Who is the most logical buyer of Manitoba Telecom?
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Jonathan Ratner | 13/05/27 | Last Updated: 13/05/27 10:41 AM ET
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Chris Young/The Canadian PressBCE Inc. CEO George Cope at the company's annual general meeting in Toronto on May 9, 2013.
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Manitoba Telecom Services Inc.’s sale of Allstream not only eliminates legacy exposure and reduces pension risk, but it relieves concerns about the stability of the company’s dividend and opens the door for an acquisition of its incumbent division.
Investors seemed pleased with the announcement that MTS is selling Allstream to private equity group Accelero Capital Holdings for $405-million in cash, sending the stock up more than 5% on Friday.
Much of the cash is earmarked to reduce pension solvency deficits, leaving $165-million currently unallocated, according to Dvai Ghose, analyst at Canaccord Genuity. He expects most of that will be used to finance spectrum purchases, leaving little for share buybacks or debt repayments.
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“Allstream seems to face many of the legacy challenges of an incumbent, including revenue pressure, a highly unionized workforce and pension solvency deficits, without any of the obvious positives such as economies of scale, pricing power, high margins and strong cash flow,” Mr. Ghose told clients,” raising his rating on MTS to hold from sell. “Consequently, we can understand why MTS investors would celebrate the sale of Allstream.”
With $240 million of the expected sale proceeds earmarked for pension solvency payments, MTS’ pension solvency deficit will decline to around $400 million from approximately $630 million at the end of 2012.
The analyst also noted that MTS gets to keep Allstream’s tax losses, which carry an estimated net present value of $290-million, likely extending the company’s cash tax holiday beyond a previous assumption of 2019.
“The deal looks very free cash flow accretive and we are no longer concerned about dividend sustainability over the medium term,” Mr. Ghose said, raising his free cash flow forecast for 2014, primarily due to the elimination of pension solvency funding requirements.
The analyst believes both BCE Inc. and Telus Corp. could generate significant synergies by acquiring MTS, but noted there are a limited number of buyers if the asset is put up for sale.
Mr. Ghose noted that unlike at Allstream, any potential buyers of the incumbent division must be Canadian controlled due to the MTS’ broadcast distribution license and IPTV business, which he considers an integral part of the company.
Second, the analyst pointed out that Rogers Communications Inc. would unlikely be given regulatory approval to buy MTS as together, they would account for 85% of wireless market share in Manitoba as of the end of 2011.
As for Shaw Communications Inc., he doesn’t think it would be allowed to buy the business either since Shaw is the primary cable company in Manitoba and MTS is the incumbent telecom company.
Mr. Ghose doesn’t see Telus wanting to see its growth and wireless exposure diluted by MTS’ incumbent operations. However, he thinks the reasons for BCE to acquire MTS are more obvious.
“BCE has shown that it can drive strong cash flows from legacy assets through cost-cutting and synergies,” the analyst said. “Consequently, while Telus could bid against BCE for MTS’ incumbent operations if they were for sale, we assume that Telus would only bid to keep BCE honest and so would bid to lose.”
Desjardins Securities analyst Maher Yaghi thinks the deal increases the odds of an eventual sale to another telco incumbent. However, he sees the most investment rationale for Telus to acquire MTS given its lower debt versus both BCE or Bell Aliant Inc.
Mr. Yaghi told clients Telus could therefore get more accretion from the use of higher debt. He also noted that the company has more intimate knowledge of competing with Shaw in western Canada.
Telus also has a lower level of wireline assets in its consolidated results versus BCE and Bell Aliant, so it may be more willing to acquire wireline assets, even though they generally exhibit lower growth trends than wireless assets.
“In addition, BCE is currently in the midst of increasing its wireless competitiveness in the Manitoba market, with improved network and handset offers,” Mr. Yaghi said. “Hence, we believe MTS’s wireless business could be the focus of increased competitive offers if BCE and Telus were looking to acquire the company in order to take market share away from MTS before a bid is made.”