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Manitoba Telecom Services (MBT-T) is facing a race against time to sell its Allstream unit, according to one analyst at Canaccord Genuity.
Recent changes to the telecom sector by Ottawa allow the company to sell Allstream, its national voice and data service, to a foreign investor. But Canaccord analyst David Ghose says the window for that sale is shrinking.
“In our view, if Allstream is not sold at a high valuation by year-end, the market’s enthusiasm may wane, especially given rising pension solvency funding risk,” he says in a note to clients.
Ghose says there is currently a wide margin on Bay Street for how much the company could get for Allstream. Ghose believes that declining revenue, low margins, negative free cash flow and high pension costs, among others, mean the company could fetch $440 million for Allstream.
But he adds that more bullish estimates by the Street estimate that it could receive as much as $800 million.
Ottawa recently tabled legislation that lifts foreign investment in wireless companies with less than 10 percent of the market by revenue -- which would include Manitoba Telecom Services and its Allstream division.
The federal government is also preparing to auction off valuable wireless spectrum, which is expected to take place either late this year or early 2013.
He also warned that the company’s dividend could be in peril because of its soaring pension costs. MTS currently funds its pension solvency deficits by relying on lines of credit, but current rules only allow such funding up to a maximum of 15 percent of assets.
“This currently equates to a maximum of about $278 million for MTS. The problem is that it had used $155 million of line of credits (LoCs) at the end of 2011, and plans to use a further $80 million in 2012, leaving only $43 million for 2013,” he says. “As we assume some cash pension funding for solvency deficits in 2013, our 2013 consolidated free cash flow estimate of $113 million or $1.70 per share is significantly below consensus of $144 million or $2.18 per share. With a current annual dividend per share (DPS) of $1.70, dividend sustainability may resurface as a major issue again in 2013.”
Ghose has a "sell" rating and a $27 price target on Manitoba Telecom Services.