Morningstar DBRS Confirms Issuer Ratings on BCE Inc. and Bell Canada at BBB and BBB (high), Respectively, With Stable Trends, Following MLSE Divestiture Announcement

DBRS Limited (Morningstar DBRS) confirmed BCE Inc.'s (BCE or the Company) Issuer Rating of BBB and Bell Canada's Issuer Rating of BBB (high). Morningstar DBRS also confirmed BCE's Short-Term Issuer Rating, Unsecured Debentures credit rating, and All Classes Preferred Shares credit rating as well as the credit ratings of Bell Canada. All trends remain Stable. The Bell-MTS Inc. (the wholly owned subsidiary) Medium-Term Notes credit rating has been discontinued as the debt has been repaid.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect 2024 operating performance that is expected to be in line with Morningstar DBRS' expectation of low-single-digit EBITDA growth, driven primarily by growth in Bell Communication and Technology Services and acknowledge the MLSE divestiture that is expected to have a positive impact on the Company's financial profile. The Stable trends reflect Morningstar DBRS' expectation of stable low-to-mid single-digit EBITDA growth through the forecast horizon, the application of capital from asset divestitures towards debt reduction, and that capital intensity and the dividend payout ratio will both begin to decline year over year (YOY) in 2024. Of note the application of capital from asset divestitures over the next 12 months and continued EBITDA growth, is expected to result in year-end 2025 leverage of approximately 3.25x, and that the long-term leverage profile is expected to continue improve over Morningstar DBRS' forecast horizon.

On September 18, 2024, BCE announced the sale of its 37.5% stake in Maple Leaf Sports and Entertainment (MLSE) for $4.7 billion. In addition, BCE also secured access rights through a 20-year-long term agreement for the Toronto Maple Leafs and Toronto Raptors on TSN. BCE plans to direct the proceeds of the sale to reducing debt and to support core growth drivers. The transaction requires approval from the NHL, among others, and is expected to close in mid-2025.

For BCE, Morningstar DBRS views the monetization of MLSE and application of the majority of net proceeds to reduce debt as aligned with the Company's capital allocation priorities. The transaction capitalizes on a material gain in valuation of an off-balance-sheet asset, the ability to maintain key sports programming for an extended period and the opportunity to accelerate the Company's anticipated de-lever program through a combination of noncore asset divestitures and EBITDA growth. It also underscores management's commitment to de-lever the Company to its long-term target of 3.0 times (x) while maintaining enough financial flexibility to continue to investment in its core assets and support future growth.

The $4.7 billion MLSE sale represents an almost 8x increase from the ~$533 million purchase price of the stake from the Ontario Teachers Pension Plan in December 2011, and an implied ~15% increase in value since OMERS acquired a 5% indirect stake from Kilmer Sports Inc. (owned by Larry Tanenbaum) in November 2023. Morningstar DBRS estimates the net proceeds of the transaction to be $4.0 billion to $4.1 billion, of which Morningstar DBRS expects the majority will be used to reduce debt. Cash flow will also benefit from lower interest expense. Morningstar DBRS anticipates that the league will welcome a simplified ownership structure and does not expect a delay in the approval process.

CREDIT RATING DRIVERS
If BCE/Bell Canada were to achieve a substantial increase in its wireless and wireline market share that resulted in a commensurate structural improvement in the Company's earnings profile, including a supportive regulatory environment, and were to manage leverage sustainably at the low end of the Company's target range, a positive credit rating action could occur.

Conversely, if, despite the utility-like nature of the industry, BCE/Bell Canada experienced a deterioration in its credit metrics as a result of weaker-than-expected operating performance, lower cash flow, and/or more-aggressive-than-expected financial management in which leverage was expected to remain at 3.5x or higher for an extended period, a negative credit rating action could occur.

EARNINGS OUTLOOK
While the competitive environment remains intense, BCE/Bell Canada continues to leverage its fibre investment to drive earnings performance. The rollout of 3800MHz spectrum in select high-value urban markets, improved subscriber momentum in 5G, and growth in commercial IoT solutions are expected to support the Company's earnings. Combined with cost cutting initiatives to streamline business process and a continued focus on lowering mobile churn should contribute to positive margin leverage over the near to medium term. Morningstar DBRS forecasts BCE/Bell Canada's 2024 consolidated revenue to increase in the low single digits to approximately $25.0 billion, which is below Morningstar DBRS' prior forecast of $25.0 billion to $25.5 billion, and to continue to increase in the low single digits in 2025 and 2026. While this revenue forecast is more conservative, Morningstar DBRS expects EBITDA margin to increase 30 to 50 basis points (bps) YOY, up from Morningstar DBRS' prior forecast of roughly flat, as the benefits of cost reduction efforts and levering the Company's premium network and brand offering have provided positive margin leverage quicker than initially anticipated. The decrease in the sale of lower margin products, continued operational streamlining and the application of technologies to improve and facilitate customer services and provisioning are expected to provide a positive margin tailwind in 2025 and 2026.

FINANCIAL OUTLOOK
The announcement of the sale of noncore assets in 2024 (which includes the $1.0 billion divestiture of Northwestel to Sixty North Unity announced in June 2024 and the $4.7 billion sale of BCE's MLSE stake) are expected to materially strengthen BCE/Bell Canada's credit metrics over the next 12 months. In addition, a roughly 200 bps decline in capital intensity to ~16.5%, the impact of severance and restructuring initiatives in 2024, continued low-single-digit EBITDA growth, and lower interest expense are also expected to contribute to the stabilization of BCE/Bell Canada's financial profile in 2024 and improvement in 2025. As a result, Morningstar DBRS forecasts 2025 year-end leverage to be ~3.25x and for leverage to continue to decline YOY through 2027 towards the Company's long-term target of 3.0x. Morningstar DBRS' financial profile outlook assumes the annual dividend growth rate remains stable at 3% and that capital intensity is at or below 16.5% through the forecast period.

CREDIT RATING RATIONALE
The credit ratings are supported by the Company's considerable size and scale, leading market position in wireline and wireless services, and other revenue diversification. BCE/Bell Canada is the incumbent telecommunications provider in Ontario, Québec, Atlantic Canada, and Manitoba and is growing its presence in Western Canada with a diverse suite of wireline and wireless products. The Company also operates one of the largest media companies in Canada.

The Company has invested heavily into both its wireless and wireline segments. Planned FTTP and wireless-to-the-premise build-out is expected to be approximately 90% complete by YE2025 and BCE/Bell Canada continues to rollout 5G availability and improve wireless performance. BCE/Bell Canada's network sharing agreement with TELUS Corporation (rated BBB with a Stable trend) facilitates operational and capital synergies including interconnection and roaming, software and technology, and network construction.

The credit ratings also reflect intensifying competition, the expected loss of legacy wireline services revenues, higher near- to medium-term network investment spending, and the risks associated with technological change.

Morningstar DBRS notes that operations are subject to a relatively high degree of regulation by the Canadian Radio-television and Telecommunications Commission; Innovation, Science and Economic Development Canada (formerly Industry Canada); and the Competition Bureau, all of which are focused on keeping the Canadian communications landscape competitive.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of BRA Factors
In the analysis of BCE Inc./Bell Canada/Bell-MTS Inc., the relative weighting of the BRA factors was approximately equal.

B) Weighting of FRA Factors
In the analysis of BCE Inc./Bell Canada/Bell-MTS Inc., the relative weighting of the FRA factors was approximately equal.

C) Weighting of the BRA and the FRA
In the analysis of BCE Inc./Bell Canada/Bell-MTS Inc., the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Communications Industry (26 June 2024) https://dbrs.morningstar.com/research/435057

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) - https://dbrs.morningstar.com/research/431186 , which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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