BCE announced yesterday that it is acquiring the U.S. based fibre internet provider Ziply Fiber for C$5.0 billion in cash with the additional assumption of C$2.0 billion in outstanding debt upon the close of the transaction. Ziply is a fibre and DSL provider in Idaho, Montana, Oregon and Washington and the acquisition includes 1.3 million fibre locations. BCE will, in part, finance the transaction from the net proceeds of the sale of its ownership stake in Maple Leaf Sports & Entertainment.
For me, it begs the question — could an inhospitable regulatory environment in Canada have forced BCE to look for more profitable growth opportunities outside our borders? It goes without saying that capital does not know borders. Investors, and there are many of them, expect BCE to deploy capital in the most profitable areas. It is highly likely that BCE views the much freer regulatory environment and favourable macroeconomic opportunity in the United States to be more accommodating to capital and the Pacific Northwest, in particular, to be more capable of sustaining profitable growth.
In the blog last week I wrote about how the Canadian Radio-television and Telecommunications Commission (CRTC) indicated that in establishing rates for wholesale access to BCE's and others' fibre assets, it believes that it had reflected those carriers' actual costs and that the rates will allow companies to continue investing in high-quality networks. In other words, the CRTC views the rates mandated by the regulatory framework will continue to support a return sufficient to make it worthwhile for companies like BCE to invest in expanding their fibre networks.
Today's announcement doesn't appear to support the Commission's thesis. With the Ziply purchase, BCE is not only adding customers upon closing but it seems to see a path to converting existing DSL providers to fibre and expanding the footprint overall. That, and an attractive EBITDA profile and few natural competitors on the horizon make this an enticing acquisition. It will also see a more conducive competitive and regulatory environment in the United States to that which exists in Canada.
BCE's announcement in many respects should not come as a surprise. Most notably, Cogeco Communications has been investing in the United States for years and in its latest results reported nearly 650,000 Internet customers in the United States, almost 42% of its total North American Internet customer base. Telus has also invested in Telus Digital and Telus Health which both have an international presence.
Today's announcement doesn't mean that BCE is in any way abandoning its over century-long presence in Canada, but it does show that BCE and it management are focused on growth opportunities. Canada is a highly fibred country with at least 83% of homes and businesses nationally having Internet available to them at 1 Gbps or greater. Bell Canada has been remarkably successful in its fibre build which has been an ongoing capital project for multiple years. Accordingly, it should come as no surprise that BCE is looking for other markets to take its capital and expertise. It indicates a growth centric strategic investment thesis in a market with very attractive growth characteristics. The growth value over time of not only the immediate inclusion of revenue, but also the potential for further penetrating the market are inescapable when you consider a comparatively sanguine regulatory and investment environment.
Largely, analysts seem to accept the strategic rationale, but nevertheless they are surprised by the timing as they had been expecting more emphasis on de-levering debt and possibly further divestitures. While that may be the case, it appears this opportunity was well worth the effort as the medium and long term prospects of this investment are similar to an annuity with material growth prospects. This investment will contribute to supporting the dividend over time and exhibits a growth mindset in a core competency of Bell in a jurisdiction where growth opportunities continue to exist.
Overall, this acquisition appears to follow on Bell's fibre first philosophy and should lead to free cash flow growth over the long term. Strategically, it is laying another asset in the foundation for future growth.
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