Manitoba Telecom Services has sold its Allstream national network -- a constant drag on the company's performance -- but the Winnipeg telco now faces the heightened prospects of being a takeover target itself.
MTS has agreed to sell its Allstream business telecommunications arm to Accelero Capital Holdings, a Cairo-based investment group focused on telecommunications, digital media and technology companies.
MTS will use about half of the $405 million in proceeds to reduce its pension obligations and debt. The deal is expected to close in the second half of this year, subject to regulatory approval.
Considering that it paid $1.7 billion for the massive national fibre network that cost its former owners about $4 billion to build, the nine-year experiment to provide a vehicle for growth outside the confines of Manitoba's borders for MTS was far from a blockbuster success.
And now the provincial telco -- a dominant competitor on its home turf -- is back to facing the prospects of operating as a regional independent in a market dominated by large national players.
"MTS goes forward as a pure-play telecom with a strong consumer franchise and significant free cash flow to support our dividend," chief executive Pierre Blouin said Friday.
'It's a little sad. For a decade, MTS had ambition to be a national player'
-- Iain Grant, a principal at The Seaboard Group
But Blouin sounded less than elated when outlining the deal, which was the culmination of an eight-month strategic review, to investors and media on Friday. That process was kick-started by the change in federal rules regarding foreign-ownership restrictions of certain types of telecommunications companies.
Those changes do not apply to MTS's Manitoba operations, so if it were in play, only Canadian-owned companies would be eligible to buy it.
Blouin said there were no plans to put MTS on the market but, he said, "We are a public company and if someone has something to submit, we have a duty to look at it with our board. But we are not in that process about MTS. The focus is on Allstream closing."
But those prospects immediately became a topic of conversation among analysts and others.
In his report to shareholders, Greg MacDonald, head of research at Macquarie Capital Markets, wrote, "We believe the stock (MTS) could get a little more support from the potential for a takeout of the stub or competing bid for the entire company by Telus or BCE."
Dvai Ghose of Canaccord Genuity said, "Many of us on the street think you (Blouin) may want to sell the asset now."
Drew McReynolds, of RBC Capital Markets, said, "Without Allstream, we believe MTS could become a takeout target for either Bell or Telus over the longer term."
MTS shares closed up $1.83 on Friday to $33.93.
Blouin said the focus is to make MTS stronger in Manitoba.
Out of the $405-million selling price, the company said it will make about $170 million in pension solvency payments and pay off another recent $70-million short-term loan to pay for a previous pension payment, leaving $165 million in net cash proceeds.
Bob Linsdell, executive director of the 1,200-member MTS local of the Telecommunications Employees Association of Manitoba, said he hopes since the company "just received a large bag of money," it might have a positive effect on contract negotiations with the white-collar workers.
According to Linsdell, the current scenario is grim: "The company has claimed it needs belt-tightening and our members have just come off two years of zero per cent increases and facing a wage freeze for three years," Linsdell said.
In addition, he said, "The company has threatened to terminate our collective agreement on July 17, at which time they may impose unilateral changes to the terms and working conditions of our members."
Blouin said the deal will not affect the dynamics of the negotiations.
Company officials would not disclose plans for the utilization of the rest of the proceeds, other than to say it will allow the company to strengthen its balance sheet and ensure sustainable free cash flow to support the MTS stock dividend.
Blouin said it will allow MTS to expand its LTE footprint -- the latest wireless technology infrastructure -- and to take part in an upcoming federal government wireless-spectrum auction.
But Blouin's insistence the company will be able to grow its business in Manitoba now that it has shed an asset that had been a drag on its overall financial performance may not mean much. That's because MTS already has a strong market share in most of its lines of business -- wireless, Internet, home phone, TV and home security.
Bell, Telus and Rogers aren't able to bundle such a range of services in Manitoba.
Blouin said there are no plans to venture outside Manitoba or to expand into any new service offerings within the province. Iain Grant, a principal at The Seaboard Group, a consulting practice, said, "You have a right to be skeptical because he already has all that business. He can upgrade the infrastructure but he's still selling to the same people, just from a different platform."
Grant said it's too bad to see the end of the company's experiment to own a national business telecommunications network.
"It's a little sad," he said, "For a decade, MTS had ambition to be a national player."