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BCE acquires remaining interest in Q9 Networks in $675-million deal

BCE Inc. said on Aug. 8, 2016 that it has struck a $675-million deal to acquire the remaining interest it does not already own in Q9 Networks Inc., a data centre operator. One of its centres, at an undisclosed location, is pictured above.

BCE Inc. is buying out the remainder of data centre operator Q9 Networks Inc. as it hopes to gain an edge in the increasingly competitive market to sell business customers hosting and cloud services.

Montreal-based BCE already owns 35.4 per cent of Q9 after a deal in 2012 in which a consortium of investors purchased the data centre operator for $1.1-billion.

BCE said Monday it has agreed to buy out its fellow investors – Ontario Teachers' Pension Plan, and U.S. private equity firms Providence Equity Partners and Madison Dearborn Partners – for $675-million, a figure that includes the assumption of Q9's net debt.

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The transaction will bulk up BCE's investment in the data centre and cloud services space as fellow Canadian telecom providers along with major U.S. and global tech and cloud-computing players compete for enterprise IT business.

"The acquisition supports Bell's ability to compete against domestic and international providers in the growing outsourced data services sector," BCE said in a brief statement Monday, adding that it expects to close the deal by the end of the year.

Citigroup Global Markets Inc. analyst Michael Rollins highlighted the battle to win IT outsourcing business in a note Monday, writing, "Competition in the enterprise category does not seem to be easing, given the market entry of Zayo [the U.S. company that acquired Allstream Inc. in January] and the launching of new offerings by Rogers [Communications Inc.]."

The deal is likely to build upon existing co-operation between BCE and Q9 since they have already integrated operations to some extent since the 2012 acquisition and together operate 27 data centres.

"We're not announcing any changes to Q9 operations," BCE spokesman Mark Langton said Monday.

"Bell and Q9 have been working closely together since our original investment in the company in 2012."

Karen Sheriff, who was the CEO of Bell Aliant before BCE's move in 2014 to take that company private, has been at the helm of Q9 since January, 2015.

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RBC Securities analyst Drew McReynolds said the deal was not "overly material to BCE's balance sheet."

He predicted it would "provide a boost to BCE's wireline organic revenue growth in 2017, albeit modest, given the sheer size of BCE's business market revenue (which is about $4.5-billion)."

BCE did not disclose exactly how much it is paying its former partners in cash for the balance of the company, stating only that the deal includes Q9's net debt but not BCE's existing ownership interest.

Based on the assumption that Q9's net debt of $500-million at the time of its 2012 sale has not changed significantly since then, two analysts estimated BCE is paying between $175-million and $190-million for the outstanding equity.

It is likely BCE got a good price for the company thanks to a term it negotiated in the 2012 deal.

That transaction also included the settlement of outstanding litigation involving a reverse break fee related to a failed attempt by the same investors to take BCE private in 2008.

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"In consideration of the settlement, Bell received certain non-cash benefits, such as increased equity ownership, and a path to full ownership with an option at a favourable valuation to acquire the partners' entire equity interest in Q9 in the future," BCE wrote in a statement at the time the original Q9 transaction closed.

BCE paid $180-million for its initial stake in Q9 while the other investors contributed $420-million.

The company's deal to own all of Q9 is also the latest in a string of transactions BCE has conducted under the leadership of chief executive officer George Cope.

Most recently BCE announced plans to acquire Manitoba Telecom Services Inc. for $3.1-billion (plus the assumption of $800-million in debt).

That deal still requires government and regulatory approvals and the company does not expect to close until late this year or early 2017.

In addition to the Bell Aliant privatization deal (worth almost $4-billion), since Mr. Cope became CEO in 2008, BCE has acquired wireless retailers the Source and half of Glentel Inc. as well as media properties CTV for $1.3-billion and Astral for $3-billion and an interest in Maple Leaf Sports and Entertainment.

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About the Author
Telecom Reporter

Christine Dobby covers the Canadian telecom industry for The Globe and Mail. Before joining the Globe in May 2014 she reported for the Financial Post for three years, most recently writing about telecom and media. She has also reported for the Toronto Star and New Brunswick Telegraph-Journal. More

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