Manitoba Telecom sells off Allstream for $540 million, will focus on telecom, IPTV

Manitoba Telecom Services (MTS) will sell off its Allstream business to Accelero Capital Holdings, a Cairo, Egypt-based investment group for $540 million. The divestiture allows the carrier to go forward "as a pure-play telecom with a strong consumer franchise and significant free cash," said chief executive Pierre Blouin in a Vancouver Sun story.

The carrier will use about half of the $405 million in proceeds to reduce pension obligations and debt and the remainder to focus on growing its incumbent businesses.

The move to shed the business-oriented Allstream unit was greeted positively by at least one analyst, Dvai Ghose of Canaccord Genuity, according to a story in the Financial Post.

"Allstream seems to face many of the legacy challenges of an incumbent, including revenue pressure, a highly unionized workforce and pension solvency deficits, without any of the obvious positives such as economies of scale, pricing power, high margins and cash flow," Ghose told his clients.

Without Allstream on its books, MTS will be able to focus on telecom businesses, such as its IPTV offering. It is, Blouin pointed out, the only telecom company in Manitoba offering services across wireless, landline, Internet, TV and home security.

"When you look at our competitors, Bell Canada (NYSE: BCE), Rogers Communications (NYSE: RCI) and Telus (NYSE: TU) are there--but for wireless only. And Shaw Communications (NYSE: SJR) is there for home products. But nobody has the same offerings as MTS has today and there's no indication that's changing," Blouin said in the Sun article.

Blouin gave about equal weight to wireless services, especially LTE, and expanded wireline services on the company's FTTH network.

"As we expand our footprint for LTE wireless, for broadband, for fiber-to-the-home--that, on its own, has a high potential for creating growth for MTS with the product line we have today," he said.

The divestiture also marks the end of an effort by MTS to expand its presence throughout Canada. The carrier purchased Allstream in 2004 as a way to become a national provider of business telecommunications for large corporations and institutions. It hasn't worked as planned, and the company said that it would "recognize a loss of $50 million on a non-cash, post-tax basis" on the unit.

Interestingly, as MTS sheds a unit, it becomes a target for acquisition, Ghose suggested in the Financial Times story, although he pointed out that the number of companies that could bid are limited to Canadian operations. Of those, Rogers Communications would be unlikely because it would control 85 percent of the wireless market in Manitoba, and Shaw would similarly be discouraged because it would control too much of the video business.

That, Ghose said, leaves Bell Canada and Telus, and BCE has a leg up.

"BCE has shown that it can drive strong cash flows from legacy assets through cost-cutting and synergies," he said. Telus, on the other hand, could bid on the property but "we assume that Telus would only bid to keep BCE honest and so would bid to lose."

For more:
- the Vancouver Sun has this story
- and the Financial Post has this analysis

Related articles:
Accelero Capital to purchase Allstream for $504M
Pace to supply MTS with residential gateway equipment

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