DBRS Places Cogeco Cable Inc. Under Review with Negative Implications

DBRS has today placed Cogeco Cable Inc.’s (Cogeco or the Company) Issuer Rating of BB (high) and Senior Secured Notes & Debentures rating of BBB (low) Under Review with Negative Implications following the Company’s announcement that it has entered into an agreement to acquire PEER 1 Network Enterprises, Inc. (PEER 1). Cogeco is offering PEER 1 shareholders $3.85 in cash per share, valuing PEER 1’s equity at approximately $526 million on a fully diluted basis (or $635 million on an enterprise-value basis). The transaction is subject to shareholder and regulatory approval.

PEER 1 is one of the world’s leading internet infrastructure providers, specializing in managed hosting, dedicated servers, cloud services and colocation. Although capital intensive up front, Cogeco views the data services business as a source of growth going forward. Cogeco believes that the acquisition of PEER 1 provides the Company with the ability to service an additional 10,000 businesses worldwide through 19 data centres and 21 points-of-presence across North America and Europe.

The negative implications of the review status reflect DBRS’s concern that the acquisition would weaken Cogeco’s financial risk profile beyond levels appropriate for the current rating category as the acquisition is expected to be financed primarily through debt. With the PEER 1 acquisition, DBRS estimates that Cogeco’s pro forma last 12 months gross debt-to-EBITDA would increase to approximately 3.8 times from 3.1 times (as adjusted for the Atlantic Broadband Group, LLC (Atlantic Broadband) acquisition).

In its review, DBRS will also focus on the business and execution risk associated with the PEER 1 acquisition, along with the Company’s ability and willingness to restore financial leverage to a level appropriate for its current rating category within a reasonable time frame. As the newly raised debt will rank pari passu with that of current senior secured noteholders, DBRS will also review the recovery ratings of Cogeco’s senior secured notes.

Cogeco’s current ratings reflect the Company’s established positions in existing markets, balanced by intensifying competition from IPTV in Canada. The ratings have already taken into consideration the execution risk and increased financial leverage associated with the Company’s acquisition of Atlantic Broadband.

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

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