As Canada’s Manitoba Telecom Services (TSX:MBT) closes in on the sale of B2B unit Allstream, analysts view Bell Canada (TSX:BCE) and Telus (TSX:T) as the most likely buyers for its remaining operations.
As Canada’s Manitoba Telecom Services (TSX:MBT) closes in on the sale of B2B unit Allstream, analysts view Bell Canada (TSX:BCE) and Telus (TSX:T) as the most likely buyers for its remaining operations. In July, Manitoba’s management said it had shifted focus to a broader exit that would “maximise value while promoting deal certainty”.
TD Securities analyst Vince Valentini said in a recent report that Bell Canada (TSX:BCE) is the most likely buyer given its strong track record of making prudent, strategic and accretive acquisitions. Its purchases of CTV, Astral Media and Bell Alliant all helped BCE boost organic free cash flow and dividends, he said.
“Once Allstream is out of the picture, we believe that the remaining operations at MTS would be a seamless and synergistic fit for BCE,” he said, predicting a sale by mid-2016.
MTS provides communications services to business and residential customers in the Manitoba province, while Allstream serves businesses nationwide.
In July, Manitoba’s management said that, with Allstream’s restructuring nearing completion, it had shifted focus to a broader exit that would “maximise value while promoting deal certainty”. A spokesperson for the company said that it has no further updates on the sales process.
BCE has no wireline presence in the Manitoba and only about a 7% share of the wireless market, meaning regulatory clearance would be straightforward, Valentini said. Bell Mobility currently uses the Telus network to service customers in the province.
He said Bell Mobility has added just 173,000 new wireless subscribers in the past year, so acquiring about 500,000 additional ones from MTS would “provide a rare opportunity to meaningfully increase its scale in the wireless business by about three years’ worth of organic growth”.
Buying MTS would boost Bell Mobility’s total subscriber base to 8.62 million from 8.13 million, putting it ahead of Telus Mobility, which has 8.35 million subscribers, and closing the gap with Rogers Wireless, which has 9.42 million, he said.
Sale expected to kick off soon
Barclays analyst Phillip Huang sees Bell and Telus as potential suitors for MTS, noting their partnership allows them to share a wireless network and access each other’s fixed-line fibre networks for future small cell deployment.
Allstream, for its part, is most likely to sell to Rogers, he believes.
“Allstream’s 30,000km national fibre network would help Rogers narrow the gap on fixed-line footprint coverage versus BCE/Telus,” he said.
Although Manitoba management has noted sponsor interest, Huang sees a strategic buyer as most likely given its challenging economics, such as minimal cash flows and need for added investment to aid its turnaround.
Fixed-mobile convergence to influence consolidation
Fixed-mobile convergence, a major M&A theme in Europe, is set to drive the next wave of consolidation, predicted Huang.
Bell and Telus’ partnership stands them in good stead, while Rogers, which relies on access to third party fixed-line networks for its backhaul, is in a weaker position, he noted. Buying Allstream would help to address this.
“As a domestic strategic buyer with lower regulatory approval risks, Rogers may not even need to be the highest bidder to win Allstream,” he said.
To expand its fixed-line presence further, Rogers could subsequently eye a tie-up with fixed-line and DTH provider Shaw, said the analysts. Cableco Cogeco could also be a target, Valentini said.
“The cable industry might want to consolidate to have greater scale to adapt to a world with more online versus linear video consumption and, also, Shaw and Cogeco might need a marriage with Rogers in order to get wireless as part of their bundled offering,” Valentini told TelecomFinance.
