In a move to expand its footprint in media business, Canada’s largest telephone operator BCE Inc. (BCE) inked a deal with Montreal-based Astral Media Inc.
The expansion follows the acquisition of CTV in April last year and the launch of a new business unit, Bell Media. The CTV acquisition accelerated Bell’s video growth for mobile, online services and satellite TV system with a competitive cost structure and enhanced its fiber-to-the-home (FTTH) network deployment in major urban areas.
Video usage is growing rapidly among Canadians who are switching to mobile, online and digital TV platforms. The announced transaction would enable Bell to lead the Quebec media industry with an annual EBITDA of more than C$850 million. The C$3.38 billion ($3.4 billion) transaction includes C$380 million of debt and is expected to fund through the combination of 75% cash and 25% equity.
BCE Inc. continues to focus on five strategic areas including, investment in broadband network and services, accelerating wireless services, leveraging wireline momentum, improving customer service, and achieving a competitive cost structure. The company is expected to generate healthy revenues, EBITDA and free cash flow growth through higher wireless revenue, stable wireline revenues, and cost reduction methods.
The deal would be beneficial for the company both in the short and longer term. The acquisition, pending approval from shareholders and regulators, is expected to be accretive to earnings and free cash flow per share on completion, driving shareholders return.
Additionally, the transaction would provide improved control on rising content costs, in particular French media, and fuel robust opportunity for advertising packages covering digital media properties, television channels, radio stations and out-of-home advertising.
Moreover, the strong financials of Astral Media will allow Bell to accelerate investments in broadband such as the expansion of high-speed Fiber-To-The-Node (FTTN) network infrastructure coverage, Bell Fibe TV footprint, and 4G Long-Term Evolution (LTE) networks across Quebec. These would generate higher revenue per user and attract new customers.
Nevertheless, Bell will have to pay a break-up fee of C$150 million to Astral should the deal fail. Besides, the company’s revenue mix is heavily weighted toward traditional telephone business, the demand for which is gradually waning. This is hurting its overall revenue and EBITDA growth.
Further, BCE operates in an environment crowded with new wireless carriers. Bell Canada, a 100% subsidiary of BCE, faces cutthroat competition from national carriers Telus Corporation (TU) and Rogers Communications Inc. (RCI).
We are maintaining our long-term Neutral recommendation with a Zacks #3 (Hold) Rank on the stock.
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