BCE stock sinks on ‘perplexing’ Ziply transaction

BCE’s (BCE.TO) share price plummeted on Monday following its announcement of the acquisition of U.S. internet provider Ziply Fiber, with analysts at Scotia Capital calling it a “perplexing transaction.”

Scotia Capital analyst Maher Yaghi expressed doubt about the $5 billion deal, which BCE says it will largely fund with the proceeds from the $4.2 billion sale of its stake in Maple Leaf Sports & Entertainment. (MLSE).

“Investors in Canadian telecom are in the sector for dividends and not in it to get growth,” Yaghi wrote. “They can get it elsewhere.”

BCE shares were down over seven per cent as at 10:30 a.m. Monday.

BCE is paying a 14.3x multiple on Ziply’s 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA), Yaghi notes. He made a pointed comparison to a similar deal, Verizon’s recent acquisition of provider Frontier Communications, which valued the fibre network at a 7.4x multiple — and to BCE’s current stock valuation of 6.8x.

“We certainly understand the impetus by Verizon to acquire Frontier given the geographic overlap on wireless but are having a hard time seeing the same synergistic potential with BCE’s move at this time,” Yaghi wrote, noting a trend of convergence among U.S. mobile and internet providers trying to keep customers on board. Yaghi writes that “it will be interesting to see how BCE will supplement its acquired business to sell converged services.”

The acquisition should push BCE’s EBITDA higher, but Yaghi notes that Scotia’s analysts “highly doubt” the deal will add to BCE’s free cash flow (FCF) in the years ahead because “the cost to load customers and [capital expenditures] remains very high for fiber operators in the U.S.”

Many expected the MLSE sale to allow BCE to pay down debt. Now, BCE says its net debt leverage ratio will remain “relatively unchanged.”

As a consequence of the acquisition, BCE says it will pause dividend growth. The company intends to fund the balance of the Ziply purchase not covered by the MLSE proceeds by allowing shareholders to reinvest cash dividends in discounted shares, a move the company says “is expected to enable BCE to retain cash to help fund strategic growth initiatives and strengthen the balance sheet.”

“Acquiring assets that are potentially FCF dilutive for a few years and is leading to potential equity dilution from the DRIP and no dividend increases in the foreseeable future represents an important strategic change,” Yaghi wrote.

RBC analyst Drew McReynolds had a more neutral take on the announcement, writing that “visibility around the growth, FCF and balance sheet trajectories through the medium term has increased along with improved clarity on strategic priorities and dividend sustainability.”

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