MTS closes Allstream deal

Manitoba Telecom Services Inc. (MTS) announced it has completed its purchase of Allstream Inc., despite what appears will be an ongoing battle with Bell Canada.

MTS announced in April its intention to acquire Allstream for $1.7 billion. Under the terms of the deal, MTS would gain Allstream’s fibre network and the ability to offer IP-based services such as voice over IP (VoIP) and IP multiprotocol label switching (IP-MPLS). The deal closed last week at $1.5 billion, according to an MTS statement.

Bell Canada has been opposing the deal since it was announced, even going so far as to take its complaints before the Ontario Superior Court, asking for an injunction. Bell — which owns approximately 21 per cent of MTS — said the Allstream acquisition will cause MTS to breach the rights Bell has under agreements in place between the two companies.

In a statement, Bell specifically identified three areas of concern: a proposal from MTS to adopt revised Conflict of Interest Guidelines; breaches by MTS of a Distribution and Intellectual and Property Agreement (DIPA) between the firms, should the acquisition be completed; and a plan by MTS to issue shares to U.S. shareholders of Allstream, which is in breach of a prior agreement between Bell and MTS. The Ontario Supreme Court dismissed Bell’s application for an injunction last week.

Despite this, Bell “is asserting a continuing claim against MTS for a permanent injunction and damages based on the alleged breaches of the subscription agreement and the DIPA,” according to a statement issued by MTS. Bell Canada did not return calls made by IT World Canada as of press time.

Bell has also taken legal action against Allstream, claiming $150 million in damages for “conspiracy and inducing MTS to breach its obligations to Bell Canada,” according to MTS.

While MTS declined to speak to IT World Canada to comment on what the potential outcome of these actions could be, it indicated in its statement that there is a risk that Bell “could ultimately be successful in some of its claims,” which “could have an adverse effect on MTS. It is difficult to predict with any certainty the ultimate outcome of the various Bell Canada legal proceedings.”

At least one industry observer is not surprised by Bell’s moves.

“Bell is continuing to throw up whatever barriers it can, if for no other reason than just to slow the proceedings down,” said Mark Quigley, research director at Ottawa-based Yankee Group in Canada. “This gives them a little bit more time to fully explore what their strategic options are going to be going forward.”

Some of those strategic moves have already started to play out, Quigley noted, pointing to Bell’s announcement in May that it would be purchasing the Canadian assets of 360networks Corp. and its subsidiary, GT Group Telecom Services Corp. Part of that deal includes Bell gaining access to some fibre in Winnipeg — a downtown core with plenty of customer potential — which will in turn “provide (Bell) with the opportunity to actually go out and compete for some of it and disrupt the market to a certain degree,” Quigley said.

Another question surrounding the MTS buy involves wireless strategies: is Bell going to go into Manitoba and try to compete with MTS in the wireless space?

“I think the answer is probably a safe ‘yes,'” Quigley said. “The network-sharing agreement they have in place with Telus…would cover the wireless network assets that Telus has in Winnipeg and let Bell go to market there.”

Quigley said he suspects after all is said and done, MTS and Allstream will likely join to form one company, with Bell selling off its share in MTS. Bell, in turn, will become more aggressive in the Manitoba market in an attempt to “disrupt MTS at home.”

Quigley added that the lack of a ruling from the federal Competition Bureau on this buy will probably have no effect. “If you look at the large picture, they (MTS) are not eliminating a hardcore competitor in Manitoba; Allstream did not do a lot of business there…it’s not as if they are putting themselves in a monopoly position.”

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