BCI, CPPIB and PSP Exit Ziply Fiber on BCE Acquisition
Bell Canada parent BCE Inc. is expanding into the United States by acquiring internet provider Ziply Fiber for $5-billion, while also putting dividend hikes on hold in order to help fix its balance sheet.
Investors showed frustration with the news by sending BCE’s stock 9 per cent lower in early trading on Monday. The company’s shares, now worth around $40.50 each, are trading for the same price they did in late 2011.
With the acquisition, announced Monday, Canada’s largest telecommunications company will operate in four U.S. states in the Pacific Northwest – Washington, Oregon, Montana and Idaho – and provide fiber internet services to 1.3 million residential and business locations. BCE hopes to upgrade more of Ziply’s copper wire network to faster fiber over the next four years, bringing its total fiber connections to three million.
BCE chief executive officer Mirko Bibic said in an interview that the acquisition shows the company is on its “front foot.” But the deal is also a gamble, considering investors have worried about BCE’s ability to afford its dividend and pay down debt. Because there is so much financial uncertainty, BCE’s shares have lost 10.8 per cent, including dividends, over the last year, while the S&P/TSX Composite Index has delivered a 25.7-per-cent total return.
Ziply is currently owned by a group of private equity funds led by Searchlight Capital, and to fund its purchase, Montreal-based BCE will use $4.2-billion of cash generated from the sale of its 37.5-per-cent stake in Maple Leaf Sports & Entertainment, the owner of Toronto’s professional hockey, basketball, soccer and football teams. In doing so, BCE is swapping an asset it treated as an equity investment – which meant MLSE’s cash flows did not flow through to BCE’s bottom line – for an operating business whose revenues and profits will merge with BCE’s.
The integration matters because investors tend to judge the riskiness of a company’s debt load by comparing it to annual cash flows: “This is a great trade, in sports terms,” Mr. Bibic said.
However, many investors and analysts expected BCE to put a good chunk of its MLSE proceeds toward debt repayment considering BCE’s debt rating was downgraded by two different rating agencies this summer. Although Ziply generates cash flow, it is currently owned by private equity backers – including three Canadian pension funds – and they have put $2-billion of net debt on its balance sheet.
In all, BCE’s total debt level will remain roughly where it is now. In a brief to clients Monday, rating agency Moody’s Investors Service the deal is “credit positive” for Bell Canada, but has no immediate impact on the company’s ratings or outlook.
To show fiscal restraint, BCE will not hike its dividend in 2025, marking a significant change for the telecom giant. BCE has raised its dividend annually for the past 16 years, and this track record has won over yield-seeking investors, including retail buyers who are nearing retirement or are in retirement.
The pause on dividend hikes is also an about-face from Mr. Bibic, who has said BCE could still increase dividends, just at a slower rate than normal.
The CEO said in the interview that the institutional investor community likely will not be surprised by the pause. BCE’s dividend yield is currently 8.9 per cent, and a number of investors and analysts had suggested that such a pause – or even a cut – was necessary.
In a note to clients on Monday, Bank of Nova Scotia analyst Maher Yaghi called the deal a “perplexing transaction,” sharing doubts that it will be profitable for BCE in the coming years given the high cost of loading new customers and building out more fibre in the U.S.
Mr. Yaghi also questioned the strategy shift. “Investors in Canadian telecom are in the sector for dividends and not in it to get growth; they can get it elsewhere,” he wrote, adding that “no dividend increases in the foreseeable future represents an important strategic change.”
The share prices of Canada’s three-largest telcos - BCE, Rogers Communications Inc. and Telus Corp. – have all struggled of late. After years of easy wins, the companies find themselves in a new era of tepid growth driven by lower immigration levels, aggressive discounting for cable and internet services and cord-cutting.
Until recently, the telcos could count on rising immigration to drive revenue growth – in 2023, the Canadian population increased by nearly 1.3 million people – but Ottawa has since changed course, and sales to newcomers won’t be as robust.
Aggressive discounts have also upended the market, particularly for wireless services. Typically, the telcos only compete with heavy discounts during certain times of the year, such as back-to-school or around Black Friday. But the discounting driven by smaller rivals such as Freedom Mobile has been persistent for more than a year, and it is putting sustained pressure on revenues.
As for cord-cutting, or the act of Canadians cancelling their cable television services, the trend has plagued the sector for years. But lately, it’s hit with more intensity, as streaming services capture additional market share.
Each telco also has its own unique challenges. In BCE’s case, the company has bet heavily on its fibre buildout. Under Mr. Bibic’s watch, BCE has borrowed heavily to upgrade its fibre networks – total debt now sits at $39-billion – with the expectation that customers will eventually pay more for faster speeds.
However, the build out has taken years, and the aggressive discounting is making it harder to recoup these investments.
At the same time, some analysts recently discovered that BCE’s dividend was arguably more costly than expected. Once certain costs are factored in, the telco has been paying out more than 140 per cent of its free cash flow each year, which is unsustainable.
After the debt rating downgrades the year, BCE’s decision to sell its MLSE stake suggested the company was prioritizing debt repayment. Mr. Bibic, though, said Ziply’s owners approached him near the end of those negotiations. While he couldn’t say much publicly, he figured the MLSE sale “was either going to allow us to significantly reduce debt or seize the growth agenda that we had in mind.”
Searchlight Capital acquired Ziply in 2019 for US$2-billion. Three Canadian pension funds – the Public Sector Pension Investment Board, British Columbia Investment Management Corporation and Canada Pension Plan Investment Board – are co-owners of the business, along with U.S. telecom-focused private equity fund WaveDivision Capital, LLC.
The purchase marks a return to the United States for BCE after purchasing long-distance carrier Teleglobe Inc., which had significant U.S. operations, in 2000. Teleglobe filed for creditor protection in 2002 after the dot-com bust, and BCE wrote down billions of dollars.
It's Monday, a day before the US elections but this morning some members of my chat group were talking about this deal as they own a good chunk of BCE shares in their portfolio (I own zero Canadian shares since I only invest in US stocks but track developments on the TSX closely).
Anyways, some of my friends weren't happy BCE didn't pay down its debt with the proceeds from selling their stake in MLSE to Rogers, others saw this acquisition as a positive over the long run and added to their shares on the dip.
More on that below.
First, earlier today, BCI issued a statement on the deal:
On November 4, 2024, BCE Inc. announced that its wholly-owned subsidiary, Bell Canada (“Bell”), has signed a definitive agreement to acquire 100 per cent of Ziply Fiber (Ziply) – a BCI private equity program investment. Ziply is the largest, regionally-focused fibre internet provider in the U.S. Pacific Northwest, with operations and assets in Washington, Oregon, Idaho, and Montana.
This marks Bell’s first expansion outside of Canada, and will accelerate their fibre growth strategy across North America. Ziply is currently owned by an investor consortium led by Searchlight Capital Partners, including BCI, and the sale to Bell was supported by a unanimous vote. The agreement values Ziply at approximately C$7.0 billion, with the accepted offer consisting of approximately C$5.0 billion in cash, and the assumption of C$2.0 billion of outstanding net debt rolled over at the transaction close.
“The sale and valuation of Ziply underscores the quality of the fibre network our investor consortium created when we originally acquired the fibre network assets and rebranded the business Ziply in 2020. Alongside other investors, BCI’s private equity program is exceptionally proud of the growth Ziply has already demonstrated and the reputation they have built in the past four years,” said Jim Pittman, EVP & Global Head, BCI Private Equity. “Today, demand for fibre optic services remains very high, and we’re excited for the opportunity ahead for a known Canadian brand like Bell to leverage these core assets as they pursue their new U.S. expansion strategy. Our team continues to see opportunities in the fibre optic space and will continue to evaluate new opportunities in the sector.”
Read more in the Bell news release
Recall, in May 2020, BCI, CPP Investments and PSP Investments confirmed they were part of a syndicate of co-investors to form new internet provider called Ziply Fiber:
Searchlight Capital Partners, along with several Canadian pension investors, is acquiring the U.S. Northwest operations and assets of internet and telephone services provider Frontier Communications, forming a new company called Ziply Fiber.
First announced in May 2019, Searchlight Capital has now completed the acquisition along with the British Columbia Investment Management Corp., the Canada Pension Plan Investment Board, the Public Sector Pension Investment Board and Wave Division Capital as its partners.
“This group of investors not only provides long-term capital, they also bring strategic and operational expertise that will help us deliver on our mission to bring better internet to our customers,” said Steve Weed, executive chairman of Ziply Fiber, in a press release. “This focus on delivering superior service will enable us to create outstanding value for all stakeholders.”
The transaction is valued at about $1.35 billion, with an additional $500 million being invested in network and service improvements for a total commitment of about $2 billion.
And two years ago, Ziply collected $450 million from the private equity syndicate:
Kirkland, Washington-based Ziply Fiber, a provider of fiber internet service, has raised $450 million in financing. The investors include WaveDivision Capital, Searchlight Capital Partners, Public Sector Pension Investment Board, British Columbia Investment Management Corp and Canada Pension Plan Investment Board.
The capital infusion will be used by Ziply for its ongoing fiber network expansion in the Northwest.
Ziply has named Chris Denzin as chief operating officer. In his new role, he will oversee residential and commercial sales, customer care, field operations and product development. The company also promoted Rob Griffith to the new position of chief, fiber design and construction to oversee all fiber expansion.
“We originally partnered with the Ziply Fiber team to provide reliable, quality fiber internet access in the Northwest,” said Eric Zinterhofer, founding partner of Searchlight Capital Partners, in a statement. “Harold and the team at Ziply have exceeded our expectations, and they will continue to deliver high-performance, fiber-based connectivity to more markets at a time when the need for best-in-class symmetrical speeds has never been higher”.
Founded in 2003 by broadband entrepreneur Steve Weed, WaveDivision is a private investment firm focused on the broadband industry.
Searchlight has more than $10 billion in assets under management and offices in New York, London and Toronto.
Now, the syndicate put in US$2.45 billion in total (including debt) and sold Ziply to BCE for US$3.6 billion (CAD $5 billion) five years later for a decent return.
As the Globe article states above, the syndicate approached BCE's CEO Mirko Bibic as BCE was finalizing the sale of its stake in MLSE.
Talking with friends who own BCE shares and know the company well, Ziply is cash-flow positive and so its "immediately accretive".
They think it will be a net positive for BCE shareholders over the long run but clearly over the short run, investors are not happy with the deal as shares tumbled to a 12-year low:
Earlier today, I posted this on LinkedIn:
My take: I don't invest in Canadian stocks but this one is very popular among dividend-minded investors (the stock now yields 9%). The acquisition pisses off some investors because they wanted BCE to use proceeds from selling their stake in MLSE to pay down debt. Others see this as a cash-generating growth asset and smart acquisition. Looking at the max chart of BCE, shares can slide below $40 before recovering. The company is NOT cutting its dividend, only slowing increases. People who want to retire in a few years with good dividend income should start buying at these levels. One of my friends who holds the stock "in perpetuity" sees this as just another buying opportunity. He's probably right over long run, in short run, stock is technically broken and can head lower. However, with bonds set to rally after Fed meeting later this week, it will help boost dividend stocks that got clipped lately.
There are a lot of variables that can impact dividend stocks, bond yields being one of them.
We shall see who wins the presidential election tomorrow and how the bond market reacts to that news and the Fed later this week. If bond yields rise, it's bad for dividend stocks; conversely if they decline, it's good for dividend stocks.
Will Mr. Bibic cut the dividend? One BCE investor told me if that happens, shareholders will revolt and replace him and the board.
Anyways, a lot of talk on this Ziply deal, reaction was negative today but I agree with those who think it was an overreaction and BCE shares are a buy at this level even though I wouldn't be surprised if they go lower in short run (maybe).
Lastly, I don't know why BCI was the only Canadian pension fund among the syndicate of co-investors to put out a press release unless it took the lead on this deal.
I've mentioned it before, Jim Pittman who heads up BCI's PE group was involved in seeding Searlight Capital back in 2010 when he was working at PSP Investments.
In fact, PSP was an anchor investor and Jim continued to have good relations with the firm when he joined BCI.
One of the founding partners at Searchlight is Erol Uzumeri who formerly worked at OTPP's Private Capital.
The firm is doing well and I am happy for them but I mention it because people have a right to know if Canadian pension funds are anchor (seed) investors in a private equity fund or hedge fund (it's a big club, you and I aren't part of the Big Club).
Below, Mirko Bibic, president and CEO at BCE and Bell Canada, on the deal to acquire US fibre internet provider Ziply Fiber. You can also view this interview here.
Listen carefully to his comments, this is a strategic acquisition which will provide BCE growth over the long run in a very important market.
Also, Rebecca Teltscher, portfolio manager of Newhaven Asset Management, talks about BCE shares hitting an 11-year low following their announcement on acquiring Ziply Fiber.
I think she's spot on, listen carefully to her comments on purchasing an asset which is accretive on cash flow basis, it will help their debt metrics and offer geographic diversification in a market that is less regulated.
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