Cogeco Fighting a Losing Battle in Portugal - RBC

Cogeco Cable Inc. (CGEAF.PK) has apparently found itself in the same position as the British during the Napoloenic Wars, fighting a losing battle in Portugal, but instead of sticking around defending freedom like the British did the Canadian cable company should just go home, RBC Capital Markets says.

"Has Cogeco met its Waterloo?" Jonathan Allen, RBC analyst, asked in a note to clients Friday. Of course, the comparison is less than apt as the British actually defeated the French at Waterloo, but there certainly are some other striking parallels.

The British landed 33,000 troops in Portugal in 1808 at the height of the Napoleonic Wars in a bid to stave off invasion. But the army under Sir John Moore was beaten back by the French, losing one in five soldiers as the British beat a hasty retreat.

"Like the British, Cogeco could have chosen anywhere in Europe or the world to land a new cable business -- it chose a small cable company in Portugal," he said. "But unlike the British, there was no need to expand to Portugal."

Mr. Allen's thoroughly entertaining Napoleonic allegory comes from Cogeco's third quarter results, which show the company's Portuguese cable property Cabovisao is bleeding subscribers and becoming a serious drag. Cogeco's 2010 guidance is especially worrisome, as the company expects nil EBITDA growth as margins drop to 40% from 42%.

Mr. Allen finds the decision to go to Portugal a bad one for several reasons. Cogeco's Canadian business was not under threat of invasion, from the French or otherwise, and while the British fought one major enemy Cogeco has to deal with two: PT and Zon.

"So, Cogeco finds itself fighting a brutal rear-guard action ... Should Cogeco leave Portugal and return home or should it send reinforcements and keep trying?" Mr. Allen asks. For the answer, he turns once again to Napoleonic history.

A year after Moore's retreat, Sir Arthur Wellesley (later the Duke of Wellington) returned to Portugal. It was touch and go for a while, but of course the good duke eventually defeated the power-mad Frenchman at Waterloo. Unfortunately, it took five years.

"Considering the odds and no need to be there in the first place ... unless the ghost of Sir Wellesley is sent with the reinforcements, Cogeco should strongly consider selling Portugal and returning home," he said.

RBC has dropped its price target to C$31 from C$36 but maintains a Sector Perform on Cogeco.