DBRS Comments on Manitoba Telecom Services Inc.’s Net Proceeds Usage Following Allstream Divestiture

DBRS Limited (DBRS) notes that on January 15, 2016, Manitoba Telecom Services Inc. (MTS or the Company; rated BBB with a Stable trend by DBRS) announced the completion of the sale of its Allstream Inc. (Allstream) subsidiary to Zayo Group Holdings, Inc. for a cash consideration of approximately $420 million, net of closing costs (the Transaction). MTS has agreed to retain responsibility for the defined benefit pension obligations of retirees and other former employees of Allstream (approximately $36 million on a solvency basis based on the most recently filed valuation).

On February 4, 2016, concurrent with the release of its fourth-quarter and annual results, the Company announced its intentions with respect to the use of the net proceeds from the sale, which includes debt repayment and share repurchases. MTS will allocate nearly half of the proceeds to repay debt incurred to finance the pension funding prepayment and AWS-1 spectrum acquisitions completed in 2015. Additionally, the Company launched a normal course issuer bid program, in early February 2016, to purchase approximately 7.1 million of its common shares, representing approximately 10% of the public float (as at January 31, 2016), at a total cost of approximately $200 million. The remaining proceeds will provide additional liquidity, which can be used to further reduce debt and/or be reinvested in the business.

On November 24, 2015, DBRS released a commentary discussing its views on the Allstream divestiture. DBRS stated that it believed that MTS’s divestiture of Allstream would be meaningfully positive from a credit risk perspective, as it would likely result in a higher quality of operating earnings going forward. However, DBRS noted that MTS’s ratings were positioned at the low end of its rating categories owing to the mounting pressure on the profitability of its core businesses. As such, DBRS indicated 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 (x).

The formally announced allocation of the proceeds supports and is consistent with DBRS’s previously stated view that recent actions by MTS, including the Allstream divestiture, the reduction in the per share dividend payout, elimination of the discount on the dividend reinvestment plan and ongoing transformation program, have better placed the Company within the current rating categories.

That said, in light of the mature nature of the Manitoba telecom market, intensifying competition in the wireless business and the ongoing structural shifts and pending regulatory changes that will affect television broadcasting, DBRS believes that the Company will have to maintain a gross leverage ratio between 1.5x and 2.0x, in a sustained fashion, to prevent negative pressure on the assigned ratings.

The ratings continue to be supported by the Company’s incumbent position, advanced networks and steady subscriber base in Manitoba, and relative diversification and stability of the Manitoba economy. 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.

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

The applicable methodology is Rating Companies in the Communications Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

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