Cogeco Jumps After $1.4 Billion MetroCast Acquisition Deal

Canadian telecommunications firm Cogeco Communications Inc. jumped the most in three months after agreeing to buy MetroCast from Harron Communications LP for $1.4 billion, increasing its U.S. footprint with its largest deal ever.

MetroCast’s cable networks cover 236,000 homes and business in New Hampshire, Maine, Pennsylvania and Virginia and are in faster-growing and higher-income communities than Cogeco’s existing U.S. presence, the company said in a statementMonday. Cogeco is buying the assets through its subsidiary, Atlantic Broadband. Shares rose 2.8 percent to C$82.05 at 3:25 p.m. in Toronto, the biggest gain since April 7.

“There is a long list of companies we would be interested in, but this was at the top of the list,” Louis Audet, Cogeco chief executive officer, said in a conference call. “The markets are attractive demographically and the competition is fragmented.”

Montreal-based Cogeco, unlike other Canadian telecommunications companies, has been expanding in the U.S. over the last several years. It bought Atlantic Broadband in 2012 for $1.36 billion, then went on to buy MetroCast’s Connecticut operations for $200 million in 2015. The family-controlled firm has been targeting U.S. cable deals that are too small for mega-players like Charter Communications Inc. and Altice NV.

More Purchases

Cogeco will keep looking for new deals once it reduces the debt load it took on to fund the MetroCast purchase, Audet said in a phone interview. It would look at smaller tuck-in deals to expand its footprint in the eastern U.S. but would also consider larger acquisitions in the west of the country, he said.

“We’re fairly agnostic,” Audet said, referring to which parts of the U.S. he could expand into. “Buying a 2,000-customer system in California doesn’t make sense but buying a 50,000-customer system in California does.”

MetroCast is expected to earn $230 million revenue in 2017. After the deal, the share of Cogeco’s adjusted earnings before interest, tax, depreciation and amortization derived from the U.S. will be 36 percent, up from 26 percent currently, according to a presentation on the company’s website.

The purchase will be financed with a combination of committed secured debt from two banks and an equity investment by the Canadian pension fund Caisse de Depot et Placement du Quebec. Caisse will provide $315 million for a 21 percent interest in Atlantic Broadband’s holding company, which will help Atlantic Broadband to grow without going public in the near-term, Cogeco Chief Financial Officer Patrice Ouimet said on the conference call.

‘Best Strategy’

“Nothing prevents us from doing an IPO in the future but we believe this is the best strategy,” Ouimet said. The deal also pushes up Cogeco’s debt-to-ebitda ratio to 3.6, the highest it’s been since at least 2008. Ouimet said he expects that ratio to drop below 3 within the next 18 months as the company focuses on debt repayment.

The deal is subject to regulatory and other customary conditions, Cogeco said in its statement. The transaction is expected to close in January 2018.

Credit Suisse acted as exclusive financial adviser for Cogeco while Stikeman Elliott and Kirkland & Ellis provided legal advice. Morgan, Lewis & Bockius acted as legal advisers to Harron while Canadian Imperial Bank of Commerce and Osler, Hoskins & Harcourt provided advice for the Caisse.

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