December 5, 2013 Sections
Winnipeg Free Press - PRINT EDITION
Industry and equity analysts struggled to come up with adjectives to describe their surprise at Industry Canada's rejection of the sale of Allstream to the Egyptian company Accelero on national security grounds.
Industry officials -- let alone executives of the two companies involved -- had no answers at to why, after a five-month Industry Canada review, the much-anticipated sale of MTS's Allstream division was squelched.
But what was well understood is the decision puts MTS's medium-term fortunes in a great deal of uncertainty.
Analysts sent out a parade of reports Monday night and Tuesday morning downgrading their target price on MTS shares and investors clambered to sell, driving the price down 8.5 per cent to close Tuesday at $29.62 on trading volumes more than 10 times normal.
When the deal was originally announced in May, it was widely heralded as perfectly suited to new Industry Canada regulations that came into effect last year, making it possible for telco players like Allstream -- that have 10 per cent or less market share in Canada's telecommunications market -- to have increased foreign investment.
-- RBC Capital Markets analyst Drew McReynolds, striking a note of caution for clients on MTS
MTS chief executive officer Pierre Blouin had no inkling rejection would be the outcome of a process he had orchestrated and hoped would be a significant milestone event in the history of the company.
"We kept the government informed all along," he said. "When we selected Accelero after a long process of looking for investors for Allstream all over the world, we determined they were the best fit based on the new rules, also based on the fact their principals had already been approved by the federal government when they launched another transaction (Wind Mobile) in Canada a few years ago."
Accelero Capital Holdings, a private equity firm based in Cairo and Paris whose principals had funded the launch of Wind Mobile in Canada, had agreed to pay $405 million for Allstream, MTS's Toronto-based national business fibre-optics business, as well as assume $115 million of its liabilities. In its proposal, it had also stated it would invest an additional $300 million into the business.
Winnipeg-based MTS was going to use the proceeds of the sale to beef up its balance sheet and put much-needed cash toward a growing and worrisome pension solvency deficiency.
But late Monday afternoon federal Industry Minister James Moore said upon review under national security provisions of the Investment Canada Act the deal will not proceed.
In the only explanation so far, Moore said, "MTS Allstream operates a national fibre-optic network that provides critical telecommunications services to businesses and governments, including the Government of Canada."
Iain Grant, a well-connected industry consultant and principal of the Seaboard Group, said, "The deal just seemed to be such a good idea. It strikes me as a very odd decision. Are we worried about Egyptians -- are they the enemy? It's a shock. It will give pause to those coming to Canada thinking it is open to investment."
The decision is even more surprising since the federal government had been mounting a high-profile campaign encouraging more foreign investment in the wireless field, something the big three Canada telcos -- Bell, Telus and Rogers -- had been opposing in an even more elaborate way, buying hundreds of thousands of dollars of advertising warning Canadians about the evils of new foreign entrants getting an unfair advantage in Canada.
Sudbury MP Glenn Thibeault, the NDP's critic for small business said, "I think this shows increasingly that for investors looking to invest in Canada, they are left rolling the dice and crossing their fingers trying to figure out how to make things work and how to invest in Canada. That's unfortunate because in my opinion, and in my party's opinion, this is no way to run a G8 country."
He said there is an ongoing issue about consistency when it comes to Industry Canada's review of foreign investments -- required with any investment of more than $344 million-- and the net benefit to Canada from that investment.
-- telecommunications analyst Iain Grant
"What we see from this decision from the Conservatives is opaque criteria on what is a net benefit to Canada," Thibeault said. "They have industry confused, they have investors confused and it will hurt investors and consumers, especially those in Manitoba."
Despite the fact MTS is such an important corporate icon in Manitoba, the provincial government was not going anywhere near the matter. A cabinet official said, "Essentially it is federal jurisdiction. We had no input at any stage. At this point, we have not decided on any further action."
In what may have been an attempt at an ironic explanation for what the national security concerns might be, Dvai Ghose, a telecommunications analyst with Canaccord Genuity, noted an Accelero partner, Khaled Bichara, has been fined $250 by the U.S. government for making false statements to secure a $2-million loan from a U.S. agency. But he continued to act in senior management positions with global public companies that trade on the New York and London Stock exchanges.
Grant wondered if Ottawa was worried about the fact the Government of Canada was such a large customer of Allstream maybe that business could be moved to Bell's network to make the deal with the Egyptian company work.
But in another twist, he said Bell, Telus and Rogers all use a lot of Huawei equipment, the Chinese manufacturer that has been probed in the U.S. for security and espionage risk. Allstream uses little-to-no Huawei equipment.
"When you peel back the onion it becomes even more mystifying," Grant said.
LIKE the annoying sibling that gets all the parents' attention, MTS has worked long and hard at finding a solution to its profit-challenged Allstream division while its Manitoba business continued to dominate the market.
The loosening of foreign ownership restrictions and a sale to Accelero Capital looked like the answer.
But now that that's been rejected by the federal government with no chance of an appeal, MTS CEO Pierre Blouin said the company will refocus its attentions on bringing the national business fibre-optics network back to where it was five months ago, when the Accelero deal was first announced.
"Just before the review, Allstream had 10 quarters of EBITDA (earnings before interest, taxes, depreciation and amortization) growth and was doing pretty well," Blouin said. "Our focus now is to bring this business back on track."
Analysts are just about unanimous in their estimation it will not be easy, citing slumping performance during the five-month Industry Canada review, among other challenges.
Neither do they hold much hope for MTS shares in the near term, which took a beating on Tuesday. Most have lowered their 12-month target price to between $30 and $31.50, despite the fact its Manitoba operations continue to be strong.
"Our previous positive view on Manitoba Telecom was predicated on a completed Allstream sale with positive implications for the balance sheet, pension obligations and an overall de-risking of the Manitoba Telecom story," wrote Drew McReynolds of RBC Capital Markets. "As such we believe the story lacks a near-term catalyst and we see better risk-adjusted returns elsewhere in the sector."
Some analysts now worry about the future of the company's ability to continue to afford its juicy $1.70 per share annual dividend.
Dvai Ghose of Canaccord Genuity said, "Dividend sustainability risk has resurfaced."
And then there is the issue of pension solvency. The company had made it clear it was going to use about $200 million of the $405 million it was expecting from the Allstream sale to pay down pension solvency deficits.
Analysts worry about where that money will come from now.
However, union officials are not as concerned.
Misty-Hughes Newman, president of TEAM-IFPTE Local 161, representing white collar MTS workers in Manitoba, said, "In terms of the MTS Pension Plan, the decision does not make TEAM members any worse off than they were the day before the sale."
-- Martin Cash
Republished from the Winnipeg Free Press print edition October 9, 2013 B4
Updated on Wednesday, October 9, 2013 at 6:06 AM CDT: