Why BCE’s Latest Transaction Demonstrates a Commitment to Stability

BCE’s (TSX:BCE)(NYSE:BCE) sale of most of its data centre business indicates a narrowing of focus on its core network infrastructure and content businesses.

| More on:

BCE Inc. (TSX:BCE)(NYSE:BCE) recently announced the sale of 25 data centres to Equinix, Inc., a data centre REIT. This represents all of BCE’s standalone data centres that are not located in its network central offices. Equinix will be paying just over $1 billion to BCE for the data centres.

The value of the transaction is relatively insignificant for BCE, which has a market capitalization of over $50 billion. However, the transaction serves as an important strategic signal to investors and the market.

Ultimately, the asset sale provides non-dilutive financing that will allow BCE to double down on its core competitive strengths.

Asset sales are non-dilutive financing that preserve future cash flows

It appears that BCE, like many other companies during the pandemic, sought to shore up its balance sheet. Had BCE issued more equity, it would have put additional demands on future cash flows, as BCE’s equity also bears a relatively high dividend yield at almost 6%.

The dividend already costs BCE just over $3 billion per year, and this is before factoring in future increases. BCE can’t simply issue new shares and not pay those new shares a dividend. Similarly, BCE can’t cut the dividend because it would crater the stock price.

While debt could have been an option, BCE was likely hesitant in taking on more debt at a time when its media business has seen its income shrink significantly. This is especially true given BCE’s focus on sports and the impact that COVID-19 has had on major sports leagues.

Shrinking income reduces the ability for BCE to service debt. Issuing more debt in the face of such uncertainty was probably something that BCE sought to avoid, given that overextending could result in a credit downgrade.

A lower credit rating could make it more expensive for the company to borrow in the future. Asset sales therefore make a lot of sense from a cash flow preservation perspective.

Sale emphasizes competitive strengths

BCE’s operations are mostly confined to Canada, with limited international exposure. Equinix is a global data centre provider. Increasingly, data centre companies offer clients solutions around the globe. BCE’s limited scale and reach in its data centre business likely meant that this decision to sell its data centres was going to have to be made sooner or later.

Given the investments that would have been required to compete effectively in this area globally, taking the money and running is a smart move.

Additionally, BCE maintains a partnership with Equinix, as its first Canadian Equinix Platinum Partner, and will still be able to derive some financial benefit from the long-term client relationships that it has built with the ability to continue to build given BCE’s prominence in the Canadian marketplace.

5G will be a major expenditure for BCE in the coming years. This, combined with continued rollout of its fiber-optic network, will require a significant amount of funds given how resource intensive building these types of infrastructures are.

Choosing to allocate its limited resources to these projects is smart for BCE, since BCE is, at its core, a network infrastructure and media company.

While data centres may provide some additional growth prospects, allocating capital to non-core areas at a time like this is certainly a risky proposition for a company like BCE, which has built its name on stability and predictability.

Takeaway

Data centre businesses have seen significant growth in the past decade. However, BCE is not a data centre company. BCE has always been, at its core, a network infrastructure company. More recently, media has become an integral part of BCE’s DNA.

Choosing to double down on its core areas during times of uncertainty is in line with BCE’s reputation as a stable and predictable shareholder-friendly company — a move that indicates a commitment to shareholders and to the long-term stability of BCE.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kyle Walton has no position in the companies mentioned.

More on Investing

Beware of bad investing advice.
Investing

2 No-Brainer Growth Stocks to Buy Right Now for Less Than $500

Both of these top Canadian stocks have impressive track records and years of growth potential, making them two of the…

Read more »

telehealth stocks
Investing

Got $100? 3 Small-Cap Stocks to Buy and Hold Forever

Given their solid underlying businesses and healthy growth prospects, these three small-cap stocks can deliver superior returns in the long…

Read more »

Aircraft Mechanic checking jet engine of the airplane
Investing

CAE Stock: Buy, Sell, or Hold in 2025?

With a record $18B backlog but a retiring CEO and Boeing delays clouding the outlook, is CAE stock's 6% dip…

Read more »

clock time
Dividend Stocks

Time to Buy This Canadian Stock That Hasn’t Been This Cheap in Years

This dividend stock may be down, but certainly do not count it out, especially as it holds a place in…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Is Brookfield Infrastructure Stock a Buy for its 5% Dividend Yield?

Brookfield Infrastructure's 5% yield is attractive, but it's just the tip of the iceberg for why it's one of the…

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

Buy 4,167 Shares of 1 Dividend Stock, Create $325/Month in Passive Income

This dividend stock has one strong outlook. Right now could be the best time to grab it while it offers…

Read more »

Canadian Dollars bills
Stocks for Beginners

3 No-Brainer Stocks to Buy Under $50

A $50 investment every month or every week can buy you one share of these three stocks, and earn you…

Read more »

Rocket lift off through the clouds
Investing

Top Canadian Stocks to Buy Now for Long-Term Growth

These top Canadian stocks operate in high-growth sectors and are witnessing significant tailwinds, which will drive multi-year growth.

Read more »