MTS looks a lot more enticing after shedding Allstream

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Manitoba Telecom Services Inc.'s cash-sucking Allstream division has sometimes been derided as a poison pill, a reason for one of the bigger telecommunications companies not to buy MTS. That all changed Friday, with MTS agreeing to sell Allstream.

"With MTS a pure telecom after the transaction, we feel the odds of a takeout of MTS have risen," RBC Dominion Securities analyst Andrew Calder wrote in a note. "We see two natural buyers in Telus and BCE."

Still, it would be a significant purchase even for the really large telecom providers. MTS has a market value of about $2.2-billion after a surge in the stock Friday, and with a takeover premium the price would be even higher.

Telus has the most room on its balance sheet to fund a purchase. But BCE might have the more pressing strategic rationale, Mr. Calder pointed out, because "buying MTS would allow BCE to accelerate its Western wireless growth strategy (BCE has a relatively modest wireless presence in the West)."

Western Canada is an attractive market for cellphone providers because residents of the region run up higher bills than users in some other areas, such as Quebec. For that reason, growth in western Canadian wireless is a priority for BCE Inc., chief executive George Cope signalled on the last quarterly conference call for BCE.

Pierre Blouin, chief executive of MTS, said Friday that there is no plan to sell MTS, "As a public company, if someone has something to say to us or submit to us, you know, we have a duty to look at it with our board," he said. "But we're not in a process about MTS and are currently focusing on getting the Allstream transaction to a close."

There are still a couple of potential stumbling blocks to a takeover of MTS based on a desire to own the Winnipeg-based company's wireless business. Mr. Calder noted that only a quarter of the company's free cash flow comes from the cellular operations, with the bulk still coming from old-fashioned phone lines.

What's more, spectrum that MTS owns is so-called "set aside" spectrum. That means an incumbent such as Telus or BCE cannot buy MTS's wireless spectrum before 2014. Also, rules around a wireless spectrum auction this year limit takeover talks between auction participants. For that reason, analyst Adam Shine of National Bank Financial said any takeover is likely a year away.

"The wait could payoff for investors, but it will require some patience," he said in a note.

Also, MTS will retain some of the pension liabilities that Allstream had run up. Offsetting that, MTS will keep Allstream's tax losses. That enables the company to shelter profits from income tax.

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(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)

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