Cogeco Cable Buying Atlantic Broadband to Expand in U.S.

Cogeco Cable Inc., a Montreal-based cable-television company, agreed to buy Atlantic Broadband for $1.36 billion, letting it expand into the U.S. after a failed attempt to gain a foothold in Europe.

Cogeco is purchasing the company from private-equity firms Abry Partners and Oak Hill Capital Partners in a deal that’s expected to be completed by year-end, the Canadian company said today in a statement. Quincy, Massachusetts-based Atlantic Broadband operates cable systems in Pennsylvania, Florida, Maryland, Delaware and South Carolina.

For Cogeco, today’s deal raises investor concerns that the company is making another risky international gamble, sending the shares down as much as 17 percent. Cogeco is pushing into the U.S. after abandoning the struggling European market, where it wrote off the value of its Portuguese acquisition Cabovisao-Televisao por Cabo SA and lost $248 million last year.

“The company has announced another surprise acquisition in a new operating territory,” Andrew Calder, an analyst at RBC Capital Markets in Toronto, said in a note to clients. “Investors will be hoping that the competitive conditions and execution prove to be more favorable this time around.”

Cogeco shares tumbled 15 percent to C$37.90 at the close in Toronto, the biggest decline in six years. The shares had fallen 13 percent this year through yesterday.

Charter Origins

The transaction is Cogeco’s biggest acquisition as a public company, more than double the size of its 2006 purchase of Cabovisao-Televisao for about $600 million.

Atlantic Broadband was formed in 2003 after it purchased cable systems from St. Louis-based Charter Communications Inc. It currently ranks as the 14th-largest U.S. cable operator, according to the company’s website.

Atlantic Broadband serves about 252,000 basic video customers, and provides cable, phone and Internet to rural communities. That suits Cogeco’s experience of offering service in less-populated areas of Quebec and Ontario, Chief Executive Officer Louis Audet said.

“There is room as you can see for further U.S. growth, in contrast to Canada,” he said on a conference call today.

The purchase helps reduce Cogeco’s dependence on its market, where it competes with larger cable operators Rogers Communications Inc., BCE Inc., Telus Corp. and Shaw Communications Inc.

“This is an attractive entry point into the United States,” Audet said. The deal also positions Cogeco to make further “tuck-in” acquisitions, he said.

Falling Margins

Cable consolidation allows companies to avoid paying duplicate programming fees while combining their sales forces and paring infrastructure costs. Smaller operators are under pressure to merge because programming fees are climbing about 7 percent to 10 percent a year, eating into their profit margins.

The Cogeco transaction follows several strategic cable acquisitions, including Time Warner Cable Inc.’s $3 billion takeover of Insight Communications Co. in February and WideOpenWest LLC’s deal completed yesterday to buy Knology for about $1.5 billion including debt.

Cogeco is paying 8.3 times Atlantic Broadband’s estimated annual earnings before interest, taxes, depreciation and amortization, the company said in the statement. Time Warner Cable paid 8.6 times Ebitda, while WOW paid 7.7 times, according to Bloomberg Industries.

Cogeco is paying about $5,400 on a per subscriber basis. That compares with $4,418 in the Time Warner deal, and $5,486 in the WOW transaction, the Bloomberg Industries data show.

Bloomberg reported in May that Atlantic was seeking a sale at a price of about $1.4 billion. Gleacher & Co. was the financial adviser on the transaction, Cogeco said. Bank of America Merrill Lynch served as sole lead arranger and providing debt financing at Atlantic Broadband.

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