Mark Evans

March 20, 2004 - With palpable opposition to Manitoba Telecom Services Inc.'s $1.7-billion acquisition of Allstream Inc., a looming issue is whether there is anything unhappy investors can do to derail it.

It is an intriguing question because two investors — Enterprise Capital Management Inc. and Highfields Capital Management — several mutual fund managers and a number of analysts believe it is a bad deal for MTS and its shareholders.

At the very least, there is growing sentiment the takeover proposal and a proposal to convert MTS into an income trust should be voted on by shareholders at the annual meeting in June.

In a research note, Desjardins Securities' Joseph MacKay said it is surprising MTS is not going to seek approval from shareholders for the acquisition, even though it represents a major change in the company's strategic direction.

“While there may be no legal requirement to hold a vote, we believe that management should put the issue to a special shareholders' meeting to highlight the advantages and disadvantages of proceeding with a trust structure as well as the Allstream acquisition,” he said.

Given it is unlikely MTS will hold its AGM until after the Allstream deal is completed, Mr. MacKay added that “shareholders, particularly BCE Inc. [which owns 21% of MTS], may be motivated to appeal to the courts to force the board to hold a special meeting concerning such significant decisions.”

It will be interesting to see how MTS management reacts if BCE demands a shareholder vote on either or both proposals. For its part, BCE has not said anything beyond a statement it issued Thursday after the MTS-Allstream deal was unveiled.

The legal route may not be available to shareholders intent on blocking the MTS-Allstream deal. Michael Sinclair, a partner with Winnipeg-based law firm Thompson Dorfman Sweatman, said there are no provisions in the Manitoba Corporations Act giving investors the right to use legal means to force a company to hold a shareholders meeting.

“The basic law is that the directors of the corporation manage the affairs of the company, and shareholders are limited to who will be on the board of directors,” he said.

Another obstacle facing investors looking to kill the MTS-Allstream deal is that MTS — with board approval — has a legal obligation to buy Allstream pending its approval by regulators and Allstream shareholders. If Allstream is acquired by another firm such as Telus, it will have to pay MTS a $50-million break-up fee.

Much of the opposition to the MTS-Allstream deal, particularly investors such as Highfields and Enterprise Capital, is focused on the probability MTS will not be converted into an income trust even if a vote is held after the acquisition of Allstream is completed. This means MTS — for the short-term — is worth less than the $55 to $60 analysts believe it would fetch as an income trust.

There are also investors leery about the transaction because Allstream is a low-growth carrier competing for corporate customer in a market with aggressive rivals such as Bell Canada, Telus Corp. and Call-Net Enterprises Inc. While Allstream has impressed investors by restructuring operations, most of its bottom line improvements have come from cost-cutting rather than growth.

Eamon Hoey, senior partner with Hoey & Associates, said a big challenge facing MTS/Allstream is the new entity needs to make major investments upgrading Allstream's networks. This has been something Allstream has not tackled, he said, because it has capital spending low at only 8% to 10% of revenue.

“Allstream is facing significant capital expenses to upgrade their networks to provide new [Internet-based] services,” Mr. Hoey said. “Now, they're financially stable and got a good banker in MTS.”

Telecom consultant Mark Goldberg said Microcell Telecommunications Inc., the country's fourth-largest wireless carrier, would have been a better fit for MTS because it would have represented a cleaner break from BCE.

MTS closed up 81 cents to $48.81 yesterday after dropping $5.23 on Thursday after the Allstream acquisition was announced.