UPDATE - Manitoba Telecom to buy Allstream

TORONTO (03/19/2004) - Manitoba Telecom Services Inc. on Thursday agreed to acquire fellow telco Allstream Inc. in a deal valued at C$1.7 billion (US$1.28 million).

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Under the terms of the proposed transaction, MTS will acquire all outstanding shares of Allstream at an offering price of C$23 in cash per share plus 1.0303 MTS shares, which equals approximately C$81.12 per Allstream share.

In addition, the deal will see MTS gain access to Allstream's fiber-based network and the ability to offer gigabit Ethernet, Internet Protocol Multiprotocol label switching (IP-MPLS) as well as Allstream's other IP-based offerings including voice over IP (VoIP) capabilities.

The combined company is expected to reap annual sales of C$2 billion and more than C$2.9 billion in assets and will consist of 7,000 employees across the country.

"This proposed transaction makes financial sense in that it creates a more stable organization," said John McLennan, CEO of Allstream during a teleconference Thursday morning. "It makes business sense (to allow us) to offer a wider range of products and services...and expand beyond the (Canadian) enterprise market to all areas of the market."

According to MTS CEO Bill Fraser, the combined entity represents an integration of the strengths of each telco. Fraser added that MTS intends to build on the successes of Allstream's blue chip customer base and capabilities and said the two are ready to "hit the ground running."

However, the deal is still pending an Allstream shareholders vote. Additionally, MTS could face potential challenges from one of its main shareholders, BCE Inc. BCE holds 22 per cent interest in MTS and Fraser said the company did not seek approval from BCE prior to announcing the proposed acquisition.

The combined company would compete directly with Bell Canada and Telus Corp. as an incumbent local exchange carrier.

According to Mark Quigley, research director with Ottawa-based the Yankee Group in Canada, from an overall national market perspective the union paints a good picture.

"Allstream as part of MTS makes MTS a more formidable competitor than they were in the past," Quigley told IT World Canada. "MTS generates C$850 million per year in cash that is largely untouched. Manitoba is not a terribly competitive market for anything outside of wireless. That means you have a protected core asset that is going to continue to churn out cash, will continue to be profitable and that money can be used to help bolster national efforts. That is one challenge Allstream would have had by themselves -- availability of capital to invest in network upgrades or expansions."

Quigley added that the combined telco will be better able to develop more innovation services and products -- something that Allstream has been more or less unable to do as a result of capital constraints.

"I think in the short- to medium-term, this is going to be an enterprise and business focused operation because that is where Allstream's core competencies lie," he said. "I think that...the consumer marketplace for a company like Allstream and MTS outside of Manitoba would prove a costly market to enter because they don't have any relationship with those customers today. I think this is absolutely a good thing. We haven't seen anything quite like this in the Canadian market since Telus bought Clearnet a number of years ago."

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