Foreign interest growing in small telecoms, Allstream chief says

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Manitoba Telecom Services Inc. says coming changes to the foreign investment rules for the telecommunications industry promise to be a boon for its MTS Allstream division at a time when a turnaround in that business unit is starting to take hold.

Chief executive officer Pierre Blouin said Thursday there is a lot of foreign interest, particularly in the United States, in Ottawa's plans to relax the 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, are expected to be approved by June 22.

"The removal of these restrictions will expand the range of strategic alternatives available that can strengthen our business and increase value in particular for Allstream," Mr. Blouin told analysts.

Winnipeg-based Allstream, which offers telecom services to medium and large Canadian businesses, has a national network that includes some 30,000 kilometres of fibre that is concentrated in large urban centres and can reach about 60 per cent of Corporate Canada.

Mr. Blouin wouldn't say whether the company is having strategic discussions with potential foreign suitors, but said the company talks to "a lot of [telecom]providers a lot of time because they are the customers of Allstream and partners of Allstream.

"So, we have discussions at all levels."

Greg MacDonald, an analyst with Macquarie Securities, has suggested that Allstream could fetch up to $800-million. Beyond an outright takeover, the range of options for Allstream could also include strategic partnerships, finding additional investors or tapping foreign risk capital.

During an interview, Mr. Blouin said Allstream could benefit from a tighter alignment or strategic partnership with larger U.S. telecom providers. "Having the ability to have joint product development, to even have cross investments, if needed, that's something that would benefit Allstream and make it more efficient," he said.

U.S. telcos often serve business clients that also have Canadian operations and are increasingly signing agreements that require them to offer similar services in all markets. Those providers currently spend hundreds of million of dollars to lease space on Canadian networks to ensure the services and features they offer are also available to customers here.

Mr. Blouin said he is focused on aligning Allstream's Internet protocol product offerings (such as video at the desktop) to those of large U.S. providers, while placing less emphasis on its less-profitable legacy services such as long distance.

Roughly 60 per cent of Allstream's revenue comes from legacy services and it could be a few years before IP (roughly 25 to 30 per cent of revenue) becomes a bigger slice of the sales pie. Mr. Blouin, meanwhile, is also focused on improving Allstream's margins and profitability. Allstream's EBITDA margin is 14.6 per cent, an improvement from previous quarters. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)

Earlier in the day, the company reported a first-quarter profit of $53.1-million, or 80 cents a share, versus $43.4-million, or 67 cents, for the same period last year.