DBRS Comments on Manitoba Telecom Services Inc.’s Proposed Divestiture of Allstream Inc.

DBRS Limited (DBRS) today notes that Manitoba Telecom Services Inc. (MTS or the Company) has signed a binding agreement to sell its Allstream Inc. subsidiary (Allstream) to Zayo Group Holdings, a U.S.-based communications infrastructure provider, for an all cash consideration of $425 million, net of closing costs. The sale reflects MTS’s renewed focus on becoming a pure-play regional telecom provider with more predictable operating results and stronger free cash flow generating capacity. The transaction is expected to close in Q1 2016.

The Allstream sale was contemplated at the time of DBRS’s most recent confirmation of MTS’s ratings. In its May 7, 2015, press release, DBRS stated that the divestiture of Allstream would be neutral to MTS’s ratings should the potential transaction (including the allocation of consideration received) result in a pro forma gross leverage ratio (debt-to-EBITDA) below 2.0 times. That confirmation also incorporated the Company’s decision to reduce its dividend and eliminate its DRIP program, which provides greater certainty of cash distributions going forward.

MTS stated that it is evaluating a number of options for the allocation of net proceeds, including the retirement of debt incurred to fund a pension funding prepayment ($120 million) and recent AWS-1 spectrum acquisitions ($45 million), which DBRS would view positively. Additionally, DBRS notes that as part of the transaction, MTS has agreed to retain responsibility for the defined benefit pension obligations of retirees and former employees of Allstream (approximately $36 million on a solvency basis based on the most recently filed valuation).

While the closing of the transaction is predicated on receiving the necessary regulatory approvals, DBRS expects that MTS will clear these regulatory hurdles. DBRS believes that the acquirer does not pose substantive national security concerns (which was the rational for the Government of Canada’s rejection of MTS’s proposed sale of Allstream in 2013) and is not a Canadian incumbent, and as such should not be deemed to reduce competitiveness within Canada’s communications landscape.

The ratings continue to be supported by the Company’s incumbent position, advanced networks and steady subscriber base in Manitoba. The ratings also reflect an intensifying competitive environment in wireless communications, MTS’s limited scale and growth prospects as well as the steady erosion of local access lines.

Although this transaction is meaningfully positive from a credit risk perspective, in terms of ratings, the starting point was that the Company’s ratings were positioned at the low end of the current rating categories. DBRS believes the recent actions taken by the Company have moderated the downside risks highlighted at the time of the last rating review.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Communications Industry, which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.