BCE’s pricy American acquisition prompts target cut at National

After the massive sale of its MLSE assets to Rogers, investors were looking for BCE (BCE Stock Quote, Chart, News, Analysts, Financials TSX:BCE) to make a splash. But at least one analyst, National Bank Financial’s Adam Shine, has serious reservations about the move.

On November 4, BCE announced that it would acquire U.S.-based Ziply Fiber, an ISP that operates in the Pacific Northwest, for approximately $7-billion. Another analyst, Scotia Capital’s Maher Yaghi noted that the pickup came at price target of 14.3 times EBITDA, widely considered expensive.

“This acquisition marks a bold milestone in Bell’s history as we lean into our fibre expertise and expand our reach beyond our Canadian borders,” BCE CEO Mirko Bibic said. “Fibre is at the heart of what we do, and we’re proud to connect people and businesses and enable them to do more through our fibre networks. By bringing together Bell and Ziply Fiber’s exceptional talent, we’ll accelerate our growth while continuing to deliver significant value for our customers and shareholders.”

Shine says the move is a bold one and a risky one.

“There were always going to be concerns that Bell in future, after delevering with non-core sales and completing key part of its fibre build next year, could pursue an acquisition that wouldn’t please some investors,” he wrote. “We just didn’t think this would happen in final part of 2024, with an expensive U.S. foray that won’t be FCF accretive until after 2028 and will elicit ongoing questions of ‘why’ despite Bell’s strategic rationale for doing this deal now. Not to be ignored is that growth is slowing in Bell’s domestic market. This in and of itself is often a trigger for diversification, but the U.S. has a rapidly evolving competitive landscape among large established players that appears destined to increasingly touch areas in and around Ziply’s footprint, while Bell has struggled of late in Canada with stepped-up competition and more aggressive pricing tactics by the Big 3. It’s not a given that Ziply will fulfill the promise of materially improving cash flow growth after its fibre build across the more rural parts of its four-state footprint in U.S. Pacific Northwest.”

In a research update to clients November 5, Shine maintained his “Sector Perform” rating on BCE, but lowered his price target on the stock from $48.00 to $42.00.