Cogeco to purchase MetroCast for $1.4 billion

Cogeco communications announced that its subsidiary, Atlantic Broadband has entered into a definitive agreement with Harron Communications, L.P. to purchase all of its cable systems operating under the MetroCast brand name (“MetroCast”).

Cogeco Communications will finance this acquisition through its Atlantic Broadband subsidiary with a combination of committed secured debt provided by two banks and an equity investment by Caisse de dépôt et placement du Québec (“CDPQ”).

MetroCast’s networks pass close to 236,000 homes and businesses in New Hampshire, Maine, Pennsylvania, Maryland and Virginia and serve approximately 120,000 Internet, 76,000 video and 37,000 telephony customers. Calendar 2017 revenue is expected to be US$230 million and Adjusted EBITDA is projected to be US$121 million.

“The acquisition of the MetroCast cable systems allows Atlantic Broadband to increase its presence in the growing and lucrative U.S. cable market,” said Louis Audet, President and Chief Executive Officer of Cogeco Communications Inc., the parent company of Atlantic Broadband.  “The MetroCast systems are a strong strategic fit for Atlantic Broadband. With this acquisition, we are increasing our customer base in attractive markets adjacent to the ones we currently serve. Under the guidance of Atlantic Broadband’s best-in-class management team, we are in a unique position to grow our customer base, revenues and profits.”

Acquisition Rationale

• Adds scale in the American Broadband services segment which continues to exhibit steady growth and is expected to keep generating strong operating margins. Atlantic Broadband’s Primary Service Units (PSU) will increase from approximately 602,000 to 835,000 pro forma the acquisition.
• MetroCast’s systems are largely located in non-metropolitan markets with very attractive demographic profiles and market dynamics.
• Opportunity to leverage Atlantic Broadband’s product and sales expertise to quickly increase the customer base and deliver superior growth.
• High quality, fully digital network, comprised of 860 MHz or fiber to the home in 95% of the network, and providing 150 Mbps Internet service across its footprint.
• Minimal execution risk due to management’s prior successful experience integrating MetroCast’s Connecticut system, and the common service delivery and back office platforms.
• Further establishes Atlantic Broadband as a strategic platform in the U.S. with a diversified geographical footprint from Maine to Florida.

Valuation Highlights and Acquisition Financing

Substantially all of the assets of MetroCast will be purchased for US$1.4 billion. In conjunction with the transaction, Atlantic Broadband expects to realize tax benefits with a present value of approximately US$310 million.

These benefits are mostly due to the tax amortization of intangible assets in an asset purchase transaction where such intangible assets are stepped up to current market value. After adjusting for these tax benefits, the purchase price represents a multiple of approximately 9.0x Calendar 2017 expected Adjusted EBITDA for the business being acquired. The purchase price is subject to customary closing adjustments.

The acquisition financing structure preserves Cogeco Communications Inc.’s strong financial position. CDPQ has committed a US$315 million equity investment for a 21% interest in Atlantic Broadband’s holding company, while the remaining balance of the purchase price and transaction costs will be financed through a committed secured debt financing provided by two banks at Atlantic Broadband, which is non-recourse to Cogeco Communications Inc.

CDPQ’s equity interest represents an implied multiple of approximately 8.8x Calendar 2017 expected Adjusted EBITDA of Atlantic Broadband pro forma for the acquisition of MetroCast, and adjusted for the present value of various tax benefits estimated at approximately US$420 million related to the tax amortization of the intangible assets acquired and the current tax losses carried forward at Atlantic Broadband.