Cogeco Acquires Cloud and Managed Hosting Provider PEER 1 for $526M


Cogeo Cable Inc., one of Canada’s largest telecommunications carriers announced Friday morning that it had issued a takeover bid for cloud and managed hosting provider PEER 1 Network Enterprises Inc., an offer to acquire all issued and outstanding shares of the company at $3.85 per share, valuing the company at $526 million on a fully diluted basis, and an enterprise value of approximately $635.

According to the announcement, Cogeco’s bid is a premium of 32.1 percent more than the 20-day volume weighted share price for PEER 1, which closed at just under $3 in trading on the Toronto Stock Exchange on Thursday.

Cogeco says the board of directors for PEER 1 has unanimously supported the offer, following the advice of a special committee created to evaluate the offer.

PEER 1 is one of the largest and most established players in the hosting market, both in Canada and beyond. The company provides a combination of managed hosting, colocation services and cloud hosting services that make its acquisition a useful alternative to a very significant amount of development work for a company like Cogeco, which is looking to expand the range of services it is capable of providing to enterprises and other customers.

According to Phil Shih, managing director at Structure Reasearch, the deal might actually see Cogeco push PEER 1 further in the direction of providing managed hosting in Canada.

“From a Canadian market perspective, this acquisition is mostly about colocation,” says Shih. “Managed hosting revenue is mostly generated from the US and now the UK. PEER 1 only  began to sell hosting in Canada a few years back. So it will be very interesting to see what Cogeco’s plans are for the international operations. My sense is that Cogeco is going to take advantage of the PEER 1 brand and platform to make a stronger push into managed hosting in Canada. Managed hosting is where Cogeco wants to go and where it is getting stronger growth.”

As with similar acquisitions in the past, there may be a significant opportunity in addressing the existing base of Cogeco customers with PEER 1’s hosting services. Cogeco serves a substantial number of small businesses with its telephone and connectivity offerings.

The buy-a-cloud-provider strategy has been executed enough by telcos in recent years to be considered an established model for introducing those services. In 2011, US telco CenturyLink acquired managed hosting and cloud provider Savvis for $2.5 billion, a similar deal on a much larger scale. In another similar deal, Time Warner Cable acquired managed and cloud hosting provider NaviSite (at roughly the same time as the Savvis acquisition) for about $230 million.

In both of those cases, the acquired service provider had an established, operating cloud offering prior to being acquired, which was likely a selling point in each case, and could have been a factor in the PEER 1 deal. PEER 1 created a new division, Zunicore, in 2011 to introduce a public cloud service. It has been expanding on that offering since then. Over the summer, PEER 1 introduced a hybrid cloud solution powered, in part, by the Zunicore offering.

Last week, PEER 1 announced that it had extended an enterprise cloud offering the company has developed in partnership with cloud hosting and platform provider Tier 3, into Canada.

“Data centre services are a key strategic focus for Cogeco Cable, and this acquisition is consistent with Cogeco Cable’s commitment to grow its presence in the sector,” says Cogeco CEO Louis Audet, quoted in the press release announcing the offer. “This acquisition enhances the company’s ability to provide complex colocation and managed data centre services to our customers. There are significant opportunities for growth including increasing Cogeco Cable’s penetration of the small and medium-sized business segment, gaining market share in the enterprise services market and maximizing the potential of current services offered.”

The PEER 1 deal adds significant data center capacity to Cogeco, as the hosting company operates 19 data centers in North America and Europe. PEER 1 completed its flagship Toronto data center in 2010, for which the WHIR has ran a series of videos chronicling the construction.

Friday’s agreement is subject to customary provisions, including PEER 1’s right to consider superior proposals. Cogeco has a five-day right to match a superior proposal, or would receive a termination fee of $18.5 million in the event that the deal is not completed because of PEER 1 accepting another offer.

Talk back: is the PEER 1 acquisition the right path into the data center services and cloud business for Cogeco? Do you think PEER 1’s services are a good fit for the small business audience that Cogeco already serves? Do the additional resources behind Cogeco create a powerhouse in the Canadian hosting market?

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  1. hosternews

    Is the price being reported right? Everyone is reporting ~$525, but at $3.85/share I get to a much higher Enterprise Value.

    • Post author

      Thanks for commenting. You're right. Cogeco specifies in the release that the price it's offering represents $526 million equity value and an enterprise value of $635 million. I'll update the story to clarify.