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Cogeco Cable wins Atlantic Broadband

by Chris Nolter and David Carey | Published July 18, 2012 at 4:51 PM

Canadian cable operator Cogeco Cable Inc. described its $1.36 billion purchase of private equity-backed Atlantic Broadband Group LLC as a move to establish a pied-à-terre that would enable it to jump into the American market.

Investors were apparently reticent to take the leap, with shares of the Montreal company dropping $6.88, or more than 15%, on the morning of Wednesday, July 18, following the deal's announcement.

The deal values the portfolio company of Abry Partners and Oak Hill Capital Partners LP at 8.3 times 2013 Ebitda.

The sale will give Abry (a 74% owner), Oak Hill (which owns just under 15%) and the target's other backers at least a 250% gain on a $261 million equity outlay, financial filings suggest. The investment helped fund Atlantic's $765 million purchase in early 2004 of cable systems from Charter Communications Inc.

The gain includes $924 million of dividends the backers garnered in dividends over the years. Of that, $345 million was paid out as part of a leveraged recapitalization in March. Stakeholders also will pocket upward of $300 million in the pending sale.

Abry did not return a phone call, and Oak Hill declined to comment.

Cogeco CEO Louis Audet during a Wednesday investor call said the cross-border move was "not about synergies" but about "establishing a promising base in which to grow in the United States."

The Deal Pipeline reported in May that Atlantic Broadband was on the market. The company has about 250,000 basic cable subscribers in Delaware, Florida, Maryland, Pennsylvania and South Carolina.

Cogeco, by comparison, has about 870,000 basic cable customers.

Since its founding in the early 1970s, the buyer has acquired about 40 cable operators, according to its web site.

During the call, Cogeco management was asked about its experience with deals outside of Canada. Specific transactions were not mentioned. The company recently exited Portuguese cable operator Cabovisão -- Televisão por Cabo SA at a loss.

The company bought Cabovisão for €464.9 million ($571 million) in 2006, and sold the company to European investor group Altice for €45 million in February 2012.

"If people are worried, I respect the worry," Audet said.

Quincy, Mass.-based Atlantic Broadband is not so far from Cogeco's Canadian base, he explained, and has been operating successfully for years. "I have no worries that it should do even better under our umbrella," he said.

That a strategic buyer, not a PE firm, ended up winning Atlantic was a mild surprise, a person involved in the deal said. That's because of an unusual wrinkle in Atlantic's debt structure that its bankers introduced in the dividend recap in March.

Specifically, Atlantic erased a change-in-control provision, common in loan agreements, that would force a buyer to refinancing the company's existing debt. But the loosened agreement applied only to PE sponsors. As a result, a financial buyer could take over Atlantic without having to reconfigure the company's debt.

That gave sponsors an edge in the bidding -- an edge Cogeco cannot employ. Because it is a strategic, Cogeco must replace all of Atlantic's debt, at considerable additional cost.

According to a banker, the refinancing penalties, in the form of premiums tacked on to the debt's par value, could reach $25 million.

Cogeco said it will finance the deal with $150 million in cash on its books, $550 million of undrawn capacity from its revolver and a $660 million first-lien term loan that refinances Atlantic Broadband debt.

The buyer expects its leverage to rise to 3.1 times Ebitda following the deal but to drop to 2.9 times Ebitda in 2013.

Atlantic Broadband retained a Credit Suisse Group banking team including Eric Federman, John Trousdale and Chris Cottrell.

Kirkland & Ellis LLP lawyers Armand Della Monica and Joshua Kogan represented Abry and Atlantic Broadband.

Joe Donohue and Bill Cooling of Gleacher and Co. Securities Inc. were financial advisors to Cogeco.

Stikeman Elliott SENCRL srl provided counsel to the seller.

Gary Horowitz led a group of lawyers from Simpson Thacher & Bartlett LLP who also advised Cogeco.

The company retained Wiley Rein LLP, as well.

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Tags: Abry Partners | Atlantic Broadband Group LLC | Cogeco Cable Inc. | Oak Hill Capital Partners LP

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Cogeco Cable wins Atlantic Broadband

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