Canadian telco MTS sells Allstream fibre optics business to Zayo

Canadian communications provider Manitoba Telecom Services Inc (MTS) has struck a deal to sell its fibre optics business Allstream Inc for approximately C$465 million ($348 million) in cash to US telecom infrastructure provider Zayo Group Holdings Inc.

The deal comes two years after the Canadian company's plan to sell Allstream to Egyptian investment group Accelero Capital Holdings for about C$520 million was turned down by the country's regulators on national security concerns.

With the sale, MTS seeks to improve its position to transform into a more customer-first business, leveraging its tremendous assets and unique position to deliver solid results in a competitive market, the company said in a statement.

MTS, headquartered in Winnipeg, is a national communications provider operating in two segments, MTS and Allstream. Its MTS segment offers a range of wireless, high-speed internet, internet television, wireline voice and home security services.

Toronto-based Allstream exclusively works with business customers. The business has over 30,000 km of nationwide high-performance fibre-optic network through which it provides internet, cloud and security solutions to a variety of customers. Its annual revenue is around C$600 million, with EBITA of C$100 million.

MTS had acquired Allstream in 2004 for about C$1.7 billion, which was previously controlled by US communications giant AT&T, and a group of Canadian banks.

Zayo, based in Colorado, is also a provider of communications solutions to enterprises and owns about 140,000 km of fibre optic network in the US and Europe, with connectivity to thousands of buildings and data centers and also offers co-location and cloud services in its carrier neutral data centers.

The company reported revenue of $1.35 billion in the fiscal ended 30 June and has a market capitalisation of $5.7 billion.

MTS president and CEO Jay Forbes said, ''The acquisition by Zayo represents a new beginning for Allstream and a significant new evolution in the competitive landscape of Canadian telecoms.''

''Allstream is a robust collection of fibre networks, which are enormously valuable to both Allstream and Zayo customers,'' Dan Caruso, chairman and CEO of Zayo, said in a statement.

''We will unleash the full potential of these assets by combining them with Zayo's network and focus on providing high-quality and low-cost bandwidth to help fuel the growth of Canada's economy,'' he added.

The transaction, approved by the MTS board, is expected to close in the first quarter of 2016 subject to regulatory approvals from national security, competition bureau as well as customary closing conditions.

MTS said it has carried out a comprehensive review of potential buyers through an orderly process.

''We had the participation of six strategic bidders and multiple offers for consideration,'' Forbes said.

He added that Zayo bid was chosen because it represented full value for the asset and also gives a reasonable degree of certainty in terms of closure.

Zayo expects about half of Allstream's revenue, which is C$300 million, is a direct fit with the company's core business and will form Zayo Canada.

The ?remaining part of Allstream will form two separate business units - voice and universal communications and a small business division.

MTS said it made a complete turnaround and planned exit from Allstream.

''We have made strong progress in 2015 executing on our strategy, resulting in significantly improved free cash flow generating capability, with plans for $100 million in further free cash flow improvements over the next three years.''

Through the sale, MTS expects to receive approximately $425 million in net proceeds, which according to analysts is above C$400 million expected earlier from the Accelero deal.

The seller said it will incur a non-cash loss of approximately $75 million to $90 million on account of the transaction.

CIBC World Markets Inc and TD Securities Inc are acting as financial advisors to MTS on the deal while Zayo is advised by RBC Capital Markets.