MANITOBA TELECOM SERVICES INC. $33 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 67.7 million; Market cap: $2.2 billion; Price-to-sales ratio: 1.5; Dividend yield: 5.2%; TSINetwork Rating: Average; www.mts.ca) recently agreed to sell its Allstream subsidiary to Accelero Capital Holdings, a private firm controlled by Egyptian billionaire Naguib Sawiris.
In 2004, the company paid $1.6 billion for Allstream, which provides integrated telephone, Internet and other communication services to over 50,000 businesses across Canada.
The sale price is $520 million. If you disregard various closing costs, Manitoba Telecom will receive $405 million. The company expects to close the deal by the end of 2013.
Manitoba Telecom will use the cash to contribute $130 million to its underfunded employees’ pension fund. It will also pay back $70 million of short-term loans it took out to fund recent pension contributions. As well, Manitoba Telecom will continue to fund the Allstream pension plans and will contribute $40 million to them when the deal closes.
Selling Allstream will let the company focus on its main telecom businesses in Manitoba, where it has 505,400 phone customers, 495,303 wireless subscribers and 200,632 high-speed Internet users.
In the quarter ended June 30, 2013, revenue from ongoing operations rose 0.2%, to $247.4 million from $246.8 million. Strong wireless and Internet demand offset weaker revenue from regular phones, or land lines. The company now gets 61% of its revenue from faster-growing services like wireless and 39% from older businesses, such as land lines.
Higher depreciation charges cut Manitoba Telecom’s earnings by 12.7%, to $28.2 million from $32.3 million. Earnings per share fell 14.3%, to $0.42 from $0.49, on more shares outstanding.
The stock trades at a high 19.9 times the $1.66 a share that the company will probably earn in 2013. That’s mainly because Manitoba Telecom’s smaller size could make it a more attractive takeover target, particularly now that Ottawa has relaxed foreign ownership limits on telecom companies with less than a 10% market share.
As well, tax losses and investment credits will let the company avoid paying income taxes until 2019. That should let it keep paying its $1.70-a-share dividend, which yields 5.2%.
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