A Cogeco sign hangs at the company's annual general meeting in Montreal, on Jan. 14, 2014.The Canadian Press
A handful of hedge fund managers are judging Louis Audet by what he’s done, not by what he says, and investing in Cogeco Inc. in expectation of a takeover.
When the executive chairman of the Montreal cable company quickly and firmly shut down a $10.3-billion offer last week from New York-based cable company Altice USA Inc. and Rogers Communications Inc. last week, most of the institutional investors that trade on these sorts of deals – known as arbitrage or arb funds – decided to steer clear.
Funds and individual investors that did jump into Cogeco and subsidiary Cogeco Communications Inc. last week are now down about 4 per cent on their investment. Cogeco Communications is the more widely held stock and trading volumes were nine times the average level on the day the takeover was announced. The price of both stocks dropped after the Audet family’s holding company – Gestion Audem Inc. – put out a statement the same day saying its members "unanimously reiterated that they are not interested in selling their shares.”
However, traders and fund managers say another, slightly older news release from Gestion Audem is drawing attention from arb funds and enticing a few of these investors to take positions in the two Montreal-based companies.
Back in January, months before Altice and Rogers came calling, Gestion Audem sold 288,183 shares in Cogeco through a private placement, a block worth approximately $27-million. That sale is now seen as a sign that members of the Audet family need cash, and would be open to parting with the two companies. Altice and Rogers offered the clan $800-million for their stakes.
This line of thinking persists despite the fact that when his holding company announced the share sale in January, Mr. Audet said: “On behalf of all members of the Audet Family, I wish to confirm that we remain fully committed to maintaining a controlling ownership position and to continue to grow Cogeco.”
Gestion Audem holds 69 per cent of voting rights of Cogeco, which in turn controls 83 per cent of the votes at Cogeco Communications.
Traders say Cogeco’s new investors include high-profile Mario Gabelli at GAMCO Investors Inc., based in Rye, N.Y. Mr. Gabelli runs funds that are dedicated to takeover arbitrage. On Thursday, the fund manager declined to comment on Cogeco.
In contrast, the chief investment officer at a Canadian mutual fund that previously owned a stake in Cogeco Communications said his firm sold its entire position last week, having concluded there was no chance a deal would go forward “and trading takeovers is picking up nickels in front of steamrollers.”
(The Globe is not naming the individual because they are not authorized to comment publicly.)
Arb funds are driven by math, weighing risk and reward on transactions. Traders and analysts roughed out numbers this way: Cogeco Communications stock currently trades around $110 – that’s the price of getting into this game.
Altice and Rogers are currently offering $134.22. Analysts say the pair could raise their bid to about $150 and still have a deal that made sense for their shareholders. At that point, independent directors at Cogeco Communications may endorse a richer offer. That approval would in turn put pressure on the Audet family and force them to strike a deal. That is the best case scenario for an arb fund, and equates with a return of approximately 35 per cent.
Cogeco Communications could also turn down the takeover, but take steps to boost its stock price and appease its minority shareholders. In a report, analyst Aravinda Galappatthige at Canaccord Genuity Group Inc. said the company might spin out all or part of its U.S. cable business, Atlantic Broadband. Again, any lift in the stock price from current levels would reward arb funds.
The worst case scenario is Altice and Rogers walk away, and Cogeco Communications drops back to a price in the $100 range, meaning arb funds take a 10-per-cent hit. Analysts say that is the most likely outcome, as Mr. Audet has ruled out negotiating with suitors.
There’s one more variable keeping arb funds out of this transaction – the prospect of Rogers dumping its holdings in Cogeco and Cogeco Communications as it abandons the takeover.
Rogers is by far the largest shareholder in the two companies. The Toronto-based company began accumulating its stakes when Bill Clinton was the U.S. president, more than 20 years ago. The Toronto-based company last added to its Cogeco positions in 2010. A number of analysts predict Rogers will sell the entire holding, currently worth $1.7-billion, if the current takeover fails. An exit would put significant pressure on stock prices.
Bank of Nova Scotia is advising Rogers on the takeover and rivals say investment dealer arm Scotia Capital Inc. would likely have a mandate to sell its stake – 5.9 million Cogeco shares and 10.7 million Cogeco Communications shares.
“It’s unlikely the market could easily digest so much Cogeco stock,” said analyst Adam Shine of National Bank Financial in a report. “It would be interesting to see if Cogeco Communications would buy and retire Rogers’ related holdings, with its Cogeco stock potentially being acquired by another party in Quebec (investor not company).”
Mr. Shine did not name a potential Quebec investor. Cogeco is currently a partner with the Caisse de dépôt et placement du Québec on its U.S. cable business.
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