(Bloomberg) — BCE Inc. will pause dividend growth next year as it makes an unexpected push into the US with the purchase of an internet provider in the Pacific Northwest, a move that sent the company’s shares tumbling 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 next four years, according to a statement 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. for C$4.7 billion. BCE said at the time that transaction would help reduce its debt, an issue credit agencies and analysts had flagged as a problem in recent months.
But BCE now says it will use those proceeds, an expected net amount of C$4.2 billion, to fund most of the Northwest Fiber deal. The company also ruled out increasing its dividend for all of 2025 — after 16 years of boosting its payout annually — and said it will raise fresh equity through a discount on its dividend reinvestment plan, also known as a DRIP.
The plan to halt dividend increases, a key part of the investment thesis for shareholders in Canada’s large telecom companies, sent BCE’s stock plunging the most in more than four years. The shares dropped 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 didn’t decide to acquire Ziply “based on an assessment of one day’s stock market reaction,” and noted that sell-side analysts had been speculating for some time that the company would pause dividend growth and introduce a DRIP discount to shore up its capital position.
“We’re managing this for the long term,” he said in an interview, adding that “pursuing a fiber growth agenda is right on strategy and core to what BCE does really well.”
Talks with the management team at Northwest Fiber, which is owned by Searchlight Capital in partnership with three Canadian pension funds, only began in late September, after the MLSE transaction was announced, Bibic said.
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“The economics of this play are very attractive over the medium to long term,” he said, pointing to the dearth of competitors in the Northwest service area that offer similarly fast internet speeds and the many new potential customers it has after Northwest Fiber recently connected a large number of homes to fiber. “Once those facts get absorbed, I think it’ll be a different perception of the transaction.”
By swapping its stake in MLSE for the US fiber investment, BCE is trading an undervalued minority interest in a sports asset for a business that’s squarely in its area of expertise and can open up new growth prospects, Bibic told analysts during a conference call. He didn’t rule out the possibility that the company will do more such transactions.
‘Perplexing Transaction’
BCE, which does business as Bell, has been under financial pressure lately because of a slowing wireless market, high capital spending and a high dividend — the shares yield more than 9%. The company has spent heavily to build out its fiber optic network around Canadian cities to offer faster internet speeds to homes and businesses, becoming more competitive in the fight for market share with cable companies such as 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 path to reducing its debt burden. Instead, BCE says it expects its net debt leverage ratio to remain “relatively unchanged” from current levels.
Some analysts panned the latest deal. Scotia Capital analyst Maher Yaghi called it a “perplexing transaction” at a high price — more than 14 times next year’s estimated earnings before interest, taxes, depreciation and amortization, including synergies.
“Investors in Canadian telecom are in the sector for dividends and not in it to get growth; they can get it elsewhere,” Yaghi wrote. Buying Northwest Fiber may dilute BCE’s free cash flow for years, he added, “and no dividend increases in the foreseeable future represents an important strategic change.”
The market will need time to digest the news of BCE’s foray into the US, said National Bank of Canada analyst Adam Shine, adding, “As such, we expect BCE shares to remain under pressure for the next several quarters.”
BCE, which is based in the Montreal region, will assume C$2 billion of Northwest Fiber debt.
The company said that with this deal, it’s poised to expand its fiber network to more than 12 million locations across North America by 2028.
–With assistance from Stephanie Hughes and David Scanlan.
(Updates with share reaction beginning in first paragraph.)
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