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Canada’s Most Exclusive Club

Our favorite oligopoly just got more exclusive. Canada’s Big Three–the telecom triumvirate of BCE Inc. (TSX: BCE, NYSE: BCE), Telus Corp. (TSX: T, NYSE: TU) and Rogers Communications Inc. (TSX: RCI/B, NYSE: RCI)–actually have a smaller competitor who’s a distant fourth: Manitoba Telecom Services Inc. (TSX: MBT, OTC: MOBAF). But not for much longer.

Last September, we wrote about how speculation was heating up that BCE might make a bid for Manitoba Telecom (MTS). Canada’s fourth-ranked telco had previously announced a comprehensive strategic review that prompted analysts to wonder whether the whole company might be in play.

At the time, BCE was tipped as the most likely buyer. With the divestiture of its troubled Allstream unit, which was completed in January, a leaner MTS offers a perfect complement to BCE, which has no wireline assets in Manitoba and controls just 6% of the province’s wireless market.

In fact, BCE doesn’t own any wireless assets in Manitoba either, instead partnering with Telus, which allows its competitor to piggyback on its network there.

Well, this week finally came the news that BCE plans to acquire MTS in a C$3.1 billion cash-and-stock deal that’s equivalent to C$40 per share, or a nearly 22% premium to the stock’s closing price prior to the announcement.

For trivia buffs, the deal comes full circle: The entity that preceded MTS was created from assets that Bell Canada sold to the provincial government back in 1908.

BCE is funding the cash portion of the deal in part by selling one-third of the MTS wireless postpaid subscriber base to Telus, along with the assignment of one-third of MTS dealer locations in Manitoba.

The deal is expected to close by the end of the year or early 2017 at the latest. And BCE management says the combination will be immediately accretive on a free cash flow per share basis.

Following the consummation of the deal, BCE plans to invest C$1 billion in Manitoba over the next five years to expand and enhance its broadband infrastructure there.

More M&A on the Way?

From a sector perspective, the deal sets an intriguing precedent that may very well upend what had been the previous government’s longstanding pursuit of a fourth national wireless carrier. Their hope was that greater competition would result in lower prices and better service.

To that end, the Conservative Harper government, which governed Canada for nearly a decade until it was ousted by the Liberals late last year, had been using government auctions of wireless spectrum as a policymaking tool. Instead of allowing the Big Three to gobble up all the most valuable spectrum, which is the lifeblood of the wireless industry, the Conservatives created set-asides at steep discounts for smaller players.

The problem for the Big Three’s upstart competitors has always been that controlling a swath of wireless spectrum at heavily subsidized prices only gets you halfway there. Companies must then have the ability to invest in capital-intensive network infrastructure, while also stealing customers away from the Big Three. Ah, the power of incumbency.

Cannacord analysts believe that if regulators approve BCE’s deal to acquire MTS, then that could give a green light to Quebecor Inc. to sell its wireless spectrum outside Quebec, or even let Shaw Communications Inc. (TSX: SJR/B, NYSE: SJR) sell Wind Mobile to another carrier.

Of course, we still don’t know how the government will respond to BCE’s bid. However, given Canada’s economic travails at the moment, it might not be as fixated on spurring greater wireless competition as its predecessor was. As one columnist quipped, the Liberals’ telecom policy thus far “can be summarized in one word: non-existent.”

But consolidation proponents shouldn’t crow just yet. The deal will require the government’s sign-off, and that may prompt the sort of scrutiny that reins in further empire-building. After all, it only takes one or two government bureaucrats to cause everything to grind to a halt.


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