US B2B fibreco Zayo has inked an agreement to acquire Canadian operator Manitoba Telecom Services’ Allstream unit for C$465m (US$348m).
US B2B fibreco Zayo (NYSE:ZAYO) has inked an agreement to acquire Canadian operator Manitoba Telecom Services’ (TSX:MBT) Allstream unit for C$465m (US$348m).
The all-cash deal comes more than two years after the Canadian federal government blocked a deal to sell Allstream, which operates a 30,000km national fibre network and provides bandwidth and telecoms services to business and public sector customers, to Egypt’s Accelero Capital on national security grounds.
Manitoba president and CEO Jay Forbes (pictured) said in a company statement that the agreement follows a comprehensive sales process which attracted a variety of potential strategic and financial buyers and multiple bids.
That Zayo has emerged the successful buyer is likely to come as a surprise to many as analysts had predicted that telecoms majors Bell Canada and Telus were the most likely buyers.
Zayo, which provides fibre and bandwidth connectivity, collocation and cloud services, said in its own statement that Allstream generates some C$600m in revenue and C$100m in EBITDA, which represents a multiple of 4.7x.
The Colorado-based company, which has a market capitalisation of US$5.7bn and an 87,000 mile fibre network in the US and Europe, intends to fund the deal with existing cash and a revolving credit facility.
It said its primary aim is to add Allstream’s infrastructure assets to its core business, noting that the target has more than 9,000 route kilometres of fibre network in Canada’s top five metropolitan markets, and a 20,000 route kilometre long-haul fibre network connecting all major Canadian markets and 10 US network access points. It also operates colocation space in Toronto, Montreal and Vancouver.
Karl Maier, president of Zayo International, said the company is targeting C$300m of revenue for Zayo Canada, a 40% EBITDA margin and a high single-digit growth rate.
Allstream’s Voice and Universal Communications and Small Business divisions will become standalone business units.
Barclays analyst Phillip Huang described the valuation as better than expected, noting that the C$425m in net proceeds Manitoba’s MTS subsidiary expects to receive is higher than the failed C$400m sale of Accelero. It is also well above his estimated selling price of C$278m.
“We believe this transaction maximises the value of a stabilised and renewed Allstream, is in the best interests of the company and positions both MTS and Allstream for long-term success in a competitive marketplace,” he said.
Wells Fargo analyst Jennifer Fritzsche believes the deal also makes sense for Zayo, saying it will help it fulfil its desire to grow internationally. However, she said she is surprised that the US fibreco will keep Allstream’s voice segment as this falls outside its core bandwidth infrastructure business.
She also noted that Allstream’s approximate 17% EBITDA margin will dilute Zayo’s overall margin.
Manitoba said it believes the talks it held with regulators throughout the sales process will help to facilitate approvals so the deal can close in Q1 2016. The MTS board has already cleared the transaction but it still needs the green light from the Competition Bureau and national security approval.
MTS expects to record a post-tax loss on the sale of C$75m-C$90m, some of which will be reflected in its Q4 results. The company said the proceeds may be used to retire debt incurred to make a pension funding prepayment earlier this year and to buy spectrum. More colour will be provided in Q1 2016.
As part of the deal, MTS has agreed to retain pension obligations and related pension plan assets concerning retirees and other former employees. Allstream retains the pension benefits for current employees. MTS has also agreed to reimburse Allstream for certain solvency funding payments.
Forbes said the sale will enable MTS to become more customer centric, noting that it has a new team and strategy.
“We have made strong progress in 2015 executing on our strategy, resulting in significantly improved free cash flow generating capability, with plans for $100m in further free cash flow improvements over the next three years.”
Manitoba’s financial advisers on the transaction were CIBC World Markets and TD Securities, while its legal adviser was Stikeman Elliott. Drysdale Forstner Hamilton Public Affairs acted as public affairs and communications counsel.
Zayo’s exclusive financial adviser was RBC Capital Markets and its legal advisers were Gibson Dunn & Crutcher and Borden Ladner Gervais.
