MTS widens search for Allstream suitor

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Manitoba Telecom Services Inc. is redoubling efforts to find a buyer for its MTS Allstream division by hiring Morgan Stanley to drum up foreign interest, especially from the United States, after attempts to find a Canadian suitor fizzled.MTS was working with investment bankers from CIBC as it considered options for Allstream. Its decision to retain Morgan Stanley as well gives more international heft to its search for a potential purchaser outside Canada, said people familiar with the situation.

Its ramped-up search comes at a time when Ottawa plans to eliminate foreign investment restrictions for small telecom companies that have a revenue market share of 10 per cent or less. The new rules, which are included in the federal budget bill, will take effect once that legislation receives royal assent – likely this month.

Winnipeg-based MTS is said to be in no rush to sell Allstream and there is no full-fledged auction planned. Although some analysts have suggested Allstream could fetch between $800-million and $900-million , sources familiar with the assets said most potential buyers value it at a much lower price, probably at $400-million or less. Allstream is believed to be seeking considerably more than $500-million in a sale.

Some analysts, though, suggest a sale of the division could still be years away, noting that Allstream has failed to generate significant interest at home.

Globalive Wireless Management Corp. held discussions with MTS for much of 2011, but those talks ended in November, sources say. Moreover, Rogers Communications Inc., Telus Corp., BCE Inc. and Shaw Communications Inc. have all taken a pass on Allstream.

Still, the recent takeover offer for Q9 Networks Inc. by an investor group led by BCE has "reinvigorated" efforts to sell Allstream – which, sources say, has effectively been up for sale since MTS conducted an extensive strategic review in 2006. MTS had acquired Allstream, formerly known as AT&T Canada, in a deal worth $1.7-billion in 2004, with high hopes of shaking up the telecom market.

Allstream, which offers telecom services to medium-sized and large Canadian businesses, has a national network that includes some 30,000 kilometres of fibre concentrated in large cities, and can reach about 60 per cent of corporate Canada.

Potential suitors are attracted to the company's vast fibre network but don't want to pay for its legacy telecom assets in a larger deal. "It's a messy deal if you don't want all of the assets," said one source. About 70 per cent of Allstream's revenue comes from services such as long-distance calling.

Nonetheless, Allstream is seen as an asset that's in transition, with president Dean Prevost viewed as a star who is doing the right things to turn the division around. During its most recent quarter, Allstream's EBITDA margin was 14.6 per cent – an improvement from previous quarters. (EBITDA represents earnings before interest, taxes, depreciation and amortization.) Moreover, Allstream is investing in its network and connecting hundreds of new buildings each year. When that period of high capital expenditure is over, and the company is reaping the benefits of new customers, margins are expected to improve.

"We want to continue the growth of Allstream, and that means investment in its network," said chief corporate officer Chris PeirceÖ. "There could be a range of ways someone would be interested in investing in a business like Allstream."

Beyond an outright takeover, the options could include strategic partnerships, finding additional investors or tapping foreign risk capital.

There has been some suggestion that large U.S. telcos, particularly those with business clients that have Canadian operations, could be interested in Allstream once the new foreign investment rules take effect. Currently, those providers lease space on Canadian networks to ensure their services are available here.

AT&T, however, is considered by some analysts to be an unlikely bidder, since it lost money on the asset through a minority interest in the past. It remains unclear whether Verizon Communications Inc. would be interested.

"Allstream claims to have about 10 per cent or so of market share of the enterprise market, so it hardly gives you any scale if you are a foreigner," said Dvai Ghose, an analyst with Canaccord Genuity. "The enterprise market in Canada is still dominated by Bell and Telus in their respective regions."