Shocker on the prairie

Winnipeg carrier Manitoba Telecom Services Inc. (MTS) plans to purchase Allstream Inc., a move that industry analysts said is good for corporate Canada, if unexpected.

Allstream was largely thought to be courting purchasers since emerging from bankruptcy protection in 2003. Still, MTS’s announcement that it would spend $1.7 billion for the Toronto-based competitor surprised many people.

“Everybody talked about Telus and Allstream, or Allstream and Sprint,” said Mark Quigley of The Yankee Group Canada in Ottawa. “MTS was never, ever considered.”

Analysts said this deal could change Canada’s telecom landscape.

“I am surprised about MTS,” said Ronald Gruia at Frost & Sullivan in Toronto. “It’s a little bit of a bold move….I think it’s going to shake things up a little.”

Gruia said Allstream and MTS together would be a force for Bell Canada and Telus Corp. to reckon with, bringing competitive pressure, lower prices and better service to the sector. “They plan to become a viable third player in the Canadian telecom marketplace.”

According to Roberta Fox of Fox Group Consulting in Markham, Ont., MTS-plus- Allstream is good news. Allstream appears stable with a financially solid a partner in MTS, and MTS’s business clients in Manitoba win access to Allstream’s enterprise-class data service offerings. Still, she wondered about the Manitoba company’s true intentions.

“I don’t think MTS really wanted to become a big guy. I think they wanted Allstream’s tax credits,” Fox said. Allstream stockpiled tax credits during bankruptcy protection. “MTS is very profitable. They were going to have to pay a lot of taxes. Allstream has hundreds of millions of dollars in tax credits just sitting there.”

But judging by the words of Bill Fraser, MTS’s CEO, the carrier views Allstream as more than a tax shelter. “We look forward to the opportunity for profitable growth and value creation this next step in our evolution represents,” he said in a March 18 press statement.

Allstream represents growth beyond current provincial borders for MTS, Gruia said. “This gives them an opportunity to play in other markets.”

But if the company really wants to make a splash with enterprises outside of Manitoba, it needs a wireless component in its portfolio. MTS operates a wireless network inside the province, but Gruia figures the firm might consider expanding by further acquisition.

He mentioned Allstream’s deal to build fixed-wireless data products with Microcell Telecommunications Inc., the Montreal mobile network operator that runs the “Fido” wireless service.

Might MTS purchase Microcell? Gruia said it’s possible. “I think there’s going to be a race to see who’s going to buy them, either Sprint Canada or possibly these guys,” MTS. “This is highly speculative, of course, but it’s one scenario that could develop.”

Quigley, however, said MTS probably wouldn’t buy Microcell to bolster its extra-Manitoba wireless operations. He pointed out that Microcell’s network uses a different kind of technology than does MTS’s in-province network (GSM versus CDMA, respectively), and it would be too costly for MTS to integrate the disparate infrastructures.

“They’d probably be better off speaking to Bell or Telus about some sort of network sharing agreement,” Quigley said. Bell and Telus operate CDMA wireless networks like MTS does.

Quigley also said MTS’s gain is Telus’s loss. People expected the Burnaby, B.C. carrier to purchase Allstream to bolster its presence in Ontario. For Telus, “growth will now have to come the hard way,” Quigley wrote in a recent market strategy report.

Gruia indicated an unusual clause in the MTS-Allstream deal: if Allstream pulled out, the firm would owe MTS $50 million. Normally it’s the other way around. The company making the purchase promises to pay the purchased company a break fee if things fall through. In this case, the purchasee promises to pay the purchaser, perhaps with good reason, Gruia said. “It eliminates the possibility for Allstream to go in and talk to Telus.”

At press time, the MTS-Allstream deal was not set in stone. Allstream’s shareholders had not voted on the agreement. Some MTS investors were reportedly unhappy with the arrangement and were maneuvering to end the deal. And Bell Canada Enterprises Inc. (BCE) hadn’t chimed it with its opinion. BCE owns nearly 22 per cent of MTS, and analysts said government regulators might frown upon a deal that would see a big incumbent local exchange carrier (ILEC) like Bell take control of a competitive local exchange carrier (CLEC) like Allstream.

Fox envisioned two potential scenarios for BCE: the company could sell its stake in MTS, and use that money to increase its investment in Aliant Inc., thereby strengthening its position in the market; or it could purchase all of MTS, as unlikely as regulators are to approve such a move. Note, however, that in this case, just as in the first scenario, BCE strengthens its position in the market. “Bell always wins,” Fox said.

If MTS and Allstream manage to make this marriage work, the combined company would operate like the big telcos do, Gruia said. “The new organization in Manitoba will be considered an ILEC, and outside of the province they’ll be considered a CLEC, which is pretty much the same as Telus and Bell.”

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