Scotiabank analyst Maher Yaghi expressed significant skepticism that the recent deal will boost BCE’s free cash flow in the coming years, noting doubts about its financial benefits. (Photo by Chris Wattie/REUTERS) · REUTERS / Reuters


November 05, 2024 Tags:

BCE Inc., a prominent Canadian telecom company, saw its stock plunge nearly 10% on Monday after it announced plans to acquire the U.S.-based internet provider Ziply Fiber. The acquisition, valued at $5 billion, raised eyebrows among industry analysts, especially at Scotia Capital. Analyst Maher Yaghi questioned the logic behind the deal, calling it “perplexing” given the heavy investment, which BCE plans to fund largely through the proceeds of its recent $4.2 billion sale of its stake in Maple Leaf Sports & Entertainment (MLSE).
Investors and analysts alike are taken aback by the deal. Many BCE shareholders, typically drawn to the company’s steady dividends, are wary of the focus on growth over income stability. Yaghi pointed out that the telecom sector is generally seen as a safe, dividend-focused investment, saying that BCE investors don’t seek growth opportunities in this sector because they can find such prospects elsewhere.

BCE’s stock closed at $40.47, marking a drop of 9.69%. The decision to pursue Ziply at such a high valuation further fuelled skepticism. BCE’s offer places Ziply’s 2025 earnings at 14.3 times multiple, which is nearly double the 7.4 times multiple that Verizon paid for a similar acquisition of Frontier Communications. Comparatively, BCE itself is valued at a lower 6.8 times multiple, casting doubt on whether this new venture will offer a sufficient return.

Yaghi contrasted BCE’s situation with Verizon’s recent purchase, which made sense for Verizon due to geographic advantages and service overlap. In BCE’s case, however, the strategic benefits of buying Ziply are not as clear, especially given the trend of U.S. providers merging wireless and internet services to retain customers. BCE’s acquisition of Ziply lacks the same market fit, as BCE has a limited existing presence in the U.S. market. Yaghi believes that while BCE’s revenue could see a boost, the high costs of adding new customers and the significant expenses tied to running a fibre network in the U.S. will likely prevent any substantial impact on its cash flow in the coming years.

The deal’s financing strategy also raised concerns. Many had anticipated that BCE would use the funds from the MLSE sale to reduce its debt. Instead, the company’s debt ratio is expected to remain largely the same. BCE also announced that it would temporarily halt dividend growth and encourage shareholders to reinvest their dividends into discounted shares. This dividend reinvestment plan is meant to retain cash, funding BCE’s growth goals while shoring up its balance sheet.

Scotia’s Yaghi pointed out that this shift in strategy could dilute shareholder value and create a period of low free cash flow, particularly since BCE’s typical dividend increases may be on hold. RBC analyst Drew McReynolds offered a slightly more balanced view, suggesting that the deal does at least bring a clearer perspective on BCE’s medium-term growth and cash flow priorities. McReynolds noted that it could strengthen BCE’s strategy and provide some confidence in dividend sustainability, despite the uncertain financial impact in the near term.

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