BCE to buy Manitoba Telecom in friendly deal worth $3.9 billion

The MTS building in downtown Winnipeg is seen on Tuesday Nov. 29, 2005. (Wininpeg Free Press - Joe Bryksa / CP)

TORONTO -- BCE Inc. has signed a friendly deal valued at $3.9 billion to buy Manitoba Telecom Services Inc., one of the few regional independent rivals to Canada's three main national telecommunications companies.

The agreement announced Monday would add Manitoba's largest phone, Internet and wireless company to BCE's Montreal-based business, which includes the CTV television network, the former Chum and Astral radio chains and Bell Canada.

"Under the terms of this transaction, MTS will achieve much more than it could have as an independent company," Manitoba Telecom president and CEO Jay Forbes said in a conference call with analysts.

"BCE's commitment to invest $1 billion over five years into Manitoba's telecommunications infrastructure will also contribute greatly to the prosperity of our province and the quality of our customer experience."

BCE has also agreed in principle to sell about one-third of Manitoba Telecom's monthly contract wireless customers and one-third of the MTS stores in Manitoba to Vancouver-based Telus Corp. (TSX:T).

"Clearly, Telus's position in the wireless industry is significantly enhanced in this transaction, as is Bell's," BCE president and CEO George Cope said.

"So you'd expect, I think, the market to continue to be as competitive as it has been -- if not maybe even more -- as a result of all this."

The deal requires approval from the Competition Bureau, the CRTC and the federal department of Innovation, Science and Economic Development -- formerly called Industry Canada.

A spokesman for Innovation Minister Navdeep Bains said in an email that the department's priority is ensuring competition for Manitobans while investment in rural service continues.

"While the government does not comment on individual companies' plans, such transactions would be subject to all relevant regulatory approvals," the email said. "We will be looking carefully to make sure the concerns of Manitobans are addressed."

Aravinda Galappatthige, an analyst with Canaccord Genuity, said the deal could lead to further consolidation in the wireless industry.

"If BCE-MBT is approved, we believe this would set a significant precedent, as it would reduce Manitoba to a three-player wireless market from four," Galappatthige said in a note to clients.

Bell trails Toronto-based Rogers and Telus in terms of wireless customers, but BCE is by far the largest of the three in terms of overall market value at more than $51 billion, compared with $23.7 billion for Telus and $19.7 billion for Rogers.

Rogers had nearly 9.9 million subscribers to its various wireless services as of Dec. 31, compared with 8.45 million at Telus and 8.24 million at Bell. MTS Mobility had 483.000 subscribers.

Under the deal, Manitoba Telecom (TSX:MBT) would need to sever its commercial ties with Rogers Communications Inc., (TSX:RCI.B) which has been providing it with wholesale access to the national market.

The network sharing arrangement with Rogers "is underpinned by a complex set of agreements that we plan to work through in the coming months as we work to closing," Forbes said.

But neither Forbes nor Cope provided details on what it might cost to unwind the Rogers relationship or what Telus would pay to acquire its share of the MTS wireless subscribers.

The acquisition would add 2,700 employees from Manitoba Telecom to BCE's Bell phone business. Bell's western operation would nearly double to 6,900 people and operate as Bell MTS, headquartered in Winnipeg.

While often allies, BCE and Manitoba Telecom have occasionally had a combative and competitive relationship.

At one time, BCE was a large shareholder of Manitoba Telecom and there was widespread speculation that it would buy full ownership of the company.

But Manitoba Telecom took a different path to remain independent and decided to buy Allstream, a Toronto-based company that competes directly with BCE nationally for business customers. MTS completed the sale of Allstream to Zayo Group of Boulder, Colo., for $465-million cash in January -- removing one obstacle to BCE.

BCE (TSX:BCE) is offering $40 per share, about 45 per cent in cash and 55 per cent in stock, for MTS shares (TSX:MBT). The deal would also see BCE assume about $800 million in debt.

BCE would have the opportunity to match any superior offer that may come forward. Each side has agreed to pay a $120-million break fee under certain circumstances if the deal isn't completed.