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BCE Inc. has announced:

• Transaction enterprise value of approximately $3.9 billion: BCE to acquire all issued and outstanding common shares of MTS for approximately $3.1 billion and assume outstanding net debt of approximately $0.8 billion
• $40 per common share value represents a significant premium for MTS shareholders; transaction unanimously recommended by the MTS Board of Directors
• Bell MTS team will serve customers across Manitoba, Winnipeg head office will become Bell’s Western Canada headquarters
• $1-billion, 5-year capital investment commitment to expand broadband wireless and wireline networks in urban and rural locations throughout Manitoba
• Free cash flow accretion supports Bell’s broadband leadership strategy, dividend growth objective

MONTRÉAL and WINNIPEG, May 2, 2016 /CNW Telbec/ – BCE Inc. (Bell) (TSX: BCE) (NYSE: BCE) today announced that it will acquire all of the issued and outstanding common shares of Manitoba Telecom Services Inc. (MTS) (TSX: MBT) in a transaction valued at approximately $3.9 billion.
…
Bell plans to invest $1 billion in capital over 5 years after the transaction closes to expand its broadband networks and services throughout Manitoba, including:

• Gigabit Fibe Internet availability, delivering Internet speeds on average up to 20 times faster than those currently offered to MTS customers, within 12 months after the transaction closes.
• the rollout of Fibe TV, Bell’s innovative broadband television service.
• accelerated expansion of the company’s award-winning LTE wireless network throughout the province, with average data speeds twice as fast as those now available to MTS customers.
• integration of MTS’s Winnipeg data centre with Bell’s existing national network of 27 data and cloud computing centres, Canada’s largest, and the country’s most extensive broadband fibre network footprint.

…
BCE will fund the cash component of the transaction from available sources of liquidity and will issue approximately 28 million common shares for the equity portion of the transaction, which offers MTS shareholders access to BCE’s dividend growth potential. The BCE dividend has been increased 12 times, representing an aggregate increase of 87%, since Q4 2008 and currently delivers an attractive 4.6% yield. When the transaction is completed, MTS shareholders will own approximately 3% of pro forma BCE common equity.

They later announced:

that it will divest one-third of the postpaid wireless subscribers of Manitoba Telecom Services Inc. (MTS) (TSX: MBT) to TELUS Corp. (TSX: T, NYSE: TU) following the completion of Bell’s acquisition of MTS announced earlier today. As part of the transaction, Bell will also assign one-third of MTS dealer locations in Manitoba to TELUS.

“This transaction with TELUS enhances wireless competition to the benefit of Manitobans while reducing the cost of our acquisition of MTS,” said George Cope, President and CEO of BCE and Bell Canada.

The Bell-TELUS transaction is subject to regulatory approvals and customary closing conditions. The Bell-MTS transaction is not conditional on completion of the Bell-TELUS transaction.

DBRS currently has BCE’s preferred shares at Pfd-3(high) and says that it:

has today placed all ratings of Bell Canada (the Company) and its parent company BCE Inc. (BCE) Under Review with Negative Implications, following the Company’s announcement that it has entered into a definitive arrangement agreement to acquire all of the issued and outstanding shares of Manitoba Telecom Services Inc. (MTS; rated BBB with a Stable trend by DBRS).
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DBRS forecasts that pro forma debt should peak at $22.3 billion upon closing of the Transaction, compared to $20.4 billion at the end of Q1 2016. As such, gross debt-to-EBITDA is expected to increase moderately to between 2.4x and 2.5x, from 2.36x in LTM Q1 2016. While this Transaction, in and of itself, is not viewed as materially negative to the Company’s financial risk profile, DBRS believes that the Company’s prolonged period of elevated financial leverage, coupled with continually mounting risks within the communications industry, has gradually eroded flexibility in the current rating levels. DBRS notes that the Company has completed several largely debt-financed acquisitions since in recent years, including: CTVglobemedia Inc. in 2011, Maple Leafs Sports and Entertainment Ltd. in 2012, Astral Media Inc. in 2013 and the minority interest in Bell Aliant in 2014, as well as over $1 billion in spectrum acquisitions in 2014 and 2015. This contributed to Bell Canada remaining above its internal financial leverage target (net debt-to-EBITDA of 1.75x to 2.25x) and a range suitable for the A (low) rating category.

DBRS had chosen to see through elevated leverage associated with previous acquisitions, based on the combination of benefits to the Company’s business profile and expectations of deleveraging to levels appropriate for an A (low) category within a reasonable time frame. In its most recent confirmation and following the Bell Aliant transaction, DBRS stated that it expected the Company to reduce gross debt-to-EBITDA toward 2.0x by mid-2017, and that failure to do so could result in a negative rating action. DBRS estimates that this previously understood schedule for deleveraging could be delayed by 12 to 18 months as a result of the MTS acquisition.

DBRS is reluctant to extend the deleveraging time frame once again due to the protracted period of elevated financial leverage, combined with intensifying competition in the wireless market, and increased risks in the media business, including structural (cord shaving/cord cutting and over-the-top video streaming) and regulatory changes (pick and pay) affecting television broadcasting, coupled with weakness in advertising. Furthermore, DBRS estimates that the Company’s pro forma free cash flow (after dividends) to total debt will remain below 5% over the near to medium term, which could limit management’s ability to deleverage by an adequate degree.

Meanwhile S&P states:

that BCE Inc.’s announcement that it would acquire Manitoba Telecom Services Inc. (MTS) does not affect its rating or outlook on BCE (BBB+/Stable/–). We expect that the C$3.9 billion acquisition, which is about 45% equity funded, would preserve BCE’s debt leverage below our key 3.0x adjusted debt to EBITDA threshold for rating pressure.
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We estimate that the proposed transaction would be modestly leveraging under our base-case forecasts for BCE and MTS, holding BCE’s pro forma adjusted debt to EBITDA at about 2.8x in 2016 before improving slowly to about 2.7x in 2017. Moreover, we estimate that funds from operations to debt would remain below 30% until 2018, which is weak for the rating. That said, our adjusted leverage estimate is only 0.1x higher because of this transaction, which accounts for less than 5% of BCE’s enterprise value.

S&P Global Ratings believes that the acquisition has limited potential to improve BCE’s profitability and returns, despite MTS’ higher EBITDA margins, given the multiple paid, reflecting MTS’ unique wireline and wireless franchise in Manitoba, as well as the modest geographic or operational overlap with BCE’s assets.

S&P rates the BCE preferreds at P-2(low).

Affected issues are: BCE.PR.A, BCE.PR.B, BCE.PR.C, BCE.PR.D, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.J, BCE.PR.K, BCE.PR.M, BCE.PR.N, BCE.PR.O, BCE.PR.Q, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y and BCE.PR.Z.

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