Northwest Fiber, LLC (BCE) Earnings Call Transcript & Summary

Good morning. Welcome to the BCE conference call following the announcement of the acquisition of Ziply Fiber. I would now like to turn the meeting over to Mr. Thane Fotopoulos. Please go ahead, Mr. Fotopoulos.

Thank you, Matthew. Good morning to everyone, and thank you for joining us on such short notice today. As you're aware by now, this morning, we did announce that BCE will be acquiring Ziply Fiber, and the purpose of today's call is to provide you with some additional details and perspectives on that transaction. On the call with me today, as usual, are Mirko Bibic, President and CEO of BCE; and Curtis Millen, our CFO. Mirko and Curtis have a few prepared remarks for you, after which we'll proceed to Q&A. However, before we begin, I want to call your attention to our safe harbor notice on Slide 2, reminding all listeners that today's presentation and remarks by the speakers will contain certain forward-looking statements, including with respect to the proposed acquisition of Ziply Fiber by BCE and the prospective timing and financial impact of these transactions. Several assumptions were made by us in preparing these forward-looking statements, and there are risks that actual results may differ materially from those contemplated by our forward-looking statements. These forward-looking statements represent BCE's expectations as of today and accordingly are subject to change after such time. Except as may be required by Canadian securities law, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. And I'm making this cautionary statement on behalf of all the speakers today whose remarks will contain forward-looking statements. With that, over to you, Mirko.

Thank you, Thane, and good morning to all, and thank you for joining us on short notice. I'm very pleased to announce BCE's proposed acquisition of Ziply Fiber, the leading broadband and fiber network provider in the U.S. Pacific Northwest. We will be acquiring 100% of Ziply Fiber's equity for USD 3.65 billion in cash. Curtis will take you through the key transaction and financing details in a few moments. This acquisition marks a bold milestone in Bell's history. It's a significant investment in our growth strategy, and it will help us take our competitive edge beyond Canada. Fiber is at the core of Bell's purpose. By bringing together Bell with Ziply Fiber's experienced management team and our shared fiber strategic vision, the acquisition enhances long-term growth by providing us with a foothold in the underpenetrated U.S. fiber market while increasing our scale, diversifying our operating footprint and establishing a platform for further expansion opportunities. BCE began its fiber journey in 2010, and we currently offer multi-gigabit speeds to 7.7 million households and business locations across Canada. We have an intimate firsthand appreciation for the power of fiber, and we are well positioned to support Ziply Fiber's fiber investment strategy. The acquisition is immediately accretive to BCE's operating cash flow while also enhancing BCE's financial growth profile. In terms of size, Ziply fiber is forecasted to generate EBITDA in excess of CAD 400 million in 2025. To reinforce our fiber growth objectives and balance sheet management with this acquisition, with a view to long-term value creation for shareholders, we intend on pausing dividend growth and maintaining the annual BCE common share dividend at the current level of $3.99 per share for 2025. By maintaining the current dividend level, Bell is reallocating capital to fund the acquisition of Ziply Fiber, ensuring that our company can seize new growth opportunities without compromising on total shareholder returns. By reinvesting in fiber growth today, we are building a stronger foundation for tomorrow. We intend to pause dividend growth until BCE's dividend payout and net debt leverage ratios are tracking towards our target policy ranges. And I'll remind you that the BCE Board of Directors reviews the dividend policy annually. I'm going to turn now to Slide 5 of our presentation. The acquisition represents a highly attractive U.S. market entry point for BCE, and it's one that's well aligned with our fiber-first strategy and core competencies, repositioning the company for growth across a more diversified geographic landscape with opportunities to scale further. The transaction, which cements Bell's position as the third largest fiber network and Internet service provider in North America, will build upon our leading position and deep fiber expertise gained over the past 15 years. We will be bringing the very best of Bell to the underpenetrated U.S. fiber market to capitalize on the significant growth opportunity, where Ziply Fiber plans to expand its current highly fiberized footprint by approximately 2 million more locations over the next 4 years. The U.S. is a natural expansion market for BCE. As I just said, but which bears repeating, we plan to bring the best of Bell and the best of Canadian innovation and competitiveness beyond our traditional borders to provide increased scale and geographic diversification. The U.S. has low fiber availability compared to Canada. It has attractive fiber economics with a low cost to build and strong ARPU growth as well as favorable competitive dynamics, particularly in Ziply Fiber's footprint. Moreover, the acquisition advances Bell Business Markets positioning in North America by enabling the sale of our leading technology services to a broader base of enterprise customers. We also expect to surface annual run rate cash cost synergies totaling USD 30 million from efficiencies, including in procurement, customer care and IT development. Let's turn now to Slide 6. For those of you not familiar with Ziply Fiber, they are the largest fiber network and broadband Internet provider in the Pacific Northwest, covering more than 2 million customer premises across 4 states. 1.3 million of these locations, representing 64% of its current ILEC footprint already have been deployed with high-speed pure fiber. And to put Ziply Fiber's size into better perspective for you, their fiber footprint is, in fact, larger than that of Bell Aliant and Bell MTS combined. Ziply Fiber delivers high-speed Internet to approximately 400,000 retail subscribers. 82% of them are on pure fiber service. They also benefit from low legacy copper exposure and a favorable operating mix with 52% of total revenues generated by fiber, which is growing in the high single-digit range annually. Significant white space remains across Ziply Fiber's operating footprint that also benefits from an attractive competitive and market environment. U.S. fiber availability lags behind Canada and other global markets. Only 51% of homes in the U.S. have access to fiber compared to 75% in Canada. So we're getting in at a very opportune time when there's still meaningful growth ahead, particularly in light of Ziply Fiber's plan to expand its fiber footprint by approximately 2 million more locations over the next 4 years. This will bring BCE's total target fiber passings to more than 12 million by the end of 2028. And notably, all of this against the backdrop of an attractive market structure with one or fewer gigabit capable competitors and 93% of Ziply Fiber's footprint and relatively less fiber overbuilding or fixed wireless access overlap than other U.S. regions. So in short, we're forging ahead with an acquisition where the demographics in Ziply Fiber's markets are best-in-class in terms of market growth and GDP per household. It's an attractive competitive environment in Ziply Fiber's footprint, frankly, unique in the lack of overbuilders. Ziply Fiber's EBITDA growth rate is best-in-class relative to its fiber peers and Ziply Fiber's capital efficiency, and by that, I mean the capital required to achieve growth, is also best-in-class, and Ziply Fiber has an outstanding management team. It is the ideal platform for us to enter the U.S. residential fiber market, and there's no platform better than Ziply Fiber. Now I'm going to move over to Slide 7. Again, the transaction increases Bell's scale and financial growth profile while providing a platform to support continued growth and expansion. Ziply Fiber currently represents around 4% of BCE's stand-alone annual revenue and adjusted EBITDA. Fiber has powered their impressive EBITDA growth of 11% over the past year, and this is projected to accelerate going forward, given significant growth runway ahead from the more than 1.3 million fiber locations already built, as I mentioned, and where penetration is still relatively low, particularly in areas deployed more recently. And as mentioned, the fiber footprint expansion growth to come by the end of 2028. From a Bell perspective, we know how to operate a traditional telco that is converting to fiber at scale, and we know how to capture fiber growth efficiently while managing the decline in legacy infrastructure services. And Ziply Fiber has already reached an inflection point in our business with fiber growth exceeding legacy revenue declines. Once the transaction is closed, Ziply Fiber will operate as a separate business unit. The combination of Bell and Ziply Fiber will create economies of scale, accelerate innovations in the market and unlock new value for both existing and new customers in both Canada and the U.S. as demand for faster, more reliable Internet and data services increases. The 2 companies will bring a depth of management, product leadership and technical expertise aligned on a customer-first culture, vision and long-term strategy. So in closing, again, this is a very exciting and historic day for Bell. This transaction is a bold approach to growth anchored to what we do best in a business we know really well. Simply put, the operating and geographic diversification will make Bell even better. It's good for customers on both sides of the border as we can invest more aggressively in innovation with the costs spread out over a larger customer base. It's good for employees as it takes our competitive fiber edge beyond our Canadian borders and enhances our growth profile. And it's good for BCE shareholders as this deal will unlock new value and drive long-term free cash flow growth. By giving us a foothold in the lucrative U.S. market, Ziply Fiber will enable us to continue to scale and to grow at an even faster pace. And with that, I'm going to turn the call over to Curtis.

Thanks, Mirko, and good morning, everyone. I'm on Slide 9. And let me start by reiterating Mirko's excitement for this transaction that will definitely support BCE's long-term capital markets objectives. Transaction enterprise value is approximately CAD 7 billion, which includes Ziply Fiber's debt that will be rolled over and remain outstanding at closing. This equates to a multiple of 14.3x Ziply Fiber's estimated 2025 adjusted EBITDA when taking into consideration both the net present value of tax attributes and cost synergies. Assets like Ziply Fiber transact at premiums to legacy telco multiples given their higher fiber revenue mix and superior growth prospects. We're actually paying a lower multiple than present transactions involving pure fiber companies and modernized ILECs, which have been more in the range of approximately 19 to 25x EBITDA. The acquisition is not conditional on any financing and no incremental debt will be required to fund the transaction. In fact, the sale proceeds from MLSE will be used to largely fund the acquisition of a high-growth on-strategy fiber asset that generates more than $400 million in stand-alone EBITDA annually, and that will be accretive to BCE's long-term free cash flow. In contrast, as you know, we do not consolidate MLSE results and therefore, generate no cash flow for Bell. The transaction agreement contains standard deal protections, including a reverse break fee as well as the usual conditions to closing, including no material adverse change and U.S. regulatory approvals, including FCC consent and various state public utilities commissions. We expect the acquisition to close in the second half of 2025. Turning to Slide 10. The acquisition is an all-cash deal with a total financing requirement at closing estimated at CAD 5 billion. As I mentioned, no incremental debt is required as the acquisition will be funded with MLSE net sale proceeds totaling $4.2 billion, together with cash surface from a discounted treasury DRP program that we announced this morning, and then we will commence with BCE's Q4 2024 common share dividend payment. In the event that the sale of MLSE is completed after the closing of Ziply Fiber, we have entered into a USD 3.7 billion fully committed delayed draw term loan facility to finance the acquisition. Concurrently, the discounted treasury DRP will accelerate improvement of BCE's dividend payout ratio and support our objective to deleverage over time. Assuming a participation rate of approximately 30%, which is consistent with comparable programs implemented by other companies, we anticipate our payout ratio to improve by more than 30% in 2025. Bell's pro forma net debt leverage ratio at transaction close is projected to remain relatively unchanged compared to 3.7x adjusted EBITDA currently, and that reflects $2 billion of incremental Ziply fiber net debt that we'll be assuming at close. The transaction is immediately accretive to BCE's operating cash flow and will be accretive to free cash flow once Ziply Fiber completes its planned fiber build-out by the end of 2028. We expect to retain our long-term debt investment-grade credit ratings throughout this period. So those are the key elements of today's acquisition announcement, which, as Mirko stated earlier, is a compelling and historic transaction for all BCE stakeholders. On that, I will turn the call back over to Thane and the operator to begin Q&A.

Thanks, Curtis. So with that done, Matthew, we are ready to take our first question.

Our first question is from Sebastiano Petti from JPMorgan.

Congrats on the deal. Mirko, I mean, why now, I guess, perhaps would be my first question, just thinking about what was the impetus? Is it a unique transaction or a unique opportunity within Ziply? Or is there perhaps other broader factors at play maybe in your local market, whether it be regulatory competitive environment? And then next, you did allude to this is a platform for perhaps further opportunities, I presume, within the U.S. Just help us think about that. I mean, as it pertains to, I guess, the comments about your leverage ratio and trying to get the dividend payout ratio down, are there other perhaps asset monetizations that maybe would help fund that? Because I think that's a question we're getting from investors as it pertains to how do you fund additional transactions? Or what does that look like over time?

Okay. So thank you, Sebastiano. So there's a lot there, but all good questions and all interrelated. So let me tackle them one by one. And at the end, maybe, Curtis, you can take the payout ratio and leverage ratio. Why now? Well, if you go back to frankly COVID and where we announced our accelerated CapEx program in Canada where the idea was to invest more, faster to build up more fiber to more locations faster than ever before. And we had the clearly stated build-out plans in Canada, trying to reach what is now 8.3 million fiber locations by the end of next year. And A little while ago, we -- recognizing that 2025 would be around the corner and we were kind of reaching the tail end of that near-term build-out plan, we started to ask ourselves, okay, where next for growth, particularly in fiber, which is kind of one segment of communications company growth that you see either in Canada and elsewhere, that's really working, and it is core to our purpose, as I said. So start thinking, okay, where do we grow next in kind of our core business and looked at a lot of things. And frankly, Ziply Fiber came up as an opportunity fairly recently, Sebastiano. And the more we looked at it, the more we thought this makes perfect sense, particularly as we kind of get to the 8.3 million fiber locations passed in Canada. Now there's still more work to do in Canada, of course, but it was an opportunity that just came up recently and that we felt we couldn't pass up particularly since it's right in what -- in our core business and what we know well and what we do well. In terms of the question about what next beyond that. Like job one will be to get this transaction closed and get the approvals and forge ahead on the Ziply Fiber growth agenda within Ziply Fiber's current footprint. And we plan to do the same as we did in Canada, which is to build more faster. And if other opportunities come along, of course, we'll take a look. And on asset monetization, I think you can see what we've been doing, right? We're looking at our portfolio of assets across the board. And if there are opportunities to allocate capital to better uses, whether or not it's growth or delevering, we're going to do it. And I think what we've done over the past 12 months is evidence of that. And on the ratios themselves, maybe Curt has a word or 2.

Yes. And thanks for the question. Pro forma for this transaction, our payout ratio is going to be sub-100%. And the funding for this acquisition, Mirko just alluded to financing flexibility that we have going forward. But for this acquisition, the financing is fairly straightforward. We're trading our stake in a sports asset that wasn't consolidated. So we didn't reflect any revenue, EBITDA or free cash flow. And we're reallocating capital into a fiber asset with significant growth opportunity, which is straight down the middle of our wheelhouse. So it's pretty straightforward in terms of funding this transaction.

And again, just maybe an extra word on that. So if you look at the last 2 months, in particular, with the MLSE announcement and this one, at the risk of repeating what Curt said, we converted MLSE into a fast-growing core asset while strategically retaining very valuable sports content to continue to power TSN and RDS. So across the board, 2 very strategic decisions that position Bell Canada and Bell Media for sustained growth.

Our next question is from David Barden from Bank of America.

I guess, Mirko, maybe following up on that a little bit. Obviously, this deal coming at this moment in time with the frontier transaction very much on people's minds, would it be fair to assume that because of your strategic view of this opportunity in the U.S. that you are part of that? If you were, why would this asset be better? And if you weren't, why wouldn't you have been involved in that process, is my first question, I guess. And second is, if I could, Mirko, a lot of your experience, a lot of Ziply's experience has been overbuilding your copper plant with fiber, it's a footprint you know. A lot of the expansion Ziply plans is, from this point forward, going to be out of region and kind of a new project for both of you. Can you kind of talk about how that -- the learnings might be applicable to that next evolution of the passings plan here in the U.S.?

Thank you, David. So today is about the acquisition of Ziply Fiber which, as I mentioned, we feel is best-in-class across a number of metrics, whether or not it's the area where it operates in terms of geography, in terms of market growth and GDP per household, very unique in terms of footprint with 93% of the footprint that has one or fewer gigabit capable competitors and no really a lack of overbuilders and very little fixed wireless access penetration. And the growth rate, if you look at the EBITDA growth rate, you compare it to other providers, it's quite -- it's stands alone, frankly. And the cost to build is very attractive. Now there's still -- when I talk about accelerating their fiber build to 3 million locations or more, this would be within their core operating area, the 4 states, so Washington State, Oregon, Montana, and Idaho. So areas that this management team has operated in since the formation of Ziply Fiber, an area they know really well. And they know how to do fiber just like we do. And in that sense, the approaches and the strategies and the competencies and skill sets are very aligned.

Our next question is from Vince Valentini from TD Securities.

First, just to clarify on the $300 million tax value, Curtis, I assume that is only applicable to U.S.-based profits? Or can you bring those to Canada in some way?

Yes. We've assumed when we're NPVing, Vince, thanks for the question, that it would be used in the U.S. only. And of course, if there's an opportunity to accelerate, we'll, of course, look at that, but that's not our base assumption.

Excellent. The Second question, I'd be quite honest, 11% EBITDA growth when I saw it was lower than what I had initially thought when I saw your release this morning. I thought given the percentage of fiber and the growth in homes, the growth in ARPU, it would be higher than that. Can you give us any sense of where you think this evolves to over the next couple of years? Can this be like more like 15% to 20% in your mind? And I ask that because I think some people are saying, it seems expensive and you just took your debt down, now you're taking it back up. I think people would need to see something really attractive here to justify why you want to take on more debt so quickly. So maybe it's that, that growth rate is expected to be better than 11% over time. So if you can help us there, I think it would help everybody.

Yes, I think that's right, Vince. I mean, you kind of answered the question for me. I do think that growth will continue to accelerate as they continue to build out more fiber and frankly, penetrate the fiber that's recently been built, right? I mean, if you look at their more kind of mature fiber markets relative to their newer builds, there's almost a doubling of penetration that we expect to grow into as well as the footprint expansion.

Yes. And that's why it's an opportune time to make this acquisition, Vince. You've got 64% of the fiber of the footprint that's been fiberized. So there's still a lot of runway in terms of new build, which we plan to accelerate. So there's future growth there. And a lot of what's been fiberized already, just repeating what Curtis said, is newly built fiber that hasn't been fully penetrated. So on both those prongs, there's significant growth ahead and their subscriber growth has been rather impressive. And so we expect that to accelerate. So indeed, we do anticipate that the growth will be faster than what it has already been, which has been quite solid and impressive in its own right.

Our next question is from Maher Yaghi from Scotiabank.

I'm still trying to wrap my head around this transaction from a strategic point of view. You're leveraging the balance sheet compared to post-closing of MLSE. You're implementing a DRP that will be dilutive to shareholders and capping the dividend for many years to expand into a market where you don't have any primary wireless service to resell as a converged service with the fiber. And from my calculation, it does look like this will be free cash flow dilutive for many years. So can you just explain maybe a little bit what you think this acquisition will mean to free cash flow for BCE because when you look at BCE's shareholder base, it's a shareholder base that is looking for dividend growth, free cash flow growth, not necessarily top line growth or EBITDA growth. They can get that from other industries. So I'm just trying to -- like are you changing what BCE represents?

No, we're leaning into our core business, which is to generate growth from fiber, and we're allocating capital quite responsibly to seize a growth agenda and without compromising total shareholder return. So it really is about reinvesting capital to build a stronger foundation for both today and tomorrow. And it's going to be in an area that's going to clearly generate long-term free cash flow growth. And that's what we are doing with the decision to acquire Ziply Fiber and pursue the fiber growth agenda that we've been on for the last several years, albeit in Canada. I mean, we've -- by doing this, we're going to diversify our revenue streams and geographic footprint. Curtis?

No, that's right. I mean, ultimately, I'd only layer on, I mean, even from a credit perspective, this is quite a positive. I mean, it's bigger scale, geographic diversity, as Mirko said, and positive boost to revenue, EBITDA and free cash flow growth profiles. So ultimately, long term, this supports dividend growth and free cash flow growth.

And Maher, I would point out just -- I'm going to repeat what I said in my opening remarks, right? We did announce today that we intend to pause the dividend growth. But I reminded everyone in my opening remarks that the BCE Board of Directors reviews the dividend policy annually. So as we get -- track towards our target policy ranges, that will be revisited and we revisit year after year. And with the dividend reinvestment program, we will have a dividend payout ratio that's 30% better than what it is today. So again, balanced allocation of capital.

Right. It's -- but it will be dilutive to shareholders in the long term, the DRP, I mean. And the second one, I'm trying to figure out the free cash flow contribution here because Ziply is still growing its fiber footprint. It's going to cost a lot of money to expand that footprint and to acquire new customers as well. So can you discuss a little bit the free cash flow profile that you expect Ziply to bring in, in '25, '26, '27? We understand you say '28 will be free cash flow accretive. But in the meantime, what are we talking about here in terms of free cash flow valuation?

Look, we're managing the company here for the long term. Job is strategically, we are building the foundation for continued success of BCE for decades to come. Fiber is a long-life infrastructure asset and shareholders will benefit for, frankly, for decades to come as we execute on our fiber growth plans in Canada and the U.S. and solidify our position as the third largest fiber infrastructure player in North America. This bodes well for accelerated growth, and that's what we're doing. We are putting this company on a position for long-term revenue, EBITDA and free cash flow growth. And that's what we -- as stewards of this phenomenal Canadian icon, that's what we have to do. And so not managing it only for next quarter, but managing it for next quarter and 10 years from now. And that's what I'm going to keep doing for this company and for our shareholders.

Our next question is from Batya Levi from UBS.

A couple of questions. First, I believe Ziply also has copper assets. When you include them, can you give us a sense on the overall growth rate that Ziply has been seeing and the projection for that over the next few years? And then a little bit more on the strategy. As you think about the long-term strategy of owning this asset, the theme of convergence in the U.S. is taking on, what are your thoughts about that? And how do you plan to participate in it?

Thanks for the question. So right now, if you see from Ziply Fiber's performance and actually the performance of other fiber operators across the United States, I think consumers are seeking the very best broadband. And fiber is the best broadband than there is out there, and there is no better network and faster speeds than that offered by Ziply Fiber. And so in the United States, you see customers are just choosing fiber from whoever is providing it regardless of whether or not they're a converged operator. So -- and that's manifested itself in the success and the growth rates of Ziply fiber. And in terms of the copper versus fiber, just some key stats. I probably shared a number of them already, but over half of Ziply Fiber's revenues are fiber revenues. They're now at 64% of the footprint covered with fiber and more than 80% of their retail subscribers are already on fiber. So you can see the crossover point has been reached with still a lot of growth runway.

Our next question is from Jerome Dubreuil from Desjardins Securities.

Mine is with regards to the opportunity to deploy more fiber in the U.S. Right now, there really seems to be a foot race in the U.S. for fiber deployments. What's your degree of confidence with regard to your ability to be kind of first and alone in the 1.7 million fiber passings that you are guiding for and maybe the competition in this footprint?

We're very confident having done our due diligence and extensive discussions with the Ziply Fiber management team, we are -- and with Bell's scale behind Ziply Fiber, we are well positioned to be -- to continue to be first in that footprint with fiber across the -- obviously, the 1.3 million homes are already done, but the remaining 2 million homes, we plan to be first.

Great. Second question is on deleveraging after 2025. So you provided guidance on your leverage at closing and free cash flow numbers. But do you expect you will be able to deleverage between 2025 and 2028 when you turn free cash accretive on that deal?

Yes. No, I appreciate the question, but we're not going to provide guidance that far out on this call, Jerome. Thank you.

I see, Matthew, that there are no further questions at this time. So on that, I want to thank everybody for joining us on such short notice this morning. And of course, as always, the IR department will be available to take any follow-up calls during the course of the day. On that, thank you very much.

Thanks, everyone.

Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.