Portugal payoff

The bet that brought Louis Audet's Cogeco Cable out of obscurity.

Name: Louis Audet
Title: CEO and president
Age: 55
Location: Montreal
Tenure: 14 years

Vindication. It's not the word that Cogeco Cable Inc. CEO Louis Audet chooses to describe how market sentiment has turned in his company's favour during the past year—he's too cautious to sound self-congratulatory. Nonetheless, the word is apt. A year ago on June 2, Montreal-based Cogeco announced it was acquiring Cabovisão-Televisão por Cabo SA, the second-largest cable company in Portugal. Stock analysts quickly slashed share price targets; investors ran for the exits. “Cogeco is getting themselves into a long and difficult battle with investor sentiment,” wrote TD Newcrest analyst Vince Valentini, who called the acquisition “very negative.” Cogeco's stock (TSX: CCA) plunged nearly 17% that day, and declined a total of 31% three weeks later to $20.21, a 52-week low.

On the surface, the acquisition did seem risky. Neither Cogeco nor its controlling parent company, Cogeco Inc. (founded in 1957 by Audet's father, Henri, who at age 88 stepped down as a director this past December), had ever made an international foray. Besides, this would be its largest acquisition ever, $657 million—most of that paid with debt—and for a company with a less-than-distinguished record. Cabovisão was wholly owned by Cable Satisfaction International, formerly based in Longueuil, Que., which had been in bankruptcy protection since 2003. “Canadian bankers were prime lenders to this company when it started in 1994,” says Audet. “A number of Canadian banks that lost their investment had to resell it to vulture funds for a fraction of the original investment. We could understand that some people had been badly burned, and their reaction would be, ‘Well, don't touch it with a 10-foot pole.'”

Fast forward a year later, and all is forgiven—and then some. Cogeco's stock now trades at about $43, heights not seen in almost seven years, and up roughly 34% to date this year. The company is firing on all cylinders, exceeding even its own expectations. In its last quarter, ending Feb. 28, revenue jumped 57% from a year earlier to $232 million, while net income was up 51%, to $15.4 million. A big part of the company's current success is due to growth at home in Ontario and Quebec, where new bundling and promotional efforts, plus the expansion of its telephony offering, have paid off. Most importantly, though, Cabovisão is beginning to pay off, too. In the first six months of its fiscal year, the Portuguese division contributed nearly a quarter of Cogeco's total revenue of $454 million, and Audet is confident that the growth opportunities are greater in that country than in Canada.

Audet's strategic decision to enter Portugal was hardly a no-brainer, but it marked the beginning of an important new chapter for Cogeco. Global expansion is not even on the radar of any other major Canadian communications company on either side of the converging telecom or cable industries. Instead, homegrown players seem content to wage domestic battles, gripe about federal regulators and grow fat on the healthy appetite for consuming communication services in a market that, for the most part, is congenially divided up among a few large companies. Cogeco, as a relatively small competitor, is forging a new path. And Portugal is just the first stop.

Cogeco is still pretty low-profile, especially when compared to its three larger peers, Rogers Communications (owner of Canadian Business), Shaw Communications and Vidéotron, which are respectively led by vocal dynamos Ted Rogers, Jim Shaw and Pierre Karl Péladeau. Audet, who turns 56 on June 30, typically eschews the spotlight, quickly dispersing any credit for his company's success among his management team and directors. Like Shaw and Péladeau, he is the son of the company founder. He earned his stripes as a national sales director in the television operations, before taking progressively more senior executive positions, culminating in becoming CEO of both Cogeco Cable and its parent company in 1993.

Acquisitions have long been a key part of Audet's growth plans. Cogeco has bought nearly 20 companies under his watch, but it had run out of new targets at home by 2002. While Audet's interest in Europe goes back as far as 2000, when the company was in the midst of Canadian market consolidation, it wasn't until 2004 that the company started kicking the tires on 10 companies spanning 12 countries. It even made a few bids that didn't pan out. “Europe reminded us a lot of Canada 10 to 15 years ago in being further down the curve in terms of consolidation, greater fragmentation, the number of languages spoken,” says Audet. He was looking for relatively small assets that could still have a big market impact. “Some people said, ‘You should be buying in the United States,'” he says. “The fact of the matter is, we could have. But we would have owned a sliver of a hair of the market there,for which we would have paid multiples far higher than what we paid in Europe. And we still would have had no market power whatsoever.”

In Portugal, the communications market is dominated by Portugal Telecom (PT), a former government monopoly that also owns TV Cabo, the leading cable operator. But the cable industry is just 15 years old, and basic cable TV still has only 37.5% market penetration. “Half the market in Portugal is virgin,” says Audet, likening the situation to that of Canada 25 years ago. But in the early 1980s, Canadian cable companies were not selling telephony services as well—and in Portugal, more than eight out of 10 TV customers buy the phone, too. (About 16% of Cogeco's Canadian subscribers currently get phone service from the company.) Broadband Internet penetration is low, as well.

Even though Cabovisão is still a distant second in market share to PT in cable and Internet (third in fixed-line phone, behind PT and Sweden's Tele2), the opportunity is there to grow. Cabovisão originally suffered because it built its cable network too quickly, became overstretched and failed to grow sales as quickly as necessary to thrive. But while its Canadian parent company was in bankruptcy, Cabovisão recovered from its zero-EBITDA days, andboasted operating margins in the low 30% range by the time Cogeco acquired it. “We knew we could increase operating margins substantially through good management practices,” says Audet.

Cogeco left Cabovisão's management team in place, but it now reports to the executive previously in charge of Cogeco's Quebec operations, Jules Grenier, who has since relocated to Portugal. The focus today is on boosting sales and marketing: when Cogeco took control, only 32.2% of homes in Cabovisão's territory subscribed to its basic cable service. Audet says the company is on track to have about 34% penetration by year-end. It has also simplified its bundle packages, launched new ad campaigns, unveiled updated storefront designs and upgraded Internet speeds. And to get its new employees onside, Cogeco introduced stock options and a bonus program. “It's clear that we're welcome there, and that's also very important,” says Audet. “You don't always know that in advance.”

With the Portuguese acquisition mostly digested, Audet is looking for another Euro play. Speculation is that eastern Europe may be a target. “There are a number of companies that are coming up for sale. Most are owned by financial players, private-equity kind of players,” says Audet. “Our job is to keep an eye on that and try to make the best of it.” Given how Cogeco proved its mettle in Portugal, investors might be more receptive in joining Audet on his next trip.