Canadian Cable Gets Shake Up - Rogers Communications Inc acquiring Quebec's Le Group Videotron Ltee - Company Business and Marketing

The biggest proposed merger of all time has cable operators north of the border scrambling to reposition themselves in the coming digital age. The first example of what is expected to be a rash of such deals came last week when Rogers Communications Inc., Canada's largest cable provider, said it would acquire Quebec's Le Group Videotron Ltee. in a stock swap worth some $4.1 billion.

In a phone conference, Rogers president/CEO Ted Rogers said, "If there had to be a single event that probably got us all thinking about the future, it was the AOL/Time Warner merger, which ! think most people agree has transformed the communications industry and brought convergence much more to the attention of the public."

And while some were seeing the Rogers deal simply as a continuation of the consolidation trend in cable around the globe, other analysts like George Karidis of the Yankee Group in Canada say the industry there could be the target of high-flying Internet companies bent on reaching high-speed households.

Foreign ownership rules

"Foreign ownership rules that exist in Canada pertaining to telecommunications companies are expected to change in the next few years," Karidis said, allowing for the ownership of Canadian companies by concerns based in countries outside Canada's borders.

It's a scenario that has the largely family run cable industry in Canada rethinking their strategies. Add that to the competitive threats to their core markets, and you can expect even more activity in the next few years.

Pushing these deals along are World Trade Organization talks slated for this coming autumn, which Karidis believes will begin the policy of eliminating foreign ownership restrictions.

"We're looking at some formal decision in 2001 with implementation in 2002 or 2003," Karidis said.

The primary impetus behind this latest deal, Rogers admitted, is also a defensive one in the face of competition coming from Canada's dominant telephone service provider, Bell Canada.

"These two companies (Rogers and Videotron) are large in Canadian terms, but insignificant in North American terms," Rogers said at the news conference. "It's obvious that two companies of this size couldn't remain on their own. How can we compete with Bell if we are fractured?"

A look at the deal

As part of the deal, each Videotron share will be exchanged for 0.925 of a nonvoting class B share of Rogers. Also, in an effort to reduce dilution on its earnings, Rogers said it would repurchase somewhere between $500 million and $1 billion of its outstanding class B non-voting shares using proceeds from the sale of non-core assets like its shares in Microcell Communications and Rogers AT&T Wireless.

The merger will create a broadband telecommunications company with more than 5.1 million homes passed, 3.7 million cable customers and 260,000 high-speed Internet access customers. The new entity is estimated to have fiscal 2000 revenues of $4.4 billion and operating income of $1.2 billion.

The deal requires the approval of two separate classes of Videotron shareholders and other regulatory bodies and is expected to close this April.

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Rogers/Videotron Compared to Cablevision Systems

                  Rogers/Videotron    Cablevision Systems
                    (estimated)      (as of Dec. 31, 1998)

Homes passed            5.1M                  5.1M
Subscribers             3.7M                  3.4M
Revenues               $4.4B                 $3.3B

SOURCE: Cable World research

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