BCE Inc. (BCE), Canada’s largest telecommunications company, agreed to buy Glentel Inc. (GLN)for C$670 million ($586 million), boosting the carrier’s retail presence as the threat of more competition looms.
BCE, known by its brand name Bell, will pay Glentel investors about C$26.50 per share in cash or stock, more than double Glentel’s closing price yesterday, the companies said today in a statement. Montreal-based BCE will issue about 5.6 million shares to help fund the purchase, which includes C$78 million for net debt and minority interest.
BCE is likely making the acquisition to defend against a potential fourth national carrier increasing competition and driving down prices, Greg MacDonald, a Toronto-based analyst with Macquarie Group Ltd., said by phone.
“It locks up another 500 Canadian distribution points ahead of growing new entrant risk,” MacDonald said in a note to clients.
The Canadian government has been giving smaller wireless companies preferential access to airwaves and lowering the rates they pay bigger carriers when customers roam on their networks. Both Quebecor Inc. and Globalive Wireless Management Corp., which operates as Wind Mobile, have said they want to compete nationally.
The deal also pushes BCE into the U.S., where Glentel runs more than 700 stores under the Wireless Zone and Diamond Wireless names, two of Verizon Communications Inc. (VZ)’s six national premium retailers. Burnaby, British Columbia-based Glentel is also the biggest independent mobile-phone retailer in Canada with almost 500 locations that sell phones and services from wireless carriers including Bell and Rogers Communications Inc. (RCI/B)
Glentel also runs 147 outlets in Australia and the Philippines after buying the Australian assets in 2012. In 2013, Glentel generated about 57 percent of its C$1.4 billion in revenue in the U.S. and 31 percent in Canada. The operations outside of the U.S. and Canada posted an operating loss last year,data compiled by Bloomberg show.
“We are unsure if Bell will operate Glentel stores in the U.S. and Australia for the long term,” Andrew Calder, a Toronto-based analyst with RBC Dominion Securities Inc., said in a note to clients.
Glentel more than doubled to C$25.75 at 3:59 p.m. in Toronto, and BCE was little changed at C$53.34. Before today, Glentel shares had dropped 11 percent this year while BCE gained 16 percent.
BCE, which generated C$20.4 billion in revenue last year, has virtually all of its operations and assets in Canada, according to its annual report.
Investors can choose to receive C$26.50 in cash or 0.4974 share of BCE for each share of Glentel they own. BCE plans to pay for the deal 50 percent in cash and 50 percent in stock.
Glentel’s credit rating was downgraded one level to B+ by Standard & Poor’s in September on concerns the firm was running out of cash after it failed to secure C$200 million in debt financing.
BCE is paying a 134 percent premium on Glentel’s closing share price yesterday, the highest announced premium for a North American telecommunications company since 2012, according to data compiled by Bloomberg.
While the valuation is on the high side, the deal is still small enough that it won’t affect BCE’s financial stability, Maher Yaghi, an analyst at Desjardins Securities Inc., wrote in a note to clients today.
“Given the competitive marketplace in Canada, we view the acquisition as strategically sound as distribution is key to gaining market share,” Yaghi wrote.
BCE and Glentel said they expect the transaction to close by the end of the first quarter, subject to approval from regulators and shareholders. The Skidmore family, who owns about 37 percent of Glentel shares, is supporting the deal.
Still, regulatory issues could complicate the deal, as the acquisition gives BCE a substantial chunk of the retail market, MacDonald said.
“For this reason, we believe there is material risk the deal will not be approved by Competition Canada,” MacDonald said in his note.