested the unsuccessful Cabovisao asset in Portugal. Now the company has announced another surprise acquisition in a new operating territory", he said.

Audet brushed off these claims and backed Cogeco's decision, by commenting that "there is room for further U.S. growth, either through an increase in penetration or through tuck-in acquisitions, a number of which are available in the United States, in contrast to Canada, where the consolidation is essentially over."