While the recent closure by its Atlantic Broadband subsidiary of its $1.4 billion purchase of MetroCast further diversified its holdings into higher growth U.S. regions, Canadian cable operator Cogeco’s low-growth core assets put it in “the most vulnerable competitive position” of any telecom company Barclays covers, the investment bank’s research arm says.
“While we believe expansion into U.S. cable provides attractive growth potential and another sizable U.S. acquisition could drive the stock higher, the segment’s financial contribution is limited by heavy investments over the next couple of years,” Barclays said in a note to investors Friday.
Barclays issued its report as Cogeco confirmed that Atlantic Broadband had also paid $16.4 million to acquire pieces of FiberLight’s dark fiber network in South Florida.
With Atlantic Broadband in the process of launching 1-gig services in and around Miami, among other network upgrade projects, the company’s capex intensity is likely to increase to the “mid-to-high 20%” range this year, Barclays said, “and margins will also see some ongoing pressure.”
However, Barclays isn’t the only investment research arm bullish about the prospects from U.S. corporate tax giveaways.
“The tax reform and the recent investment and acquisitions are expected to extend CCA’s U.S. tax holiday by an additional year to the end of 2024,” noted Scotiabank analyst Jeff Fan, in another investor note released late last week. “In light of the growth opportunity that the company expects in South Florida, the timing [of the MetroCast purchase] makes sense.”
Barclays also noted, however, that Cogeco’s American operations yield only about 33% of its EBITDA. Most of the business is still situated in Canada and faces tight competition from fiber operators.
“The cable business in Canada is heavily reliant on pricing for growth, but we believe it has limited pricing power as a sub-scale player with no long-term quad-play bundling capability,” the firm added.