TORONTO – Manitoba Telecom Services has reached a deal to sell its Allstream subsidiary, which analysts say was an albatross around the company’s neck as it deals with fierce competition from the national incumbents.
MTS (TSX:MBT) said on Monday that it’s signed a deal to sell its Allstream business to Boulder, Colo.-based Zayo Group Holdings Inc. for $465 million in cash.
Allstream provides Internet and other services to commercial and government customers and the U.S.-listed Zayo (NYSE:ZAYO) says it wants to add the company’s assets to its own communications infrastructure business.
After closing costs for the deal, which requires federal government approval, Manitoba Telecom (TSX:MTS) says it expects net proceeds of roughly $425 million, some of which may be used to pay down debt.
This is the second time MTS has reached a deal to sell Allstream, which it took over in 2004. Ottawa blocked its $520-million agreement with Egyptian investment group Accelero Capital in 2013 due to national security concerns.
Greg MacDonald, head of equity research at Macquarie, said the deal won’t affect the telecom provider’s core business of providing wireless, Internet, home phone and TV services to Manitoba customers in competition with larger players such as BCE, Rogers Communications, and Telus.
“It’s business as usual, which is, based on the most recent quarter, pretty challenging,” he said.
MTS president and CEO Jay Forbes said in a statement that the deal positions MTS for long-term success as it transforms into a customer-centric business in the face of intense competition.
In its most recent quarterly report, MTS said that only a “complete turnaround” of Allstream’s operations would allow the subsidiary to become financially sustainable.
3Macs analyst Troy Crandall said the deal was part of the effort by Forbes, who took over the top job at MTS on Jan. 1 of this year, to refocus the company on its core business.
“They had their own challenges as a regional telecom, let alone having a declining asset to deal with as well,” he said. “Allstream has kind of been the albatross around their neck.”
Crandall said the ill-fated 2004 purchase of Allstream by MTS was mostly about saving on taxes by converting the company into an income trust, but that those advantages were lost when the federal government changed the tax rules in 2006.
In 2013, the most recent year for which CRTC data is available, roughly half of the wireless subscribers in Manitoba had an MTS plan.
Despite its significant market share, Crandall said, there isn’t much room to grow within the Manitoba market.
Scale is a huge advantage for the major telecom companies such as BCE and Rogers, he said, allowing them to cut costs and offer discounted bundles that the smaller players can’t match.
“Given their limited geography, MTS just can’t get the scale that its competitors can,” he said.
Meanwhile, Crandall said the deal makes MTS more attractive as a candidate for a buyout by one of the incumbents.
And while it’s unclear how the Trudeau government will approach regulating the telecom industry, he said the decision by MTS to sell to an American company is far less likely to raise the ire of the new government.
Under the deal, MTS has agreed to retain Allstream’s pension obligations and pension plan assets related to retirees and other former employees under its defined benefit pension plans. Allstream will retain those related to current employees.
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