Manitoba Telecom Services Inc. (MBT.TO) announced that it has signed a binding agreement to sell its Allstream business to Accelero Capital Holdings S.? r.l. Group in a transaction that values Allstream at $520 million, subject to certain customary adjustments, including assumed debt obligations and normalized working capital, as well as certain pension related obligations.
The transaction has been approved by the MTS Board of Directors and is expected to close in the second half of 2013, subject to receipt of Investment Canada approval and customary closing conditions.
MTS and Allstream are two operating subsidiaries of Manitoba Telecom Services.
The company noted that its dividend is currently supported only by the cash flows of its MTS division, and that capex is expected to stay at 2013 levels over the next few years.
After closing costs, MTS expects to realize net proceeds of about $405 million. Out of these proceeds, the Company expects to contribute an additional $130 million into the MTS pension plan, and to repay $70 million in short-term indebtedness incurred in February 2013 to pre-fund the Company's pension obligations. The company believes these prepayments into the Company's pension plans should eliminate all pension solvency funding until 2016, assuming no change in long-term interest rates.
After giving effect to these contributions, the MTS Pension Plan's solvency funding ratio will be approximately 85%. Assuming an approximate 1% increase in long-term interest rates by 2016, the Company would have no further cash solvency funding requirements for either the MTS or Allstream plans. MTS will determine its planned use of the remaining transaction proceeds upon the close.
In addition, and as part of this transaction, MTS has agreed to retain the pension obligations, and related pension plan assets, in respect of retirees and other former employees of Allstream under Allstream's current defined benefit pension plans. Allstream will retain such plans in respect of current employees. MTS has also agreed to reimburse Allstream for the solvency funding payments that may become payable in respect of employees of Allstream as they relate to pre-closing service. These are existing liabilities of the Company, and will not be increased as a result of this transaction.
MTS estimates the net present value of its remaining obligations to these Allstream pension plans at approximately $87 million, to be incurred over a period of five to seven years. MTS expects to deposit $40 million into these Allstream pension plans at the close of this transaction, after which it expects no further solvency funding requirements until 2016.
Accelero has paid a deposit of $55 million to Computershare Trust Company of Canada , which will hold the funds in escrow. In certain situations, this deposit would be paid in full to MTS. At closing, the deposit will be credited towards the purchase price.
By closing, the Company expects to record a non-cash, post-tax loss on the sale of approximately $50 million, a portion of which will be recognized in the Company's 2013 second quarter results. Based on the estimated net proceeds, MTS expects to have realized a return on investment from its 2004 acquisition of Allstream of negative 1%. This takes into account the $300 million of cash Allstream had on its balance sheet at the time the acquisition, the realized value of approximately $3 billion of Allstream tax losses, as well as the cash generated for the Company by Allstream over the period of the Company's ownership.
The company expects to report its Allstream operations as discontinued operations beginning in the second quarter 2013 until the transaction closes. The company currently expects that the component of its 2013 financial outlook applicable to MTS will continue to be in line with forecasts.
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