In a bold move to expand its reach outside the confines of its Manitoba borders, MTS has acquired Allstream, a company that has a long history of national communications in Canada, dating back 150 years to the era of railroad telegraphs. Allstream’s predecessor companies include CNCP, Unitel and AT&T Canada. The move creates a third national integrated competitor which is certain to drive interesting changes for the Canadian services marketplace.
Background
MTS was the historic monopoly carrier in the province of Manitoba. Formerly owned by the Manitoba government, MTS was reorganized as a private company in 1996. Since it has been largely constrained in its geographic reach, MTS has entered into various arrangements to find revenue growth opportunities, including a joint venture (Bell West) with Bell Canada to jointly enter Western Canadian markets controlled by TELUS. In February, Bell announced that it was going to buy the MTS stake in Bell West. MTS had been asked by shareholders to explore an income trust restructuring. This acquisition was MTS’ pre-emptive response.
Implications for the marriage
Two thirds of the forecasted synergies, $80M per year, arise from MTS unlocking Allstream’s tax losses. Forward looking operational savings are only $40M, representing about 2% of the combined revenues. Allstream gains access to a deeper capital base, which should permit it to better manage its requirements, which have been constrained since it emerged from creditor protection. For the first time in its recent operating history, Allstream will have an incumbent base in the province of Manitoba. As a result, it will be faced with similar regulatory challenges to those faced by Bell Canada with its Nexxia operations. For example, its national services operating in Manitoba may be captured under the federal bundling rules and may therefore require public disclosure and CRTC approval of tariffs. Allstream’s regulatory strategy is certain to change as a result of its new perspective as an integrated incumbent.
Implications for Bell
There was a close alignment in its national service offerings with Bell Canada that owned as much as 22% of MTS. Under this transaction, it appears certain that this relationship will end. The new joint venture will likely face intense competition from Bell Canada, operating under its own brand. Much of the population and business base in Manitoba is centred in a single market. There will be an intense drive to build or acquire infrastructure in Winnipeg in order to provide local access to customers and to build a city-wide mobile wireless overlay. The mobile operations of MTS are likely to face some intense new competition from Bell, on top of existing pressures from Rogers and TELUS, especially in the national corporate market.
Implications for other carriers
The Canadian landscape is now mapped with three national operators integrated with regional incumbent networks: TELUS in Alberta and British Columbia, MTS/Allstream in Manitoba and Bell Canada in all territories east of the Ontario/Manitoba border. Sprint Canada and SaskTel remain as independents.
As Bell seeks alternate channels for local access, there may be other consolidations and companies put into play, including cable companies or pure local fibre companies.
Conclusion
With Allstream’s next incarnation as part of a facilities-based incumbent, there is likely a need to re-examine a number of regulatory safeguards imposed by the CRTC. Many Commission concerns may be addressed by commercial arrangements between relatively equally situated comeptitor/suppliers. Other concerns about powers of incumbency may dissipate with services enabled by Internet Protocol, such as VOIP (see our report: 
Guerilla Telecom versus Gorilla Telecom).
As signs of a recovery are beginning to emerge for the telecom industry, this transaction may trigger a fresh look at equity based combinations for other Canadian carriers.