Canadian cablers ready for more
Cogeco, Shaw eye Eastern Europe, wireless after recent gainsThe Canadian cable sector is going swimmingly as measured by the solid fiscal second-quarter results reported by key sector players in recent days.
However, industry players also are looking for future growth opportunities outside their traditional borders and businesses to avoid future financial drags from maturing markets.
Shares of cable giants Cogeco Cable and Shaw Communications rose sharply as Shaw on Friday tripled its latest quarterly earnings and Cogeco doubled its profit on higher demand and a tax recovery.
Management teams of both companies unveiled plans to enter new markets, arguing that current industry growth can't be sustained for much longer.
"Canada is a maturing market," Cogeco president and CEO Louis Audet told analysts during a conference call, and better growth prospects lie elsewhere.
Cogeco, which is active in the Quebec and Ontario cable markets, made its first international foray in 2006 when it bought cable operator Cabovisao- Televisao por Cabo SA in Portugal for about $660 million.
With that investment paying off, Audet said he is prepared to risk near-term dilution in Cogeco shares to expand further, this time in Eastern Europe, which has seen a booming TV market. Such media and entertainment giants as News Corp. and Germany's Bertelsmann AG also have invested in the Eastern European TV market.
The only barrier for possible Cogeco deals abroad is the current credit crunch and financial crisis.
"Practically speaking today, the deal flow is about nonexistent," Audet said. "It's nonexistent because the credit markets are so poor that potential sellers have essentially decided to put off any sale decision until further notice."
Meanwhile, at Calgary-based rival Shaw, CEO Jim Shaw told analysts that he also was prepared to sacrifice near-term cash-flow growth to possibly build out a wireless phone network.
The Western Canadian cable giant has signed up to participate in a May 27 wireless spectrum auction by the federal government. Shaw will fund the purchase of wireless licenses from its free cash flow and, if required, an existing bank credit facility.
Until now, the cable giant has insisted that it won't necessarily launch and run a wireless network with its spectrum licenses.
U.S. cable operators also have been carefully exploring their wireless options. Last month, for example, reports surfaced that Comcast and Time Warner Cable have been discussing with telecom giant Sprint Nextel and broadband provider Clearwire the launch of a wireless network joint network (HR 3/26).
Investors and analysts have been concerned, though, that a push into the wireless space would eat up a lot of the free cash flow that cable operators finally have started to see.
Shaw also has faced reticence from investors because of such worries over any expansion.
"The cash outlay and years of operating losses Shaw would incur in the early years developing a wireless business represents the biggest source of risk to Shaw's free-cash-flow growth profile," RBC Capital Markets analyst Jonathan Allen said in a note to clients.
But Jim Shaw on Friday signaled for the first time a possible entry into the Canadian wireless market, emphasizing that it would be a cautious one.
"Shaw will not deploy if the economic model does not work in the long term," he told analysts. "And when we see the economic model on wireless, it looks to us like it works. As always with Shaw, it will be a slow and steady rollout. Certainly, Shaw would not put any capital at risk unless it saw an opportunity for its shareholders."