(Bloomberg) — BCE Inc. will pause dividend growth next year as it makes an unexpected push into the U.S. with the purchase of an Internet provider in the Pacific Northwest, a move that sent the company’s shares to a 12-year low.
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Canada’s largest telecommunications company will pay C$5 billion ($3.6 billion) for Northwest Fiber LLC, which does business as Ziply Fiber and has 1.3 million locations in Washington, Oregon, Idaho and Montana, with plans to expand to more than 3 million in the coming years. four years, according to a statement on Monday.
The announcement comes less than two months after BCE unveiled a deal to sell its stake in Maple Leaf Sports & Entertainment Ltd. to Rogers Communications Inc. to sell for C$4.7 billion. BCE said at the time that the transaction would help reduce debt, which credit agencies and analysts had identified as a problem in recent months.
But BCE now says it will use these proceeds, an expected net amount of C$4.2 billion, to finance the bulk of the Northwest Fiber deal. The company also ruled out an increase in its dividend for all of 2025 – after 16 years of annual payout increases – and said it will raise new equity through a cut to its dividend reinvestment plan, known as a DRIP.
The plan to halt dividend increases, a key part of the investment thesis for shareholders of the major Canadian telecom companies, sent BCE’s shares tumbling the most in more than four years. Shares fell 9.7% to close at C$40.47 in Toronto, the lowest closing price since May 2012.
Chief Executive Officer Mirko Bibic said the company did not decide to acquire Ziply “based on an assessment of one day’s stock market reaction,” noting that sell-side analysts have speculated for some time that the company dividend growth would pause and a DRIP discount to strengthen the capital position.
“We are managing this for the long term,” he said in an interview, adding that “pursuing a fiber growth agenda is the right strategy and is at the heart of what BCE does really well.”
Discussions with the management team of Northwest Fiber, which is owned by Searchlight Capital in partnership with three Canadian pension funds, did not begin until late September, after the MLSE transaction was announced, Bibic said.
“The economics of this play are very attractive in the medium to long term,” he said, noting the lack of competitors in the Northwest service area offering similarly fast internet speeds and the many new potential customers it has after Northwest Fiber recently is connected. a large number of homes are equipped with fiber optic cables. “Once these facts come to us, I think there will be a different perception of the transaction.”
By exchanging its stake in MLSE for the U.S. fiber investment, BCE is trading an undervalued minority stake in a sports asset for a company that is fully in its field and can open new growth prospects, Bibic told analysts on a conference call. He does not rule out the possibility that the company will make more such transactions.
‘Baffling transaction’
BCE, which does business as Bell, has been under financial pressure lately due to a slowing wireless market, high capital expenditures and a high dividend – its shares yield more than 9%. The company has spent heavily on building out its fiber-optic network around Canadian cities to bring faster internet speeds to homes and businesses, making it more competitive in the battle for market share with cable companies like Rogers and Quebecor Inc.’s Videotron.
When the company announced the sale of its 37.5% stake in MLSE in September, many analysts saw it as a way to reduce its debt burden. Instead, BCE says it expects net leverage to remain “relatively unchanged” from current levels.
Some analysts have panned the latest deal. Scotia Capital analyst Maher Yaghi called it a “mind-boggling transaction” at a high price – more than 14 times next year’s estimated earnings before interest, taxes, depreciation and amortization, including synergies.
“Canadian telecom investors are looking for dividends, not growth, in the sector; they can get it elsewhere,” Yaghi wrote. Buying Northwest Fiber could dilute BCE’s free cash flow for years, he added, “and no dividend increases in the near future represents a significant strategic change.”
The market will need time to digest news of BCE’s foray into the U.S., National Bank of Canada analyst Adam Shine said, adding: “As such, we expect BCE shares to remain under pressure in the coming quarters will remain standing.”
BCE, based in the Montreal region, will assume C$2 billion of Northwest Fiber’s debt.
The company said that with this deal, it is poised to expand its fiber network to more than 12 million locations in North America by 2028.
–With help from Stephanie Hughes and David Scanlan.
(Updates with share response starting in first paragraph.)
