BCE Inc T.BCE.PR.F

RBC's comments on BCE's Ziply transaction

[ckwong]

Key points:

• Looking for more timely entry points. Notwithstanding near-term NAV dilution, we believe the Ziply acquisition along with the pause individend growth and institution of the DRIP do provide incrementalvisibility around the balance sheet trajectory and dividend sustainability,and reinforces management’s fibre-first strategy. While we continue tobelieve BCE is well equipped to navigate a slower revenue environmentleaning on a scale advantage, FTTH investment and Internet market sharegains, cost efficiencies, an extensive array of tactical initiatives acrosswireless, wireline, and media, and long-term growth in 5G B2B (IoT, MEC,private network, cloud, security), we look for more timely entry pointswith the closing of the MLSE and Ziply transactions, an associated uptickin revenue and EBITDA growth, and greater progress in tracking towardstargeted dividend payout and leverage ratios potential catalysts for thestock.

• Strategic rationale. Against the backdrop of four strategic pillarsof growth – fibre, business solutions, Bell Media digitization andlowering the cost-to-serve – management indicated Ziply acquisitionbenefits that include a higher financial growth profile, scale, geographicdiversification, cross-sell opportunities and operating efficiencies. Webelieve the acquisition is consistent with BCE’s fibre-first strategy andtiming-wise upon close in H2/25 represents a next phase of fibreinvestment for BCE post-accelerated fibre build in Canada. With Canadaclearly ahead of the U.S. on fibre coverage and with BCE commencingits accelerated FTTH build in 2015 and consistently gaining market sharewithin FTTH footprints ever since, we believe the combination of thistrack record with Ziply’s local market knowledge minimizes execution risk.

• Financial and valuation implications. Given the constructive competitivestructure of the Ziply footprint, a relatively low fibre penetration rate,healthy economic growth, a limited legacy revenue drag and futuretargeted fibre footprint expansion, management expects Ziply’s revenueand EBITDA growth profile to accelerate. The transaction enterprisevalue of $6.7B (net of a $300MM NPV in tax losses) translates to a2025E EV/EBITDA multiple of 14.3x including annual cost synergies of US$30MM (versus a pre-announcement 2025E EV/EBITDA multiple of 7.3x).Reflecting our estimate revisions and the near-term dilutive NAV impactdue to the acquisition premium (~$4/share), our price target decreasesfrom $52 to $47. Our forecast translates to: (i) net debt/EBITDA of 3.75xin 2025E with leverage declining 0.15x-0.20x a turn annually thereafter;and (ii) a cash dividend payout ratio of 81.2% in 2025E and 76.5% in 2026E(or +113.7% and 107.1% excluding the DRIP, respectively).