DBRS Places Cogeco Cable Inc. Under Review with Negative Implications

DBRS has today placed Cogeco Cable Inc.’s (Cogeco or the Company) Senior Secured debt rating of BBB (low) Under Review with Negative Implications following the Company’s announcement that it has entered into a definitive agreement to acquire Atlantic Broadband Group, LLC (Atlantic) for USD1.36 billion. The transaction is subject to approval by certain regulatory authorities.

Atlantic Broadband is a privately owned, independent cable system operator serving about 252,000 basic video customers in Pennsylvania, Florida, Maryland, Delaware and South Carolina. It was formed in 2003 and is the 14th largest cable television system operator in the United States, providing analog and digital video, as well as high speed internet and telephony services. Atlantic generated revenue of USD329 million and EBITDA of approximately USD149 million in 2011. Cogeco believes the acquisition provides an attractive entry into the U.S. market and provides the Company with a platform for further growth and penetration by leveraging its core competencies.

The Negative Implications of the review status reflects DBRS’ concern over Cogeco’s ability to execute and compete effectively in a new market with characteristics that differ significantly from the Company’s core operating regions. The rating action is also based on DBRS’ concern that the acquisition would weaken Cogeco’s financial risk profile beyond levels appropriate for the current rating category. The acquisition is expected to be financed by $150 million of cash on hand, $550 million of additional bank debt, and the assumption of $660 million of debt at Atlantic. With the Atlantic acquisition, DBRS estimates that Cogeco’s pro forma F2012 debt-to-EBITDA would increase to approximately 3.1x from 1.74x for last 12 months ending May 31, 2012.

In its review, DBRS will focus on the Company’s potential to execute and compete effectively in its new markets, and its ability and willingness to restore financial leverage to a level appropriate for the BBB (low) category within a reasonable time frame. This will be considered within the context of the Company’s objectives for growth (organic and via further acquisitions) and cash returns to shareholders.

Cogeco’s current rating reflects the Company’s sound financial profile and established positions in existing markets, balanced by an intensifying competition from IPTV in Canada. For the nine-month period ending May 31, 2012, Cogeco continued to display reasonable revenue growth driven by PSU growth, rate increases and acquisitions. Margins and profitability remained fairly steady despite higher operating expenses related to servicing additional PSUs, the launch of new HD channels, additional programming costs, and migration of customers from analog to digital. In terms of financial profile, Cogeco generated moderately negative free cash flow as a result of higher capex related to recent acquisitions and dividends. As such, debt increased from $949 million at fiscal year-end 2011 to $1,046 million at May 31, 2012, and debt-to-EBITDA increased from 1.68x for F2011 to 1.74x for the LTM ending May 31, 2012.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Notes:
The applicable methodology is Rating the Communications Industry, which can be found on our website under Methodologies.