Bell’s $5 Billion Gamble in the U.S. is ‘Perplexing’, Says Analysts

Bell’s parent company BCE saw its stock drop nearly 10% on Monday, after announcing its $5 billion purchase of U.S. internet provider Ziply Fiber.

The acquisition is causing waves among investors and analysts alike, with Scotia Capital analysts calling it a “perplexing transaction.”

Maher Yaghi, Scotia Capital analyst, was skeptical of the purchase by Bell, reports Yahoo! Finance. He believes the deal doesn’t align with Bell’s usual dividend-focused strategy, which is a major draw for Canadian telecom investors. “Investors in Canadian telecom are in the sector for dividends, not for growth,” Yaghi said. “They can get it elsewhere.”

Yaghi also pointed out that Bell is paying a high premium for Ziply Fiber, valuing it at 14.3 times its projected 2025 earnings before interest, taxes, depreciation, and amortization (EBITDA).

For comparison, Verizon’s recent purchase of Frontier Communications in the U.S. was valued at just 7.4 times EBITDA. Bell’s own stock valuation is currently at a 6.8x multiple.

The Ziply deal, Yaghi argues, lacks the clear benefits of Verizon’s acquisition, which had synergy with its wireless services. He suggests Bell may struggle to replicate this benefit, questioning how the company plans to leverage the purchase to offer bundled services to U.S. customers.

While the acquisition is expected to boost Bell’s earnings in the short term, Scotia analysts doubt it will improve the company’s cash flow in the years ahead, noting the high costs linked with expanding fibre services in the U.S.

Investors were hoping BCE’s sale of its MLSE stake to Rogers would help reduce debt. Instead, BCE’s debt level will “remain relatively unchanged,” after this purchase.

To cover remaining Ziply purchase costs, Bell says it will suspend dividend growth and offer shareholders the option to reinvest dividends in discounted shares. Yaghi labelled this a “strategic change” that may dilute shareholder equity and stall dividends.

RBC analyst Drew McReynolds, on the other hand, offered a more measured view, saying Bell’s deal at least clarifies its growth strategy and future dividend approach, but doubts remain about the deal’s long-term benefits.

On Tuesday, shares of BCE dropped another 1.36%, closing at $39.92 per share, down 11.49% in the past five days. Operating an internet provider in the U.S. definitely will be different compared to Canada, where Bell has been able to call most of the shots when it comes to dealing with the federal government.