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Manitoba Telecom to sell Allstream for $520-million
2013-05-24 09:01 ET - News Release
Mr. Pierre Blouin reports
MTS CONCLUDES STRATEGIC REVIEW PROCESS WITH AGREEMENT TO SELL ALLSTREAM TO ACCELERO CAPITAL IN TRANSACTION VALUED AT $520 MILLION
Manitoba Telecom Services Inc. has concluded the wide-ranging strategic review to consider a full range of alternatives to enhance Allstream's growing competitiveness and improve the long-term position of the company's stakeholders.
Following a comprehensive auction process and a review of other strategic alternatives, the Company today announced that it has signed a binding agreement to sell its Allstream business to Accelero Capital Holdings S.? r.l. Group ("Accelero"), an investment and management group focused on telecommunication, digital media and technology in a transaction that values Allstream at $520 million, subject to certain customary adjustments, including assumed debt obligations and normalized working capital, as well as certain pension related obligations as described below. The transaction has been approved by the MTS Board of Directors and is expected to close in the second half of 2013, subject to receipt of Investment Canada approval and customary closing conditions.
"This transaction is the successful culmination of a diligent process to determine the best way to create shareholder value and drive strong, competitive and sustainable futures for both MTS and Allstream," said David Leith, Chair of the Board of Directors. "We believe this transaction represents attractive value for Allstream, is in the best interests of the Company, its customers, employees and business partners, and that it will increase the level of investment and competition in Manitoba and across the Canadian business market."
Pierre Blouin, Chief Executive Officer, said, "This transaction makes MTS a stronger, more focused and more valuable company. MTS goes forward as a pure-play telecom with a strong consumer franchise and significant free cash flow to support our dividend. We will also have sufficient capital to invest in wireless spectrum and to continue bringing fibre-to-the-home, 4G LTE wireless technology and other products and services to more communities across Manitoba, further solidifying our position as the undisputed market leader in the province."
Mr. Blouin noted that the Company's dividend is currently supported only by the cash flows of its MTS division, and that capex is expected to stay at 2013 levels over the next few years. MTS will retain all of the Company's valuable tax assets, extending the period during which the Company will not incur cash taxes.
Mr. Blouin added, "This transaction also enables Allstream to accelerate its strategy towards achieving long-term sustainable growth. Accelero brings access to capital, telecom expertise and intimate knowledge of the Canadian marketplace. We have confidence that Accelero and Allstream's management will together succeed in realizing Allstream's full potential. This is a very positive development for Allstream employees, customers, business partners, and for increased competition across the Canadian enterprise market."
Accelero is an investment and management group focused on telecommunication, digital media and technology. Accelero's team has a strong track record in strategic, operational and financial management in Canada and around the globe. Naguib Sawiris, Accelero's Non-Executive Chairman and Co-Founder, is a renowned telecom entrepreneur who has overseen more than $1 billion of investment in the Canadian telecommunications market, contributing to the emergence of independent wireless competition in Canada.
Transaction details and planned use of proceeds
After closing costs, MTS expects to realize net proceeds of approximately $405 million. Out of these proceeds, the Company expects to contribute an additional $130 million into the MTS pension plan, and to repay $70 million in short-term indebtedness incurred in February 2013 to pre-fund the Company's pension obligations. The Company believes these prepayments into the Company's pension plans should eliminate all pension solvency funding until 2016, assuming no change in long-term interest rates. After giving effect to these contributions, the MTS Pension Plan's solvency funding ratio will be approximately 85%. Assuming an approximate 1% increase in long-term interest rates by 2016, the Company would have no further cash solvency funding requirements for either the MTS or Allstream plans. MTS will determine its planned use of the remaining transaction proceeds upon the close.
In addition, and as part of this transaction, MTS has agreed to retain the pension obligations, and related pension plan assets, in respect of retirees and other former employees of Allstream under Allstream's current defined benefit pension plans. Allstream will retain such plans in respect of current employees. MTS has also agreed to reimburse Allstream for the solvency funding payments that may become payable in respect of employees of Allstream as they relate to pre-closing service (i.e. as determined by the employee's years of service and salary at the time of closing). These are existing liabilities of the Company, and will not be increased as a result of this transaction.
MTS estimates the net present value of its remaining obligations to these Allstream pension plans at approximately $87 million, to be incurred over a period of five to seven years. MTS expects to deposit $40 million into these Allstream pension plans at the close of this transaction, after which it expects no further solvency funding requirements until 2016.
The completion of certain of these arrangements will be subject to the approval of the Office of the Superintendent of Financial Institutions (OSFI).
The transaction will not result in any changes to the pension plans for current MTS employees and retirees; they will continue to participate in their respective MTS pension plans, which will continue to be funded by the Company and are not impacted by this transaction, other than the expectation that they will be further pre-funded with a portion of the transaction's proceeds.
As of January 1, 2013, the total solvency deficit in respect of retirees and former employees under the current Allstream pension plans was approximately $116 million and the total solvency deficit in respect of current employees was approximately $52 million. This is in addition to $42 million of existing letters of credit. The estimated net present value of these pension payment obligations of approximately $87 million is based upon current market conditions, historical rates of return within the Allstream pension plans, the capturing of tax deductions associated with such payments, and the spreading of such payments over a period of five to seven years. The actual amounts of any such payments over time may vary based on interest rates and rates of return on the assets of such plans.
Accelero has paid a deposit of $55 million to Computershare Trust Company of Canada, which will hold the funds in escrow. In certain situations, this deposit would be paid in full to MTS. At closing, the deposit will be credited towards the purchase price.
MTS 2013 financial impact and outlook
By closing, the Company expects to record a non-cash, post-tax loss on the sale of approximately $50 million, a portion of which will be recognized in the Company's 2013 second quarter results. Based on the estimated net proceeds, MTS expects to have realized a return on investment from its 2004 acquisition of Allstream of negative 1%. This takes into account the $300 million of cash Allstream had on its balance sheet at the time the acquisition, the realized value of approximately $3 billion of Allstream tax losses, as well as the cash generated for the Company by Allstream over the period of the Company's ownership.
The Company expects to report its Allstream operations as discontinued operations beginning in the second quarter 2013 until the transaction closes. This means that the revenue and expenses relating to Allstream will no longer be reflected in the Company's financial results. The Company currently expects that the component of its 2013 financial outlook applicable to MTS will continue to be in line with forecasts.
To provide further details in respect of the foregoing, the Company intends to file on SEDAR a material change report, along with a redacted copy of the Sale and Purchase Agreement.
Advisors and legal counsel
CIBC World Markets and Morgan Stanley acted as financial advisors to the Company. Each provided its opinion to the Board of Directors that the consideration to be received in connection with this transaction is fair from a financial point of view to the Company. Stikeman Elliott acted as legal counsel to the Company.
Conference call details
For investors:
The Company will host a conference call for the investment community today, May 24, 2013, at 9:30 am Eastern Time. Participants include Pierre Blouin, Chief Executive Officer and Wayne Demkey, Chief Financial Officer.
To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available by dialing 1-855-859-2056 and entering passcode 76105406.
For media:
The Company will host a conference call for media today at 10:45 am Eastern Time. To participate, please dial toll-free 1-888-231-8191 or 647-427-7450. A replay will be available by dialing 1-855-859-2056 and entering passcode 76142875.
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