MTS to sell Allstream, put $200M to pension and debt

Manitoba Telecom Services Inc. has agreed to sell its Allstream business telecommunications arm to an Egyptian investment group and use about half of the $405 million in proceeds to reduce its pension obligations and debt.

MTS, which operates Manitoba's largest telecommunications business, said Friday that the money it receives will be used to bolster its already strong position in its home province and tap growth opportunities.

"MTS goes forward as a pure-play telecom with a strong consumer franchise and significant free cash flow to support our dividend," said chief executive Pierre Blouin.

Asked whether the MTS board will now consider a sale of the main company, Blouin replied the company isn't looking for buyers, although he couldn't rule out an unsolicited offer.

"I think as a public company if somebody has something to say to us, or submit to us, we have a duty to look at it with our board. But we're not in the process about MTS and are currently focusing on getting the Allstream transaction to a close."

On the Toronto Stock Exchange, shares in the company (TSX:MBT) closed up $1.83, or 5.7 per cent, at $33.93.

Group based in Cairo

Allstream's buyer is Accelero Capital Holdings, a Cairo-based investment group focused on telecommunications, digital media and technology companies.

Accelero was co-founded by Naguib Sawiris, an Egyptian businessman who was instrumental in financing the startup of small Canadian wireless company Wind Mobile when he headed Orascom Telecom Holding.

"This investment reflects Accelero's long-term commitment to the Canadian telecommunications market, and our belief in the opportunity that exists to provide capital to enhance the competitive landscape in Canada," Sawiris said in a statement.

Blouin noted MTS is in an unique position because it is the only telecom company in Manitoba to operate in five market segments — wireless communications, phone, Internet, television and home security.

"When you look at our competitors, Bell, Rogers and Telus are there — but for wireless only. And Shaw is there for the home products. But nobody has the same offerings as MTS has today and there's no indication that's changing either."

He said MTS has experienced moderate growth relative the telecom industry, which has been experiencing a long-term decline in some older types of service such as landline phones.

'High potential for creating growth'

The biggest growth opportunities lie in expanding adoption of its LTE wireless service, which has an extremely high-speed suitable for multimedia services, and growth of fibre-optic Internet service to more residential customers, Blouin said.

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

MTS also looking at how the market is evolving "around the web, around media, around content, around applications, around data."

The company said it expects to realize $405 million from the sale, of which $130 million will be used towards the company's pension plan and $70 million will be used to repay debt incurred in February to meet its pension obligations.

The deal, which is the result of a previously announced strategic review, is subject to certain conditions but it's expected to close later this year.

Blouin said the deal will enable Allstream to accelerate its strategy towards achieving long-term sustainable growth.

"Accelero brings access to capital, telecom expertise and intimate knowledge of the Canadian marketplace. We have confidence that Accelero and Allstream's management will together succeed in realizing Allstream's full potential," Blouin said.

"This is a very positive development for Allstream employees, customers, business partners, and for increased competition across the Canadian enterprise market"

Bought Allstream in 2004

Allstream, formerly an independent company created after AT&T Canada restructured, competes in the business telecom market against Bell Canada, Telus and the other large Canadian telecommunications carriers.

MTS bought the company in 2004 in a bid to gain a national presence in certain types of telecom services, mainly geared to large corporations and institutions.

However, the Allstream deal has been controversial from the start and the company said Friday that it will recognize a loss of $50 million on a non-cash, post-tax basis.

It estimated the realized return on its investment in Allstream at minus one per cent.

Allstream currently employs about 2,000 people and serves about 50,000 businesses.

Accelero co-founder Ossama Bessada, said that Allstream fits within their strategy of providing capital and operational support to build value.

"We are committed to working closely with current management to invest in the business and drive enhanced competition in the Canadian telecommunications marketplace through innovation and superior customer service in the future," Bessada said.

MTS union concerned

Bob Linsdell of the Telecommunications Employees Association of Manitoba, which consists of about 1,200 MTS employees, says there are concerns that foreign ownership would make the company vulnerable.

"The biggest concern would be a takeover by some multi-national who doesn’t have the same sense, of you know, providing a service to Manitoba," Linsdell told CBC News.

Blouin said he believes Allstream's new owners will want to keep the majority of the company's employees.

"The management team, my assumption is that the large majority of them will continue [to] operate their job, operate the business. So it's going to be probably very much business as usual," he said.

Subbu Sivaramakrishnan, a marketing professor with the Asper School of Business at the University of Manitoba, says MTS will have to make itself stand out in this market.

"Unless MTS in the long run is able to differentiate itself, I can see problems ahead, because it's an industry where the differentiation is not a whole lot," he said.