Comments from TDHere are some of the comments from TD. TD did a good job breaking down the announcement into six distinct areas.
THE TD COWEN INSIGHT
12 Month Target Price. $43.00 (prior $50.00)
Many questions from investors about why BCE needed to take on more debt leverage for a seemingly expensive acquisition. We do not like the move (simply doing nothing and paying down debt with the MLSE proceeds would have been better, in our view) and our forecasts and TP have been lowered.
We understand why management wanted to both reset the dividend burden and augment organic revenue/EBITDA growth with a faster-growing asset. Having some diversification into the U.S. could be useful if Canadian market conditions do not improve, and we like the flexibility to allocate less capex to Canada and more to the U.S. if future government/ regulatory policies do not reward investment in Canada. We also expect debt leverage fears to be eased NTM via accretive infrastructure funding deals and/or non-core asset sales. After investors digest the FCF dynamics of the Ziply deal (capex to extend the FTTH footprint to 3.0M homes from 1.3M homes is not expected to be as high as we first thought), and after we get through the Q3/24 results on Thursday (headwinds for organic service revenue growth should be on full display), we believe the stock could find a support level. We do not expect a dividend cut; so we would be surprised to see the yield to stay above 10% for any extended period of time (if it even gets to that level).
Event: BCE to acquire 100% of Ziply Fiber for an enterprise value of ~C$7.0bln. BCE will implement a DRIP to support acquisition funding, along with expected proceeds from the sale of its stake in MLSE. Accompanying this announcement, the company announced a pause in its dividend growth plans.
Impact: NEGATIVE
Our Investment Thesis The dividend yield on BCE shares is well above market averages, and we believe some investors will be attracted to this yield as interest rates in Canada likely continue to decrease over the next year. We do not expect a dividend cut, but we also do not expect dividend growth in the near term due to high leverage, and the payout ratio remains elevated versus most peers. The yield alone keeps us at a HOLD rating, but we see better upside potential with the same or lower risk in other names in the telecom sector.
There are six key pieces to the news from BCE; so let us summarize how we treated each of them in our model. Not every analyst will do it the same way; so we acknowledge that consensus could get confusing for a while.
1. Organic headwinds: The actions taken by BCE (especially on the dividend) and the recent industry news (sluggish ARPU at Rogers and population growth policies from the government) would suggest that organic revenue/EBITDA growth trends are getting worse temporarily. We chose to wait for Q3/24 results before considering any changes to this aspect of our forecasts; so revenue/EBITDA/capex estimates remain unchanged for 2024E and 2025E.
2. Dividend freeze: We had previously assumed +1% dividend growth in 2025; so we took that to zero.
3. DRIP: We assumed 35% participation in the new discount DRIP, which saves about $1.2bln per year in cash/debt, but it comes at the expense of about 30M new shares being issued in 2025. Our 2025E FCF increases slightly, but both FCF/share and EPS have declined with the dilution. We show cash only dividends in our net FCF calculation (Figure 3), but the dividend payout ratio (137% in 2025) is shown using dividends paid in cash and shares. Technically, the DRIP should allow FCF (on our definition) to cover cash dividends (89% payout in 2025E), but we want to see 100% of the dividend obligation covered over time.
4. Ziply acquisition impact on debt leverage: Spending all the MLSE proceeds, and then some on an acquisition was not expected and not desirable, in our view. We assumed closing of the $7bln deal on the last day of 2025 (it makes the modelling impact much easier to see, as opposed to any hard view from us on when the deal will close). We did the end of 2025 debt/EBITDA ratio on a pro forma basis (including C$466mm in EBITDA), but Ziply revenue, EBITDA and capex are not included in our estimates until 2026. Figure 2 (new versus old forecasts) shows that estimated leverage increased to 3.8x in 2025 versus 3.5x previously.
5. Ziply impact on revenue and EBITDA growth: We assumed 9% growth in revenue in 2026 versus the 2025 guidance provided of US$700mm in revenue (C$959mm). We assumed 13% growth in EBITDA in 2026 versus the 2025 guidance provided of US$340mm (C$466mm), which was cited inclusive of US$30mm in expected synergies (7.7% ratio of synergies to opex). The current EBITDA growth rate was cited at 11%, but management indicated that this should be able to improve (we believe towards 15-20%) over time as new FTTH passings are completed. Achieving high-teens EBITDA growth could be critical to proving that this acquisition was justified; however, using our 13% estimate in 2026, the boost to consolidated EBITDA growth for BCE will be 44bps (in our first-look note, we estimated near 100bps, but that was based on 20-25% growth for Ziply). Internet subscribers are estimated to reach 530k by the end of 2026 (500k on FTTH, for ~26% penetration of homes passed, and a small amount of 30k still on copper), with 60k net adds in that year (current figures cited are 400k total subs, with 325k of those on FTTH).
6. 19% dilution to 2026E FCF/share: Our capex assumptions for Ziply are 7% of revenue for maintenance, and then C$1,400 per home for new FTTH passings (management indicates US$1k per home or less for new construction because backbone fibre is already in place and a lot of the plant is aerial). This derives total capex of C$773mm in 2026, which exceeds the estimated EBITDA of C$528mm (in other words, negative simple FCF). When we also factor-in the interest expense implications of the deal, plus the flow-through impact of the DRIP, you can see the material impact on our FCF estimate for 2026 in Figure 3 (prior estimate of $4,219mm for management definition FCF is down to $3,739mm, and on a per-share basis, we have lowered our 2026E by 19%). We have not modelled beyond 2026 at this point, but based on Ziply’s plan to grow FTTH passings through to the end of 2028, we would expect FCF dilution from this deal to last for several years.