BCE Inc. moved to seal a long-anticipated deal Wednesday, revealing plans to acquire the stake it does not already own in Bell Aliant Inc. in a $4-billion transaction that will help support dividend growth, at least for the near term.
Montreal-based BCE, Canada’s largest telecommunications company, has used blockbuster acquisitions to fuel growth in the past – consider its purchases of CTV and Astral Media Inc. – and bringing its Eastern Canada telecom affiliate fully under its wing helps accomplish a similar goal.
BCE already owns about 44 per cent of Bell Aliant’s shares and plans to acquire the remaining 127.5 million shares it does not own for a combined value of $31 a share or $3.95-billion. Bell Aliant’s shares surged close to 12 per cent on the Toronto Stock Exchange Wednesday, closing at $31.53.
(BCE owns 15 per cent of The Globe and Mail.)
“The privatization of Bell Aliant dramatically simplifies BCE’s corporate and operating structure, eliminating the requirement for two duplicate public companies and the costs associated with operating those companies,” BCE chief executive George Cope said during a conference call Wednesday morning.
He pointed to the ability to harmonize billing platforms and also share product development costs as examples of where the combined company could avoid redundancies.
BCE said the deal will be immediately accretive to earnings per share and expects to realize about $100-million in pre-tax annual operating and capital synergies, while improving annual free cash flow by $200-million.
Analysts said the largely financial transaction will help BCE support its dividend growth policy at a time when businesses such as land-line telephone and media are coming under pressure and even wireless is not the growth engine it once was.
Greg MacDonald, head of research at Macquarie Capital Markets Canada, said BCE could view the prospect of Quebecor Inc. emerging as a fourth national carrier as an operational headwind and protecting free cash flow and EPS for 2015 at this point in time is appealing.
“But the criticism of the slowdown in the operating growth profile of the company doesn’t disappear,” he said.
Canaccord Genuity’s Dvai Ghose played down the threat on the wireless front but agreed that the long-term growth prospects remain challenging.
“It solidifies the view in some investors’ minds that you have to buy in order to grow your dividend. … The question is: What are you going to buy next?”
A jump in shares of Manitoba Telecom Services Inc. Wednesday, which gained 1.7 per cent, suggested some see it as a potential target, but Mr. Ghose cautioned that prospect faces serious regulatory hurdles as Ottawa is unlikely to allow the sale of one of Canada’s regional challengers on wireless to one of the Big Three.
The completion of the Bell Aliant transaction, on the other hand, is not likely to face regulatory challenges. BCE said it does not require approval for the deal from Industry Canada or the Canadian Radio-television and Telecommunications Commission as it already controls Bell Aliant and there is no transfer of wireless spectrum licences.
It must notify the Competition Bureau but analysts do not expect an issue there as the two companies do not compete with each other. Bell Aliant was formed out of the incumbent telephone operators in the four Atlantic provinces in 1999. It offers wireline and television services in that region, bundling them with Bell Mobility wireless service, and also operates in rural areas of Ontario and Quebec.
The transaction is expected to close in Nov. 30, subject to more than 50 per cent of Bell Aliant common shares held by public minority shareholders being tendered to the offer. A special committee of the company’s board recommends the offer and CEO Karen Sheriff said Wednesday she supports it as “the next logical step.”
Rather than the $31 per share cash offer, Bell Aliant shareholders can elect to take 0.6371 of one BCE share or or $7.75 in cash and 0.4778 of one BCE share for every share they own, the companies said. The offer represents an 11.6-per-cent premium over Bell Aliant’s 20-day weighted average of $27.78 as of Tuesday. Shareholders will not receive the regular quarterly dividend that would have been payable in October.
The company is using $1-billion in cash and financing the balance of the deal with debt. Moody’s Investors Service did not change its stable, Baa1 rating on BCE but said Wednesday the deal is credit-negative for the company due to an increased net debt-to-earnings ratio and steady erosion of after-dividend free cash flow.
BCE said it will spend $2.1-billion in the Atlantic provinces over the next five years on wireline upgrades and expansion of wireless LTE services to 100 more communities in the region. Mr. Cope said the regional headquarters would remain in Halifax and the company will continue to operate the Bell Aliant brand in Atlantic Canada.
BCE also announced Wednesday it acquired two new customer service call centres in New Brunswick, which Mr. Cope said would add 700 jobs.
“Never as a company [have we] disclosed a five-year commitment in any one region in the country,” Mr. Cope said. “We’re doing this today to make sure those who have worked with us for so many years in Eastern Canada understand BCE’s commitment hasn’t changed at all as a result of today’s announcement.”
Mr. Ghose said he believes more than 50 per cent of private minority shareholders will approve the transaction. He noted that an independent valuation pegged the value of Bell Aliant in the range of $27 to $31.50 per Bell Aliant share and no change of control premium is required.