On July 18, two Canadian firms ventured south of the border and came back with pieces of the US$98-billion American cable industry. Cogeco Cable spent US$1.36 billion to buy privately held Atlantic Broadband. Hours later, the Canada Pension Plan Investment Board (CPPIB) announced it had teamed up with European private equity firm BC Partners to buy Suddenlink Communications for $6.6 billion.
Given all the chatter about “cord cutting”—consumers’ shift to digital technology —plus the fiercely competitive U.S. market and rising cost of quality content, why would anyone want to invest in U.S. cable? That depends on who’s doing the buying. CPPIB’s move got the thumbs-up from most analysts and observers, while Cogeco got the gong. The day after the deal, investors reacted by taking almost 15% off Cogeco’s stock price.
With more than 1,150 cable companies, the American marketplace is a quilt of small, medium, large and gargantuan players. Suddenlink is the seventh-largest operator, while Atlantic Broadband is No. 14. Both operate outside large urban markets, where competition is less severe. But it’s not the quality of Atlantic Broadband or Suddenlink in question, rather the suitability of the suitors.
Since the CPPIB’s mandate is to get a specific rate of return, buying a cable company makes sense. A stable subscriber base offers a nice, steady stream of cash. “Companies in this industry tend to generate fairly strong and predictable cash flows, which aligns with CPPIB’s long-term investment goals,” says the pension fund’s senior vice-president, private investments, Andre Bourbonnais. The involvement of BC Partners, which has done sizable cable deals in Europe, also gives CPPIB an experienced partner for its first foray into this industry.
For a public company like Cogeco, with less available cash, and shareholders looking for maximum return, evaluating such a large investment isn’t as cut and dried. The company says the deal could lead to further expansion south, but many feel that money would be better spent at home. BMO Capital Markets analyst Trevor Bateman also says the company’s poor track record in its international business is cause for concern. In February, Cogeco sold Portuguese cable company Cabovisão for $59.3 million, after paying $660 million for it just six years ago. Cogeco’s Canadian business is healthy right now, but the market here is just starting to feel the heat from new Internet protocol TV (IPTV) products from telecoms such as Telus and Bell.
Desjardins analyst Maher Yaghi says Cogeco need only look west at Telus’s impact on Shaw for a glimpse of its short-term future in Canada. Shaw was forced to start giving discounts and investing in its networks. “If Bell’s IPTV product becomes a hit in Cogeco’s territory, they’ll need to adjust fast to improve the product and remain competitive on pricing,” he says. Nonetheless, Yaghi is optimistic about the long-term payoff of Cogeco’s U.S. deal. “It could be a very good move,” he says.