Philippe Jette, president and CEO of Cogeco, in their offices in Montreal on Sept. 21.Christinne Muschi/The Globe and Mail
When cable provider Cogeco Communications Inc. CCA-T launched in Portugal in 2006, the company hailed it as a pivotal move for its expansion into European markets. But six years later, it sold the division at a steep loss.
The lessons of that failed foray into a new market have not been forgotten at the Montreal-based company, which is taking a far different approach with its ambitious U.S. expansion plan. Less than a decade after entering that market, earnings from its U.S. business represent 50 per cent of the company’s total revenue, and Cogeco has become the eighth-largest cable provider in the country.
“We are growing our coverage or our footprint every year,” said Cogeco chief executive Philippe Jetté in an interview with The Globe and Mail. “There’s a lot of activity there.”
Analysts were skeptical when the company launched its U.S. strategy – understandably so, after Portugal and less-than-successful business lines such as data centres. But they and investors are coming around as U.S. growth escalates and as Cogeco plots its move into wireless services.
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Historically, Cogeco’s main business line has been cable connections in Quebec and Ontario. But a decade ago, most of Canada was covered by at least one incumbent and all cable licences had been allocated, Mr. Jetté said. “There were limited areas we could go to.”
During the 1970s and 80s, several large Canadian telecoms built out their cable networks and quickly reached most major markets, he said. In the U.S., such widespread development by major players never happened to the same degree, leaving many suburban and rural areas serviced by small, community-based operators.
Through a series of five cable-company acquisitions – bookended by its 2012 purchase of Atlantic Broadband for US$1.36-billion and its 2021 takeover of WideOpenWest Inc. (WOW!) for US$1.13-billion – Cogeco expanded its operating zone to 12 states, spanning the eastern seaboard from Maine to Florida. After its acquisition of WOW!, Cogeco rebranded its U.S. operations under the name Breezeline.
For its past quarter, ended May 31, Cogeco reported revenue from its U.S. broadband services of $366-million, a 35-per-cent increase year over year. Revenue from Canadian broadband services, meanwhile, was up 2.5 per cent year over year at $362-million. Cogeco will report its fourth quarter earnings at the end of October.
“We view Cogeco Communications’ current network expansion and rebranding initiatives as laying a crucial foundation for future growth,” Canadian Imperial Bank of Commerce analyst Stephanie Price said in June. She added that the company’s exposure to less-densely populated areas in both Canada and the U.S. deserves “credit not recognized by the market.”
When Cogeco first announced its new direction, recognition was even sparser.
The purchase of its Portuguese cable enterprise, Cabovisão – Televisão por Cabo S.A., in 2006 for $660-million immediately faced widespread disapproval, sparking worries that reconstructing the business would sidetrack executives and become a drag on earnings. The day the acquisition was announced, Cogeco shares dropped 17 per cent. Then the global recession and subsequent European debt crisis slashed household spending, and competition became fierce. In February, 2012, Cogeco sold the subsidiary to a European telecommunications company for just $59.3-million.
Meanwhile, shareholders were warily watching as Cogeco poured capital into another venture: data centres. Between 2009 and 2019, it acquired several enterprise data-service businesses, highlighted by its $526-million acquisition of Peer 1 Network Enterprises, a Canadian internet-infrastructure provider.
But the company faced increasing competition from the likes of Amazon AMZN-Q and Google GOOGL-Q. Analysts questioned how quickly Cogeco’s further investments – including a $100-million facility in Montreal – would turn a profit. In a 2019 move that one analyst called “inevitable,” Cogeco sold its data centre holdings to a U.S. investment bank for $720-million.
Yet the company’s executives remain confident that there is still an upside for the company in the U.S – so confident that, in 2020, Cogeco shot down a US$7.8-billion cash takeover offer from Rogers Communications Inc. RCI-B-T and U.S. partner Altice USA ATUS-N. The company has a dual-class share structure, giving the Audet family control over the takeover bid decision.
While analysts are positive about Cogeco’s long-term outlook, some have expressed concerns about shorter-term threats such as fixed wireless, an alternative to broadband internet.
Over the past year, with growing accessibility to 5G networks, mobile providers have used excess spectrum capacity to aggressively build out fixed wireless services in less populated areas; in the first quarter of 2022, they represented 51 per cent of all new internet hookups, according to CIBC data. Fixed wireless connects devices to the internet via an antenna, which receives signals from a tower rather than an underground cable.
While the internet connection is typically slower and less reliable, fixed wireless does not require a cable or fibre coming into the home and therefore is a good option where it is expensive to put down cables – historically, Cogeco’s main markets.
Mr. Jetté said he does not believe the technology is a threat, calling it a “transition phase” for the industry and adding that its network capacity will soon be used up. So far, fixed wireless has little overlap with Cogeco’s territory.
The company’s customer base is also being affected by inflationary pressures, forcing the low-end segment to cut spending and services, according to Bank of Nova Scotia analyst Maher Yaghi. “While the stock has few catalysts in the short term, we believe [Cogeco] has to be looked at from a long-term perspective,” he said.
However, the company could benefit from public funding in the U.S. for rural expansion, as it has in Canada (last year, Cogeco received more than $200-million from the federal and Quebec governments to build out its rural network). The U.S. government is set to release US$43-billion through the Broadband Equity, Access, and Deployment (BEAD) Program, a portion of which Cogeco could receive to build out its network.
Yet the company’s direction in Canada stands to change in the next few years. Cogeco is also looking at an opportunity to roll out a mobile-phone service, which would allow it to offer more complete product bundles.
The CRTC is currently determining the mobile virtual network operator (MVNO) framework, which determines the price resellers must pay to access incumbents’ networks.
Until now, companies have been required to make private deals with Rogers, Bell BCE-T and Telus T-T, which own the networks, and Cogeco has not yet signed such an agreement.
“We are asking for reasonable rates,” Mr. Jetté said. “High enough that the party that leases is incentivized to build their own network, not to lease forever, but low enough to support competition and affordability, through the price for consumers.”