DBRS Confirms Bell Canada/BCE Inc. Ratings, Trend Stable Following Announced Acquisition of Bell Aliant

DBRS has today confirmed the long- and short-term ratings of Bell Canada (Bell Canada or the Company) and its parent company BCE Inc. (BCE) at A (low)/R-1 (low) and BBB (high)/R-1 (low), respectively. DBRS has also confirmed the ratings of Bell Canada’s Subordinated Debentures at BBB.

The confirmations follow BCE’s tender offer to acquire the minority interest in Bell Aliant for $3.95 billion (BCE/Bell Canada currently own a controlling 44.1% stake in Bell Aliant). The purchase is expected to be financed with approximately $990 million of cash and $2.96 billion of BCE common equity. As part of the transaction, BCE will assume Bell Aliant’s $2.89 billion net debt and $618 million preferred shares.

The confirmation is based on DBRS’s view that BCE’s/Bell Canada’s business profile should benefit from the privatization of Bell Aliant, as complete ownership of Bell Aliant should enhance BCE’s/Bell Canada’s scale and competitiveness, create synergies and result in more effective capital allocation. This, combined with the Company’s strong wireless growth and successful fibre expansion, largely offsets the risks associated with the increase in financial leverage.

BCE/Bell Canada expects to achieve synergies of $100 million per year, which DBRS views as conservative. The synergies include corporate overhead, labour savings and streamlined network investments. Pro forma, DBRS expects the combined entity to generate $1.1 billion in free cash flow after dividends, $200 million more than BCE/Bell Canada on a standalone basis. In addition, DBRS believes BCE/Bell Canada will be able to allocate capital investment more effectively on a consolidated basis, enhancing its competitiveness in both Atlantic Canada and in southern Ontario and Québec. This could contribute to further growth in market share, earnings, cash flow and returns on capital over the longer term.

Following the transaction, DBRS expects Bell Aliant to be transferred to Bell Canada from BCE. As such, DBRS expects Bell Canada’s 2014 year-end gross debt-to-EBITDA to be approximately 2.35 times (x) versus DBRS’s previous expectation of approximately 2.10x. In its rating report dated April 7, 2014, DBRS stated that it expects Bell Canada to reduce its gross debt-to-EBITDA ratio to below 2.0x by mid-2015 and that failure by the Company to deleverage as expected could result in a negative rating action. DBRS is now more comfortable with a gross debt-to-EBITDA ratio of slightly above 2.0x over the medium term given the benefits to the business risk profile of the combined entity, the Company’s strong coverage ratios and its solid operating performance.

Going forward, the Company intends to deleverage through growth in operating income and the application of free cash flow toward debt reduction toward 2.0x over the next two to three years. This could be accelerated with the use of a dividend reinvestment plan funded by treasury stock issuance. Weaker-than-expected operating performance and/or failure to deleverage in the expected time frame could result in pressure on the ratings.

DBRS expects the transaction to be completed in November 2014. DBRS notes that the CRTC and Industry Canada approvals are not required because there is no change in control of Bell Aliant and no transfers of wireless spectrum licenses. DBRS will re-evaluate its ratings confirmation if there is an increase in BCE’s offer price and/or a change in the terms of financing.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Communications Industry, Rating Companies in the Television Broadcasting Industry, Rating Companies in the Radio Broadcasting Industry and Rating Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.

This Rating is endorsed by DBRS Ratings Limited for use in the European Union.