Telecommunications: Seismic shift

The BCE-Aliant deal is part of the North American industry consolidation trend.

The Canadian telecom industry's tectonic plates shifted a little bit more on March 7. BCE Inc. and Aliant Inc. (53.2% owned by BCE) announced a proposed deal to combine certain wireline assets in Ontario, Quebec and the Atlantic region into a single income trust that would also include BCE's 63.4% stake in the Bell Nordiq Income Fund (TSX: BNQ.UN). The new trust would be run by BCE out of Aliant's corporate head office in Saint John, N.B., with a total of 3.4 million phone lines and about $3.2 billion in annual revenue.

BCE (TSX: BCE) expects the trust to have an equity value of $8.5 billion (calculated at a 7.25% yield), making it one of the biggest trusts in the country. In a conference call, company executives also touted the combined entity as one of the largest regional telecom service providers in North America. “This company will be regionally focused, a community-by-community focus,” president and CEO Michael Sabia told analysts. “We're doing that because we're convinced that this is the best way to deliver high-quality communications services in regional markets.”

The trust plan, which is expected to go through in the third quarter, puts more flesh on the bones of the financial reorganization Sabia unveiled on Feb. 1. BCE will transfer some $1.25 billion of Bell Canada debt to the new trust. Aliant's minority shareholders will exchange their shares for 26.5% of the trust–Aliant shares (TSX: AIT) rose 19% on the news to adjust for the assumed value–while BCE expects to reduce its initial 73.5% stake to 45% by distributing trust units to shareholders.

The flip side to the deal is that Bell Canada will acquire Aliant Mobility wireless operations and Aliant's DownEast Communications retail outlets. “We think that consolidation and bringing that kind of national presence…into the Atlantic Canadian market will be of significant benefit…to the competitive position in this market,” Sabia said. Consumers will not likely notice a change. Branding in the various regions will remain the same, and executives expect a “seamless” transition.

But for BCE, including Aliant and Bell Nordiq in its trust plan further simplifies its financial structure, and provides the firm with increased flexibility thanks to the wireline business's greater scale and scope. “Strategically, BCE is swapping wireline exposure for more wireless exposure and provides opportunity for the wireline operations to gain additional synergies and efficiencies,” wrote UBS Investment Research analyst Jeffrey Fan in a report.

The new structure might also protect BCE should foreign ownership rules eventually disappear for Canadian telecom providers. The North American industry is quickly consolidating: just two days before the BCE-Aliant deal, AT&T Inc. tabled a US$67-billion takeover offer for BellSouth Corp. And that move came just a few months after SBC Communications completed its US$16-billion acquisition of AT&T in November, and then adopted its famous corporate banner. Should AT&T's latest takeover offer be approved by shareholders and regulators, only two other dominant U.S. carriers will remain, Verizon Communications and Sprint Nextel.

In Canada, industry watchers are focusing on Manitoba Telecom Services Inc. (TSX: MBT), whose CEO, Pierre Blouin, is undertaking a complete review of operations. The option of converting to an income trust is likely on the table, and some analysts think the BCE-Aliant deal will send shock waves into Manitoba. One potential scenario: MTS's Allstream division combines its wireline operations in the new trust, while either BCE or Telus snaps up MTS's wireless business. “With the telecom consolidation theme in full swing,” wrote Fan, “we believe further combination of wireline into the new trust is a definite possibility.” Brace yourself for more seismic activity.