BCE last week pulled off the biggest deal the telecom sector has seen in years, acquiring Manitoba Telecom Services (MBT-T) in a $3.9-billion transaction. Whether it's a winner for BCE remains to be seen.
Except for MBT shareholders, who received a fat bonus offer of 23 per cent on their stock, the market yawned. BCE shares barely moved after the blockbuster takeover was announced, perhaps because investors aren't sure if it's really the great growth opportunity that CEO George Cope and his team claim.
Glenn LeBlanc, BCE's chief financial officer enthusiastically promoted such advantages as "immediate free cash flow accretion and significant operational synergies and tax savings" after the deal closes late this year or early in 2017. Significantly, there was no mention of any increase in BCE's earnings per share.
Perhaps that's because Manitoba Telecom lost money in fiscal 2015. Year-end results released in February showed the company was in the red to the tune of $24.4-million (31 cents per share). That compared to a profit of $131.7-million ($1.70 per share) in 2014.
To be fair, the red ink was triggered by a loss of $85.3-million from discontinued operations. Stripping that out, MBT earned $60.9-million (77 cents per share) from continuing operations in 2015. But even that was well down from the 2014 comparable number of $117.4-million ($1.52 per share).
The reality is that MBT has struggled for several years, as growth has been elusive. Wireless revenue, the growth engine of telecoms, was actually down marginally in 2015. The share price, which flirted with $50 in late 2007, has been stuck in the $30 to $35 range for most of the time since 2008. It briefly dipped to $24 in early March of this year before rallying.
In an effort to streamline its business, the company sold Allstream, its Internet and fibre optic division, in a deal that closed in January. CEO Jay Forbes said that the divestiture put MBT "in an improved position to continue our transformation to become a true, customer-first organization, leveraging our tremendous assets and unique position to deliver strong results in a competitive market."
There was much talk of "brand renewal" but the top brass didn't see that as translating into hard cash very quickly. Guidance for 2016 is for operating revenue growth of zero to 2 per cent. Free cash flow is expected to increase between 10 per cent and 15 per cent, however most of that improvement stems from the fact the company does not expect to pay any cash taxes this year "by utilizing our substantial capital cost allowance pools and available tax losses".
It appears that BCE has a lot of work to do to make this acquisition accretive to earnings. The key will be the estimated $50-million in expected cost savings through synergies when the deal closes.
If it closes, that is. The regulators will take a long, hard look at it, especially the separate arrangement that involves selling one-third of MBT's wireless clients to Telus.
Investors are clearly wary. The offer values MBT at $40 per share but there is a cap on how much cash BCE will pay That means MBT shareholders will likely end up receiving a combination of cash and BCE shares. As a result,, the price only rose to $38.50 after the deal was made public and then slipped back. The stock closed on Friday at $37.16, a discount of 7.1 per cent to the offer price.
The bottom line that the acquisition, if approved, will make BCE a bigger company. Whether it will make it a better company is a question mark.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.
Gordon Pape