BCE Inc. has signed a deal to buy U.S. fibre internet provider Ziply Fiber for about $5 billion. BCE Inc. headquarters is seen in Montreal on Aug. 3, 2023.Christinne Muschi/The Canadian Press
Canadians have bragging rights over our neighbours to the south in a few key areas. We live longer than Americans, we are less likely to get shot and we make better beer.
We also enjoy vastly superior internet service. But Bell Canada parent BCE Inc. now sees an opportunity to profit handsomely by narrowing that gap in high-speed internet availability between its home market and the northwestern U.S.
Bell’s proposed $5-billion purchase of Ziply Fiber shows the Montreal-based telecom has found a way to boost profits by taking something it does well in a mature domestic market – run fibre networks – and exporting it to an underserved American audience.
It’s a bold strategy, aimed at building a U.S. market leader out of a Ziply platform with 15-per-cent annual subscriber growth across networks in Washington State, Oregon, Montana and Idaho.
It’s also a plan income-seeking investors hated. And Bell is a favourite holding for income-obsessed retirees and dividend stock funds.
On Monday, when Bell announced that, as part of the takeover, it would pause common-share dividend increases after hiking its payout for 16 consecutive years, the stock price dropped by 9 per cent to an 11-year-low. Analyst Maher Yagi in a report called the Ziply purchase a “perplexing transaction,” summing up the skeptics’ take.
“Investors in Canadian telecom are in the sector for dividends and not in it to get growth; they can get it elsewhere.”
However, to increase dividends, a chief and board need the business to increase its revenue and profit. And that’s what Bell chief executive Mirko Bibic expects from this career-defining acquisition. Income-seeking investors will return in droves if the U.S. expansion plays as expected and boosts Bell’s cash flow, which didn’t cover last year’s dividend payout.
Bell’s executive team and board have been working on a U.S. fibre growth strategy for the better part of two years, Mr. Bibic said in an interview. When Bell crunched the numbers, one statistic stood out. After years of investment by telecoms – Bell spent $22-billion upgrading its network over the past four years – 75 per cent of Canadian households have fibre internet access. But only 51 per cent of U.S. homes sport the same high-speed service.
Mr. Bibic’s expansion plan includes selling Bell’s minority stake in Maple Leaf Sports & Entertainment, a platform producing next to no cash, and putting $4.2-billion in proceeds from the sale into cash-generating Ziply.
This year, Ziply posted $400-million in earnings before interest, taxes, depreciation and amortization, or EBITDA. Bell projects the U.S. business’s EBITDA will increase at an 11-per-cent annual clip, a growth rate that is hard to match in the domestic telecom industry.
Last year, Bell throttled back planned spending on its domestic fibre network by $1-billion in the face of perceived unfair rulings on network sharing from Canadian regulators. The shift in priorities means Bell can help Ziply almost double its fibre reach to three million locations by 2028 without increasing its overall capital spending.
On Monday, while Bell shareholders dumped the stock, rating agency Moody’s said the Ziply purchase is “credit positive” for Bell, and that the company “will expand its geographic footprint and the operator will become the third largest fibre provider in North America with improved revenue and EBITDA growth trajectory.”
Telecom entrepreneurs created Ziply in 2019 by acquiring the business for US$2-billion from Frontier Communications, a debt-heavy telecom company that was itself recently acquired for US$20-billion by Verizon.
Ziply’s management team is made up of Verizon and AT&T veterans, backed by Toronto-based private-equity fund Searchlight Capital and telecom-focused private-equity fund WaveDivision Capital LLC, as well as three domestic pension plans: the Public Sector Pension Investment Board, British Columbia Investment Management Corp. and Canada Pension Plan Investment Board.
Ziply has a strong pedigree, and Mr. Bibic said the executive team is committed to sticking around and building the business. In a conference call on Monday, he said that “fibre is the core of Bell’s purpose.” He sees that same sense of purpose in Ziply’s culture.
If Mr. Bibic has it right, Bell will build a dominant U.S. fibre network and deny Canadians the right to feel smug about superior high-speed internet.
