Morningstar DBRS Places BCE Inc.'s and Bell Canada's Credit Ratings Under Review With Negative Implications Following Announcement of Ziply Fiber Acquisition

DBRS Limited (Morningstar DBRS) placed all its credit ratings on BCE Inc. (BCE or the Company) and Bell Canada Under Review with Negative Implications following the Company's announcement of a definitive agreement to acquire Ziply Fiber (Ziply) for approximately $5.0 billion in cash and the assumption of approximately $2.0 billion of outstanding net debt, representing a total transaction value of approximately $7.0 billion (the Transaction). The closing of the Transaction is subject to a series of approvals including regulatory, state, and security considerations, and the Transaction is expected to close in the second half of 2025.

KEY CREDIT RATING CONSIDERATIONS
Ziply is a fiber Internet provider in the United States' Pacific Northwest, providing high-speed Internet connectivity to 1.3 million locations across four states. The Transaction provides BCE with an opportunity to expand its operations into the highly fragmented U.S. fiber market and leverage its experience in building and scaling a fiber-optic network as it has done in Canada. Once the Transaction has closed, Ziply will operate with its current management team as a separate business from Bell Canada and will continue to be headquartered in Kirkland, Washington.

The cash consideration for the Transaction is expected to be approximately $5.0 billion and to be primarily funded by the net proceeds from the $4.7 billion divestiture of the Company's minority stake in Maple Leaf Sports & Entertainment (MLSE), which was announced on September 18, 2024, and the pending sale of Northwestel, which is expected to close by the end of 2024. The balance of the acquisition cost is expected to be funded by the introduction of a discounted treasury Shareholder Dividend Reinvestment and Stock Purchase Plan (the DDRP). In conjunction with the DDRP program, BCE also announced that it intends to maintain the common share dividend of $3.99 per share during the financial year ending December 31, 2025, and has set a target dividend payout ratio of 65% to 75% of free cash flow going forward, compared with the over 100% expected in 2024. Closing of the Transaction is not predicated on financing, as BCE has secured a USD 3.7 billion (approximately $5.0 billion) fully committed delayed-draw term loan facility should the MLSE divestiture not close before the Ziply acquisition.

The Under Review with Negative Implications status reflects Morningstar DBRS' view that, while BCE's decision to divest the non-core MLSE business in order to pay down debt materially enhanced the Company's credit profile, the decision to invest in the U.S. fiber network industry, though strategically attractive, will likely pressure credit metrics and cash flow over the medium term, such that Morningstar DBRS expects them to remain outside the acceptable range for the current credit ratings through at least 2027. Morningstar DBRS notes that entering the U.S. fiber market is a potentially effective way to maintain earnings growth over the long term and also enables geographic diversification of the Company's operating platform through a transaction that carries limited integration risk. However, successfully capturing the growth opportunity in the predominantly residential broadband fiber network market will require considerable network investment, the ability to effectively leverage Bell Canada's digitization expertise, and crisp execution on Ziply's expected high-growth expansion strategy, which is not without risk.

In its review, Morningstar DBRS will focus on (1) assessing Ziply's business risk profile as it looks to accelerate EBITDA growth in the fragmented U.S. market by leveraging its already-fiberized broadband network footprint and expanding from approximately 1.3 million locations to more than 3.0 million locations by 2028; (2) the impact to consolidated cash flow given higher capital investment at Ziply leading to a higher consolidated capital intensity than initially contemplated, offset by the introduction of the DDRP program; (3) a review of the near- to medium-term consolidated credit metrics as the Company looks to establish itself in the U.S. fiber network market; (4) the credit implications of a slowing growth environment in the core Canadian market; (5) the prospect of continued organic and acquisition-driven growth in the U.S. fiber/communications market and the potential associated investment that may be required; and (6) BCE's long-term business strategy and financial management intentions going forward.

Morningstar DBRS notes that a negative credit rating action would likely be limited to a one-notch downgrade. Morningstar DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status by the closing of the Transaction.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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) at 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. and Bell Canada, the relative weighting of the BRA factors was approximately equal.

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

(C) Weighting of the BRA and the FRA
In the analysis of BCE Inc. and Bell Canada, 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 (June 26, 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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