Winnipeg Free Press - PRINT EDITION

Whispers of MTS sale grow louder

Telcom attractive to national giants now it's free of Allstream anchor

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The possibility Bell and Telus may bid for a divided MTS is driving up share prices for Canada�s only widely held regional telcom.

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The possibility Bell and Telus may bid for a divided MTS is driving up share prices for Canada�s only widely held regional telcom.

MTS has always been the poor cousin of the Canadian telco sector and its share valuation has reflected that.

Its day in the sun looks to be arriving because -- more than ever -- it's now seen as a takeover target.

Unlike other regional telcos such as SaskTel (which remains a provincial crown corporation) and Bell Aliant (Bell is the dominant shareholder), MTS is a widely held public company that is truly independent.

It's always had to fight and claw for attention and make damn sure it was at least as good an operator as the rest of them.

The idea behind MTS's purchase of Allstream, the big national fibre network that used to be AT&T Canada in 2004, was to give it some leverage into the lucrative national enterprise business providing services such as virtual private networks for big banks and corporations that operate across the country.

But Allstream was in the shadow of Bell's larger operation and every blip in the economic cycle -- and upgrade in technology -- affected the division's fortunes.

But since it went public in 1997, MTS has always paid a handsome dividend, making it one of the best-yielding stocks on the TSX.

In the summer of 2010, the company decreased the dividend by about 30 per cent -- because of newly aggressive pricing from competitors in Manitoba and the post-recession blues experienced by Allstream's corporate customers -- and the stock hit a 52-week low.

Since then, while shares in Bell and Telus have enjoyed a steady rise, MTS shares have scuffled.

Even though management at MTS Allstream was always up for the challenge, its biggest break came when the federal government changed the foreign ownership restrictions rules on certain kinds of telcos, making Allstream a potential target for the larger global investment community.

Since the announcement on Friday of a deal to sell Allstream for $405 million to Accelero Capital, owned by Egyptian billionaire Naguib Sawiris, MTS shares are up 12 per cent and closed at $36 on Monday.

Now the value of MTS's Manitoba operations is benefitting from the more distinct possibility of MTS being acquired by another Canadian telco.

The spike in the share price is not so much because Allstream was such a hindrance to MTS's performance or that MTS received more than investors thought it was worth.

It's the expectation MTS is now a juicy takeover target for the likes of Bell or Telus, according to veteran Bay Street telco analysts.

Drew McReynolds, analyst with RBC Capital Markets increased his target price on MTS from $33 to $37 based on a 75 per cent weighting of the fundamental price of $34 and a 25 per cent weighting of $46, McReynolds' estimated takeout price.

"Regardless of the timing and likelihood of any transaction, we believe Manitoba Telecom will now be viewed as a logical takeout candidate, providing a boost to valuation," McReynolds wrote.

Dvai Ghose of Canaccord Genuity, who has typically been less bullish on MTS over the years, increased his target price even more dramatically from $29 to $35.

In the past couple of years, Ghose has challenged MTS's ability to maintain its dividend level and believes the Accelero deal reduces the risk of a dividend cut.

He also believes there is really only one likely buyer -- Bell's parent BCE -- and when it comes down to it, Telus might only bid to keep BCE honest.

Because of MTS's television business, it is regulated by the CRTC and must be Canadian owned (unlike Allstream).

Ghose believes Rogers would not get regulatory approval to buy MTS because that would give Rogers 85 per cent of the wireless market in Manitoba (right now MTS has about 53 per cent and Rogers has 32 per cent).

Similarly, he doesn't believe Shaw would get regulatory clearance because Shaw would then dominate television distribution in the province.

"Realistically, this leaves only Telus and Bell as potential acquirers," Ghose wrote Monday, adding, "(MTS is) much more a Bell-type asset than a Telus target."

His determination Bell is the more likely suitor has to do with Bell's ability to "drive strong cash flows from legacy assets through cost-cutting and synergies" and Telus's desire to concentrate on wireless and its disinterest in MTS's no-growth legacy assets.

Over the years, the talk of a potential takeout has swirled around MTS.

It's much louder now.

 

martin.cash@freepress.mb.ca

Republished from the Winnipeg Free Press print edition May 28, 2013 B5

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About Martin Cash

Martin Cash joined the Free Press in 1987 as the paper’s business columnist.

He has spent two decades chronicling the city’s business affairs.

Martin won a citation of merit from the National Newspaper Awards in 2001 for his coverage of the strike and subsequent multi-million-dollar union settlement at the Versatile tractor plant. He has also received honours and awards for his work on agriculture and technology development in Manitoba.

Martin has written a coffee-table book about the commercial and industrial make-up of the city, called Winnipeg: A Prairie Portrait.

Martin Cash on Twitter: @martycash

martin.cash@freepress.mb.ca

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