BCE is getting $4.7-billion for its 37.5-per-cent share of MLSE, a conglomerate that owns the Toronto Maple Leafs and the Toronto Raptors, among other sports teams.Yader Guzman/The Globe and Mail
Mirko Bibic was boxed in.
An unsustainable debt load coupled with a precarious dividend strategy pushed BCE Inc.’s balance sheet to the brink, forcing the telecommunications giant’s chief executive to unload its stake in Maple Leaf Sports & Entertainment to arch-rival Rogers Communications Inc. RCI-B-T
BCE BCE-T is getting $4.7-billion for its 37.5-per-cent share of MLSE, a conglomerate that owns the Toronto Maple Leafs and the Toronto Raptors, among other sports teams, but the sale is something that used to be considered off limits by management.
Yet with BCE’s financials in such disarray, resulting in debt-rating downgrades from two different agencies in the past three weeks, Mr. Bibic had to find a new approach. Under pressure to pay down $39-billion in debt, and staring at a stock price that had fallen back to 2014 levels, he was forced to sell the prized asset in order to generate some much-needed cash.
The financial woes that got him here mounted rather quickly. Only two years ago, BCE’s shares traded at a record high. However, central banks started raising interest rates in March, 2022, and the aggressive hikes put pressure on dividend stocks like BCE because their yields stopped looking as enticing relative to ultra-safe guaranteed investment certificates.
As BCE’s stock fell, the sustainability of its balance sheet came into question. For years, the company had raised its dividend by about 5 per cent annually, but last fall multiple analysts noticed that management might be using some unique accounting methods. Once certain costs were factored in, the telco was arguably paying out more than 140 per cent of its free cash flow each year, which was unsustainable.
The revelation not only put the nearly automatic dividend hikes at risk – it raised the prospect of a dividend cut.
At the same time, BCE’s debt load came into focus because the industry’s growth prospects have taken a hit. Canadians continue to cut their cable subscriptions; lower levels of newcomers to the country will limit the number of people looking for wireless plans; and lower-cost rivals such as Freedom Mobile have been offering aggressive discounts to win market share.
“It is a difficult environment, no question,” Mr. Bibic said at Bank of Montreal’s annual telecom conference last week.
The irony is that BCE still generates strong operating-profit margins of around 40 per cent. But its interest payments have become problematic. Management is still spending heavily on capital expenditures to install fibre networks in more neighbourhoods across Canada, and BCE doesn’t want to divert cash away from its dividend for fear of upsetting yield-hungry investors. Instead, it has borrowed billions of dollars to fund these outlays.
On the Friday afternoon before Labour Day, rating agency Moody’s Investors Service called this model into question and downgraded BCE’s debt to Baa3 from Baa2, citing “high financial leverage and limited deleveraging ability.”
The rating agency also noted that BCE has consistently increased its debt relative to earnings before interest, taxes, depreciation and amortization (EBITDA) since 2019, “and has not demonstrated any commitment to deleveraging while maintaining a dividend growth model.”
To its credit, BCE has tried to get its house in order. In February, the company announced that it was cutting its work force by 4,800 jobs, or nine per cent, amounting to its largest restructuring in almost 30 years. At the time, Prime Minister Justin Trudeau called it a “garbage decision” because of the job losses, particularly in its media division.
Central-bank interest rates are also starting to fall, which should make BCE’s yield look more attractive again. The Bank of Canada started cutting in June, and the U.S. Federal Reserve made its first cut this cycle on Wednesday.
But the competitive landscape is so challenging that BCE can’t wait it out. Not only has the federal government continued to slash newcomer targets, rival telecom companies won’t let up with their price war, particularly for wireless plans.
The double whammy puts BCE in a tough spot because it spent heavily on new infrastructure to support faster internet speeds and better service for cellphone data, all with the hope that customers would ultimately pay more for better service. If this played out, BCE would have higher revenues to pay down the debt, but there’s no end in sight to the price war.
Rating agencies have also increasingly become restless. Two weeks after Moody’s downgraded BCE’s debt, S&P Global followed suit, noting that BCE’s management kept promising changes, but had yet to deliver.
“BCE management has indicated its desire to reduce leverage by 2026 through noncore assets sales and other corporate initiatives; however, the timeliness and magnitude of these actions is uncertain,” the rating agency wrote in its report.
With the sale of its MLSE stake, BCE is trying to change that narrative. In a statement, BCE said the sale, which represents a return on investment of more than $4-billion since 2012, will “reduce debt levels and reallocate capital toward growth initiatives and our ongoing transformation from telco to techco.”
The question now is whether it will be enough to win investors back. Not only does the MLSE sale face a regulatory review that could take a year or longer, but its debt load is also so large that even after using expected net proceeds of $4.1-billion to reduce the burden, total leverage will remain elevated. BMO analyst Tim Casey estimated Wednesday that the MLSE sale will help lower BCE’s debt to 3.3 times EBITDA, down from 3.7 times.
BCE also continues to pay a dividend that amounts to more than its free cash flow. While Mr. Bibic has promised to get it down to 100 per cent of free cash flow, the target date for that isn’t until 2026.