Altice USA showed up at Cogeco’s door over the weekend, bearing a sweetened offer that was soundly rejected for a second time by the Canadian telco’s controlling shareholders. And while Gestion Audem, the family trust that controls 69% of Cogeco’s vote, effectively swatted away Altice’s offer of more candy and bigger flowers, there are those that believe that the latest bid may not have been aimed at them after all.
Gestion Audem, the trust headed by the telco’s executive chairman Louis Audet, wasted little time in firing off a rejection of the latest Altice USA bid for the company, which at $8.4 billion represented an 8% increase to its Sept. 2 offer. In a tersely worded statement, Luis Audet basically asked Altice USA what part of “No,” does it not understand?
Audet referenced Gestion Audem’s earlier rejection of Altice USA’s offer in its statement, adding: "Since this is apparently not registering with Rogers and Altice, we repeat today that this is not a negotiating strategy, but a definitive refusal. We are not interested in selling our shares."
That’s a pretty clear “We’re not that into you,” from an entity that pretty much calls the shots for Cogeco and its subsidiary Cogeo Communications. But some analysts believe that the raised offer wasn’t for the family -- although it did include a little sweetener for them -- but for minority shareholders that seem to be more receptive to a deal.
“Under the circumstances, Audet's decisive rejection of Altice's bid could not have come as a surprise,” wrote Bernstein media analyst Peter Supino in a note to clients Monday. “In that light, we assume that Altice has aimed this second offer at Cogeco's minority shareholders. The deal's valuation of Atlantic –11x forward EBITDA – certainly merits their attention.”
Minority shareholders appear to be open to a transaction. Altice USA CEO Dexter Goei said at the virtual Goldman Sachs Communacopia conference in September that it has received “supportive feedback” from some Cogeco shareholders.
Supino, in an e-mail message, added that shareholder interest has been high in the deal.
“Our sense is that there is significant minority investor support for Altice’s proposal,” Supino said. “Whether the Audets will place a value on that, we don’t know.”
But just what could Cogeco’s minority shareholders do? Like their American counterparts, they could take their case to court, but the chances of that being successful are low.
Robert Yalden, Stephen Sigurdson Professor in Corporate Law and Finance Faculty of Law, at Queen’s University in Kingston, Ontario, said while class action suits are not the norm around takeover bids in Canada, shareholders could sue under the “Oppression Remedy,” which allows any shareholder to take action if they feel the company has wronged them. But there are two very big hurdles in using the Oppression Remedy to try to force a controlling shareholder to sell: Canadian law requires company boards to act in the best interests of the company, not its shareholders; and it’s hard to prove you’re being oppressed just because a larger shareholder doesn’t want to sell.
Yalden added that Canadian courts, like U.S. courts, usually give public companies the benefit of the doubt, assuming that a company’s board of directors made decisions on an informed basis and with the best interests of the company in mind, the so-called “business judgment rule.” So shareholders would have to make an extremely compelling case that the board has done something wrong.
“Even if you made that case, I’m not sure where it would get you because what you’re trying to do is force a majority shareholder to sell,” Yalden said. “I think it would be very unlikely that a court would say the majority shareholder, by refusing to sell its shares, is acting improperly. I think it’s an uphill battle. That doesn’t mean they won’t try something, but it’s not obvious to me.”
While court action may be a long shot, it may not even be necessary. Most of the shareholder pressure to do a deal seems to be centered on the Altice portion of the transaction.
In a research report Monday, Barclays research media analyst Kannan Venkateshwar noted that there is a big disparity in the multiples being offered for Cogeco’s Canadian and U.S. assets. According to the deal parameters, Rogers is offering about 8.5-to-9 times cash flow for Cogeco’s Canadian businesses, about in line with other past telecom deals. Altice USA’s bid for Atlantic Broadband is valued at more than 11 times cash flow, at the upper end of past U.S. media deals. .
Venkateshwar wrote that the disparity between those multiples could eventually force the Audets to sell Atlantic Broadband and keep its Canadian holdings. The $3.9 billion in Altice cash could go a long way toward shoring up its balance sheet and competing more effectively with the larger Rogers.
Earlier this year Cogeco unveiled plans to enter the wireless business, long a stronghold of Rogers, the most dominant mobile player in Canada. Cogeco executives have speculated that Rogers’ motivation to do a deal could be more about eliminating a competitor than expanding its reach.
At the virtual BMO Capital Markets Media & Communications conference Sept. 15, Cogeco chief financial officer Patrice Ouimet said the company was not surprised by the Rogers and Altice USA bids, but was taken aback by how they did it.
“...Proceeding with a hostile offer on a family-owned company was something that was surprising to us,” Ouimet said. “Not the interest, but the way it was done, especially since the Audet family had indicated the night before that they would not sell in the transaction.”
He also was puzzled about the timing of the bid and speculated it could be connected to Cogeco’s plans to launch a wireless service. Cogeco submitted a plan to offer a Hybrid Mobile Network Operator (HMNO) wireless service, using its own spectrum and leasing network space from other carriers, to the Canadian Radio-television and Telecommunications Commission in February. That proposal is still awaiting approval from the regulatory agency.
“Taking Cogeco out of the equation for Rogers is probably part of the equation to launch a hostile bid right now,” Ouimet said at the conference.
In his report Venkateshwar wrote that buying Cogeco could “potentially smooth out the competitive environment for Rogers, particularly given its wireless market share in Ontario and Quebec (~47% and ~28% subscriber share, respectively).”
But it also could force Rogers to make a decision regarding its existing Cogeco investment. If the Audet family continues to fend off its advances, Rogers may just decide to sell its stake and focus on other things.
“Given the tightly held family ownership structures of Rogers and Cogeco, any transaction is ultimately subject to idiosyncratic choices made by a small set of individuals rather than the underlying economic or strategic rationale of the proposed deal,” he wrote.
Altice seems to get it, adding in the press release for its revised offer that it would withdraw the bid if it doesn't have a "mutually satisfactory" agreement or "at least a clear path forward to completion of a transaction," by Nov. 18. That gives both sides plenty of time to decide just how much they're into each other.
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