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MTS gets green light for Allstream takeover, but will the enlarged group have any impact?

13 May 2004

Allstream shareholders have approved the CAD1.57 billion (USD1.13 billion) takeover offer by larger rival Manitoba Telecom Services (MTS) which, if approved by regulators, will it hopes create a new number four player to challenge the dominance of Bell Canada and TELUS Corp in the Canadian fixed line market. MTS entered into an agreement to buy the Toronto-based local and long-distance corporate services provider in March this year in an attempt to bolster its footprint in Canada; its business is currently confined almost exclusively to the province of Winnipeg in the west of the country. It opted for the acquisition ahead of an alternative plan to convert its shares into high-yielding income trust units. If ratified by the Ontario Supreme Courts, the new enlarged entity would have more than 7,000 employees, revenues of over CAD2.1 billion and a 5.52% share of the local access market. However, given the dominance of Bell Canada and TELUS which between them control more than 16.4 million lines or over 80% of the local telephony market, it is unlikely to have much impact in the short-term. Added to this the arrival of fresh competition in the VoIP sector from the likes of Canada’s second largest cable TV operator Shaw Communications, is changing the landscape and forcing MTS to revise its future capital requirements.

Allstream was created by AT&T in 1999 as AT&T Canada, but was forced to enter into Chapter 11 bankruptcy protection in 2002. Last year it completed a court-supervised restructuring that freed it of an enormous debt load amassed since 1999, but which left former shareholder AT&T with little or no interest in the company. It hopes to benefit from the merger as its rival’s financial clout will help it better compete in the crowded corporate contracts market. Allstream said that 99.7% of the votes cast on the issue were in favour of MTS’s proposal: the 16.7 million shares voted represented around 85% of the company’s equity. The deal is expected to be completed by June, although Canada’s competition bureau will scrutinise it closely given that the country’s dominant player, Bell Canada, holds a 21.7% interest in MTS.

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