On Monday, Bell Canada parent BCE Inc. BCE-T surprised investors and triggered a sell-off in its stock by launching a U.S. expansion strategy anchored on the $5-billion acquisition of high-speed internet provider Ziply Fiber.
But, since then, it’s become clear Bell had far loftier ambitions in the rapidly growing U.S. sector. Executives at the Montreal-based telecom spent six months pursuing a supersized prize, Dallas-based Frontier Communications Parent Inc. FYBR-Q, America’s largest pure-play fibre provider.
In the final round of the auction for Frontier in early September, Verizon Communications Inc. – the second-largest U.S. telecom company – topped Bell and won the company with a US$20-billion offer, according to regulatory filings and four sources familiar with the transaction. The Globe and Mail agreed not to name the sources because they are not permitted to speak for the companies.
After Frontier was sold, Ziply owner Searchlight Capital – which bought the business from Frontier in 2019 for $2-billion – decided to put it up for auction and invited Bell to bid.
Investors reacted poorly this week to Bell’s planned purchase of Ziply, which owns fibre networks in four Northwestern U.S. states. Bell’s stock price dropped by 9 per cent on Monday when the company announced the deal and said it would pause common-share dividend increases after hiking its payout for 16 consecutive years
The frosty reception given to Bell’s U.S. expansion plans and the scale of investment needed to keep pace with rivals such as Verizon highlight the challenges Bell chief executive officer Mirko Bibic faces as he attempts to boost profits at a telecom with limited growth opportunities in its home market.
In an interview Nov. 3, Mr. Bibic said running fibre – the backbone of the digital economy – is Bell’s competitive advantage. He said two years ago, as the company neared completion of a four-year, $22-billion build out of its Canadian networks, Bell’s executives and board began working on strategies to “lean into our fibre expertise.”
Over the past year, Mr. Bibic said Bell decided to look at U.S. acquisitions, in part because internet networks there are far less developed than Canada’s. Only 50 per cent of American homes have access to fibre-based high-speed internet, versus 75-per-cent market penetration in Canada. The U.S. telecom market also features a number of small regional players – Ziply operates in Washington, Oregon, Montana and Idaho – Bell could buy, then boost profitability by speeding up fibre rollouts.
Before bidding for Ziply, Bell looked at potential acquisitions of large and small U.S. telecom companies, in part to build its understanding of the sector, Mr. Bibic said. He declined to comment specifically on Bell’s interest in Frontier.
Bell’s challenge is convincing investors it is the best owner for U.S. fiber network Ziply
In October, Frontier filed documents with U.S. regulators detailing the year-long sales process leading up to Verizon’s takeover. While the document does not specifically name other contenders, it does identify five rival bidders as Party A through to Party E, and four sources said Bell is Party E.
Frontier’s filings show activist fund manager Jana Partners LLC began a campaign to sell the company in the fall of 2023 and Mr. Bibic first reached out to Frontier chair John Stratton in February “regarding a potential strategic transaction.”
In June, Bell made a preliminary offer to acquire Frontier for between US$34 and US$37 a share, or between US$8.5-billion and US$9.2-billion, and take on the company’s US$11.5-billion in debt. The documents show Frontier agreed to let Bell contact a small number of institutional investors, such as pension funds, that would buy Bell stock to help finance the acquisition.
In the tight telecom world, one of the Frontier board members evaluating offers was Maryann Turke, former president of Bell Media.
As the high-stakes poker game played out over the summer, Frontier used interest from Bell and other bidders to successfully pressure Verizon into boosting its offer. In early August, Verizon said it would pay a maximum of US$33 a share for the company. When Frontier demanded final bids ahead of the Labour Day weekend, Bell offered US$35, while Verizon raised the stakes to US$38.50 – valuing Frontier’s debt and equity at US$20-billion – and won the company.
Weeks after Frontier sold, Ziply’s owner, a Toronto-based private-equity fund, invited Bell and other potential buyers to bid on the company. Bell won Ziply by paying a price equal to 14.3 times the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). In a report, analyst Maher Yaghi at Scotiabank said the acquisition is “an expensive way to acquire fibre.”
However, analysts Nick Del Deo and Craig Moffett at investment dealer MoffettNathanson LLC said based on the number of potential subscribers served – or “passed” as industry insiders say – “on an apples-to-apples basis, the implied value per passing for Ziply is almost identical to what Verizon agreed to pay for Frontier.”
This year, Ziply will generate $400-million in EBITDA. Bell projects the U.S. business’s EBITDA will increase at an 11-per-cent annual clip, a growth rate that is hard to match in the domestic telecom industry.
Yet some experts have raised concerns about whether the company’s plans have fully taken into account competition from fixed wireless, a form of internet service using a wireless connection that has gained popularity in the U.S. over the last two years.
While previously, the connection offered by fixed wireless was too slow to support more than just casual use, recent developments in 5G cellular technology have vastly improved the speed and quality it provides, according to Jason Buckweitz, an associate director of Columbia Business School’s Institute for Tele-Information studying telecom market ownership.
For the average user who surfs the internet, uses social media and streams television, fixed wireless “easily” provides adequate speeds, and is more affordable than fibre, he said. That’s why the country’s largest players have been doubling down on the technology, reaching about 14 million Americans in the last two years.
In Seattle, Ziply’s largest urban coverage area, Verizon offers fixed wireless service for about US$25 to those already on a wireless plan. Ziply’s fibre service starts at a US$10 monthly promotional offer, but increases to US$45 after the first year, he said.
Prof. Buckweitz said Verizon’s acquisition of Frontier’s fibre networks makes sense because of Frontier’s range of business clients, which are less likely to switch to fixed wireless.
Meanwhile, Bell may be seeking to take advantage of U.S. federal funding. In 2022, the Biden administration announced US$45-billion in capital expenditure support for businesses that develop affordable, high-speed internet in rural areas. According to Christopher Ali, a telecommunications professor at the University of Pennsylvania, Ziply’s footprint in rural areas make it a potential candidate for this funding.
However, those funds might now be at risk. U.S. president-elect Donald Trump has said he would undo funding deals made by the previous administration – although it’s unclear whether he will keep this commitment, given that much of his supporter base is rural. Even if the funds remain in place, they come with strenuous regulatory demands.
“I wouldn’t stake $5-billion on hoping that that money’s coming,” said Prof. Buckweitz.
Erik Bohlin, a professor and Ivey Chair in Telecommunication Economics with the University of Western Ontario, said he sees Bell’s southward move as a statement about the slowing profitability of the Canadian market, and a desire for a less-regulated market environment.
He says Bell’s recent disposition of its media assets in favour of an acquisition closer to its core business makes sense, given how few telecoms have been able to successfully maintain a profitable stake in the media business.