On August 26, Tim Hortons Inc (TSX: THI)(NYSE: THI) and Burger King Worldwide (NYSE: BKW) announced an agreement to form a new global quick service restaurant company with over 18,000 restaurants in 100 countries.

At the time of the agreement, 3G Capital owned 243,858,915 shares of Burger King, for a controlling stake of 69%. 3G Capital leveraged its controlling position in Burger King to combine with a bigger Tim Hortons while managing to maintain control of the newly merged company. This is deal-making at its finest.

The price of control

If investors were curious as to why a significant premium was paid to Tim Hortons shareholders, it was most likely a reflection on the 51% control that was attained by 3G Capital.

Looking back at the last couple of years’ results, Tim Hortons generated more net income and cash compared to Burger King. Between 2012 and 2013, Tim Hortons generated about $420 million in net income annually. Compare this to about $175 million in net income that Burger King generated over the same time frame. Similarly, Tim Hortons generated $580 million in cash from operations per annum while Burger King managed $275 million in cash from operations during that same time period.

Given Tim Hortons’ superior position, I was surprised that 3G Capital was able to negotiate control. It will be interesting to see how much of a premium Tim Hortons placed on this during negotiations.

Structuring the deal

Existing Tim Horton shareholders have three options relating to their shares: a cash buyout at $88.50, an all shares exchange at a ratio of 1 Tim Hortons share for 3.0879 shares of the new holding company, or a mixed exchange of $66.50 in cash and 0.8025 in newly issued shares for each Tim Hortons share.

Given the complexity of the deal, investors may be interested in knowing how 3G Capital ensured it had control of the entire merged company. It came down to one clause in the final agreement where “in no event shall the fair market value of [3G Capital’s] interest in the [combined company] be less than 50.1% of the fair market value of all equity interests…”

Financing the deal

At the time of the deal, Tim Hortons had 132,619,671 common shares outstanding. Assuming all investors take the cash buyout at $88.50 per share, then existing shareholders would be bought out for $11.74 billion.

Not coincidentally, 3G Capital was able get enough financing from JPMorgan Chase & Co. and Wells Fargo & Co in the form of a $6.75 billion term loan, a revolving credit facility of $500 million (similar to a line of credit), and a $2.25 billion secured second lien bridge facility (like a second mortgage).

If investors were to add these amounts, they would total $9.5 billion, still short of the approximately $12 billion needed.

Where did 3G Capital get it?

3G was able to get Warren Buffett himself to agree to invest $3 billion in the form of cumulative compounding perpetual preferred shares. This investment also bears a 9% interest and a warrant option (the right) to convert to common shares.

The convert option will represent 1.75% of the fully diluted common shares of the combined company.

While this may not be as lucrative as Buffett’s $5 billion preferred share investment in Goldman Sachs Group Inc that paid a 10% dividend and also had a warrant option attached, given the run-up in the markets and the U.S. Treasury’s 10-year yield at 2.4%, a 9% guaranteed return is simply a good investment.

So then, between the $9.5 billion of debt and $3 billion investment from Buffett, 3G Capital had the financing it needed to close the deal.

Follow the cash

Tim Hortons’ 2013 effective interest rate was 5.4%, a decrease of 40 basis points from 2012. Comparatively, the weighted average interest of Burger King in 2013 was 6.6%, a decrease of 70 basis points from 2012.

As of June 30, 2014, Tim Hortons had about $1.3 billion in long-term debt while Burger King had about $2.8 billion in long-term debt. Multiplied by their respective interest rates, investors should calculate approximately $255 million in yearly interest expenses.

To be conservative, let’s assume that the $9.5 billion of debt is calculated at the higher Burger King’s interest rate of 6.6%, which would total $627 million in yearly interest expenses. This is coupled with Buffett 9% perpetual preferred dividends, which are worth $270 million every year.

The total estimated interest and dividend expenses would be about $1.15 billion ($255 million + $627 million + $270 million).

Tim Hortons’ existing operations could easily generate $760 million in cash (about $600 million from operations + $160 million in dividends saved). At the same time, Burger King could generate $495 million in cash (about $350 million from operations + $85 million in dividends saved + $60 million in not retiring debt).

Combined, they can generate $1.2 billion to $1.3 billion easily to cover off the necessary interest and dividend expenses. Factoring in expansion plans, revenue, and cost synergy, as well as a consistent repeatable business model, the combined company now has the cash flow it needs to sustain itself.

Ultimately, 3G Capital’s acquisition of Tim Hortons is based on its strong dominant position in Canada, its non-cyclical business model, and its ability to generate cash.

The post The Art Of The Deal: How 3G Capital Pulled Off the Acquisition of Tim Hortons Inc. appeared first on The Motley Fool Canada.

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Earlier this week, Rogers Communications Inc. (TSX: RCI.B) (NYSE: RCI) and Shaw Communications Inc (TSX: SJR.B)(NYSE: SJR) announced a new streaming service called Shomi to compete with Netflix.

Let’s examine the strategy that Rogers and Shaw will employ in positioning Shomi.

Unbundling the corporation

Traditionally, telecommunication companies have been good at bundling services to make their value proposition stronger for the customer.

Investors only need to look to a December 2012 public presentation by Jean-Francois Pruneau, CFO of Quebecor (TSX: QBR.B) and Quebecor Media, to know the true value of a bundle. In his presentation, he outlined convincing data that bundling has increased average revenue per user (ARPU) and that bundling has reduced churn (cancel rate).

In fact, the data showed that if a customer were to take a four-product bundle, he or she is 10x less likely to cancel compared to a customer taking on only one product.

So why is Shomi a separate entity compared to, say for example, Rogers Smart Home Monitoring service, which is operating under the same umbrella?

It’s all about maximizing Shomi’s potential.

Rogers and Shaw unbundled Shomi out of their traditional product offering because it would cannibalize its existing TV revenue base (the term is cord-shaving).

Had management not unbundled Shomi, the product may not have received the focus and resources required due to competing incentives. Why promote a $9 product to compete against a $70 TV service?

On that price

It was only earlier this year that Netflix moved to a two-tier pricing structure for Canadians.

Netflix’s new customers would pay $8.99 while existing customers have their rates frozen for two years at $7.99. It also introduced a $7.99 plan with standard-definition quality viewing on any screen (TV, tablet, mobile) one at a time.

Not surprisingly then, Shomi will launch at $8.99 per month. Because it is a late entrant, it does not have the pricing power to price any higher nor does it want to be seen as an inferior service by pricing cheaper. So $8.99 is the sweet spot, or maybe, the only spot.

Second mover advantage

In September 2010, Netflix expanded into Canada with its first expansion into the international market. Since then, it has rapidly grown its base to the tune of 3.5 million subscribers.

While business strategy 101 typically touts first-mover advantage, Rogers and Shaw may also gain a second-mover advantage becuase they do not need to create and promote an entire new product category. Shomi can also leverage the deep pockets of its parent companies and their existing relationships with current distributors.

At the same time, Netflix has created a successful scalable business model that is ripe for competition as it still lacks the rights to the latest contents due to licensing agreements.

If there is any time to be a fast follower, this is it.

Ultimately, given the scalability of the business, this is a low-risk, high-reward investment for Rogers and Shaw. The biggest question is how important is a first mover advantage and can a second mover succeed by being a fast follower?

The post Unbundling Shomi: How Rogers Communications Inc. and Shaw Communications Inc Are Positioning Their New Streaming Service appeared first on The Motley Fool Canada.

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Late last week, the CRTC released its working discussion document on the future on the television industry. Canadians will have until September 19th, the last public hearing date, to provide feedback and comments to the CRTC.

What do investors need to know?

1. Basic package

Canadians would be able to purchase a basic cable or satellite package between $20 and $30.

The actual impact on telecom companies would most likely be small. Good content remains key. American networks usually have bigger budgets to produce larger shows, thus attracting a larger audience that includes Canadians. Most customers do not watch four to five hours of Canadian content every night. Customers would most likely subscribe to other channels in the pick-and-pay scenario.

2. Pick-and-pay

Canadians would be able to purchase channels on an individual basis.

Based on an analysis from Nielsen, the number of channels that consumers watch consistently stays at around 17. Based on Rogers Communications Inc.’s (TSX: RCI.B)(NYSE: RCI) latest quarterly results, it generated $437 million in television revenue on a base of slightly over two million television subscribers, for an average TV revenue per user of about $70.

Based on this, quick math would show that if Rogers priced each channel individually at $2.65, it would stay revenue-neutral per user ($2.65 x 17 channels + $25 basic package = $70.05). However, some of the 17 channels would probably be consumed as part of the basic package. Thus, Rogers should price each channel higher than $2.65.

How much higher?

There should to be a way to differentiate between premium demand channels like those for sports and less mainstream specialty channels, such as the Food Network. Thus, it would not surprise me if Rogers were to split pick-and-pay options based on a range, for example, between $3.50 for the less in-demand channels and $5.00 for the premium channels — and even higher for some multicultural channels.

For example, say the average Canadian purchases a basic package at $25 and decides to pick 10 additional channels at a mix of $4.25 per channel; the final bill would be $67.50. All of a sudden, pick-and-pay looks acceptable for telecom companies as it’s close to the original $70 target. In addition, there may be the added benefit that fewer TV customers would cancel.

3. Build your own package

Canadians would be able to build their own packages made up of channels of their choosing.

In 2011, Rogers tested such packages in London, Ontario. It started with a “digital starter pack” and allowed customers to add packages of additional channels starting at bundles of 15, 20, and 30 channels. It then tried to upsell customers with additional theme and premium packs such as a “movies pack” for $26.34, which included TMN, HBO, MPIX, U.S Superstations, and Feature Guide Magazine.

For example, if a customer picked a digital starter pack at $20.29 per month, plus 20 channels at $28.41 per month, and added the movies pack for $26.34 per month, the total would have been about $75.

Investors may expect Rogers and other TV providers to price build-your-own packages profitably. While consumers may gain more choice in terms of selecting their own personal TV packages, Rogers already has enough data to price each bundle perfectly so that it averages out to around $70.

Ultimately, as the CRTC changes the rules on content delivery, telecommunications companies will reinvent themselves by being innovative with their business models. Investors should not worry.

The post Should Shareholders of Rogers Communications Inc. Worry About the CRTC’s Pick-And-Pay TV Plan? appeared first on The Motley Fool Canada.

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Last week, Metro, Inc. (TSX: MRU) released its Q3 2014 earnings report. On the day of the release, the stock dropped 2.5%. Since then, it has bounced backed nicely.

Overall revenue grew 1.4% to $3.6 billion, while same-store sales grew 1%. Net earnings stayed flat at $144.5 million compared to a year earlier. Flat earnings and higher revenue imply a lower margin. Indeed, management attributed lower profitability to a decreased gross margin driven by merchandising actions to drive sales.

Moving forward, what may be some of the catalysts driving Metro?

A strong balance sheet

As of July, Metro had $915.2 million in long-term debt and slightly over $5 billion in total assets for a long-term debt to assets ratio of 18.2%.

Comparatively, Loblaw Companies Limited’s (TSX: L) long-term debt to assets ratio as of June is 35.3%, while Empire Company Limited’s (TSX: EMP.A) long-term debt to assets ratio is 26.8% as of May. For added comparison, U.S.-based food retailer The Kroger Co. (NYSE: KR) has a long-term debt to assets ratio of 33.4%.

This implies that Metro could potentially reach a ratio of 30% comfortably. A ratio of 30% would imply that Metro could carry $1.5 billion of long-term debt, or an increase of $585 million of debt.

At $585 million, assuming it retires its shares at $70, Metro would be able to buy back another 8.35 million shares, which is about 9.5% of existing outstanding shares. As a result, its outstanding share count would decrease from 87.8 million as of March 2014 to 79.5 million. Assuming that operational efficiencies offset any increase in interest expense and that net earnings continue to stay flat at $144.5 million, the company’s earnings per share would be $1.82. This figure of $1.82, compared to the company’s current Q3 EPS of $1.63, implies another 11.7% upside on earnings.

This is the power of a strong balance sheet.

A transformational merger

Another way Metro can leverage its strong balance sheet is to pursue a transformation merger by acquiring The Jean Coutu Group (PJC) Inc. (TSX: PJC.A). Metro’s current market cap is slightly greater than $6 billion, and Jean Coutu’s market cap is trading at slightly above $4 billion. While there may be significant synergies that may be realized, it will not be a bargain price.

Assuming a minimum premium of 25% to 30% to the existing market cap, investors are looking at a take-out value of $5 billion to $5.2 billion. Assuming a split down middle at $5.1 billion, it would still be a mammoth acquisition for Metro.

To make this deal work, a significant portion of the transaction needs to be equity-funded. At 40% equity and 60% debt, this acquisition looks more plausible. Assuming no synergy, a company that combined Metro and Jean Coutu would be easily worth $10 billion.

I like Jean Coutu, as it is an excellent company with no debt. This could be the next Loblaw/Shoppers Drug Mart combo with a dominant presence in Quebec.

Metro’s investment position in Alimentation Couche-Tard Inc

Last year, Metro sold almost half of its position in Alimentation Couche-Tard Inc (TSX: ATD.B). At the end of 2013, Metro owned 10.7 million shares in Couche-Tard. Since then, it has split its shares three for one. Thus, Metro now owns 32.1 million shares; at about $31 a share, its stake is worth close to $1 billion at current valuations.

While investors cannot speculate about what exactly management will do with this stake, we do know that Couche-Tard continues to focus on growth through acquisitions. While there are rumours that it may take a stake in China’s Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), regardless of whether it makes such a purchase, this is a hidden unrealized asset sitting on Metro’s balance sheet.

Ultimately, while Metro may not be the most exciting investment in your portfolio, you can sleep well at night. With a forward 2014 P/E ratio of under 14 and a strong balance sheet that could be utilized in a variety of ways, Metro has multiple ways to further drive value for shareholders.

The post Why Metro, Inc. Deserves a Place in Your Portfolio appeared first on The Motley Fool Canada.

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Change is hard. In the past week, BCE Inc.’s (TSX: BCE)(NYSE: BCE) subsidiary Bell Media hired Kevin O’Leary as a contributor to its suite of programming assets while cutting back its flagship news magazine show “W5”, which has been running since 1966.

What do investors need to know?

Advertising is down

Based on the latest Q2 results, Bell Media’s revenue totaled $761 million, up from $559 million a year prior. Its growth was primarily driven by the $3.4 billion acquisition of Astral Media. Excluding the Astral deal, Bell Media’s advertising revenue would have decreased in the second quarter as well as during the first six months of 2014.

At the same time, its adjusted EBITDA margin increased 60 basis points from 23.7% a year prior to 24.3% for the first half of the year. Management attributed this increase to higher operating revenue driven by Astral. Excluding the acquisition, operating margin would likely have been flat or slightly down, driven by higher content costs.

TV advertising remains soft

There has been a tremendous shift in viewing habits from traditional television to mobile platforms, especially for those under 35. The youth mobile market remains the most attractive for advertisers, as was seen recently when Barry Diller, a U.S. media billionaire, purchased the social networking site Ask.fm through his company IAC/InterActiveCorp.

As long as advertisers are chasing the mobile market, TV advertising dollars will remain difficult to come by.

It’s about engagement

The biggest challenge for media companies is how to attract and retain big advertising dollars.

Technology continues to transform the media industry, especially in content distribution and viewership. Over-the-top content providers such as Netflix continue to grow while traditional networks try to engage their customers through a “TV everywhere” strategy that allows customers to stream TV anytime and anywhere as long they have an account with their provider.

Kevin O’Leary’s hire may give Bell Media what it needs in terms of an engaging personality who viewers and listeners alike will tune in to. On the other hand, while “W5” has provided unique and interesting programs on current affairs, it was most likely continuing to lose viewership. Not that the show is uninteresting; rather, it is more about changing times and viewing habits.

Ultimately, as TV advertising remains soft, media companies are continuing to shift their programming mix in order to engage and capture new audiences. At the end of the day, it is the number of advertising dollars that can be raised that matters the most to public media companies.

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Earlier this week, I wrote an article on the state of the telecommunication industry, focusing on the wireless segment. This time, I will examine the battle for your home to see who is winning among the “big three” — Rogers Communications Inc. (TSX: RCI.B)(NYSE: RCI), BCE Inc. (TSX: BCE)(NYSE: BCE), and Telus Corporation (TSX: T)(NYSE: TU).

What do investors need to know?

Fibre versus cable

One of the biggest questions for consumers has always been whether there is a noticeable difference between fibre technology, such as BCE’s Fibe TV or Telus’s Optik TV, and cable technology, such as Rogers Cable. While the core technology is different, the end product has always been similar: a television signal.

Based on the latest Q2 results, it looks like fibre is trouncing cable when it comes to television subscribers. BCE grew its total TV subscriber base by 6% year-over-year, driven by its strong Fibe TV product. Out west, Telus is dominating television subscribers with Optik TV, which increased subscribers by 16.4%. In contrast, Rogers experienced a 5.5% decline in cable television subscribers.

TV subscribers drive multi-product opportunities

While television may not be the stickiest product that a telecommunication company may offer, there are signs that by focusing on television subscribers, there has been an incremental drive toward other products.

For Telus, while TV subscribers increased by 122,000, Internet subscribers also increased by 76,000, resulting in a 62% attach rate, or 76,000 divided by 122,000. Similarly, while BCE increased its television subscribers by 132,395, it also increased its Internet subscribers by 70,589, a 53% attach rate.

By focusing on television subscribers, telecom providers may be able to drive additional products through multi-product bundling.

Pricing power

If there is anything that these Q2 results show, it is the extent of pricing strategies that companies use to combat subscriber losses.

While Rogers experienced a 5.5% TV subscriber decline year-over-year, overall TV revenue declined by 4%, or $20 million. One suspects that there were conversations within the company on potentially increasing prices to offset TV subscriber decline; but because of the attraction of fibre TV, management most likely decided against significant increases.

While Rogers does not provide exact pricing details, it looks like the greatest price increase was for Internet services. As discussed in a previous article, Internet remains the best product to increase prices for due to its prevalence in society. For Rogers, while it only grew its Internet base by 2.7% year-over-year, Internet revenue increased by 9%, or $25 million, which was just enough to cover TV revenue decline.

Moving forward

Ultimately, as BCE and Telus gain TV subscribers through their fibre products, expect Rogers to be aggressive in stemming the loss of cable subscribers.

There are various tactics to address the situation. One may be to aggressively use cheap home phone packages as tip-of-the-spear approach to gain telephone subscribers who may also go for other products.

There are signs that Rogers may be implementing this, as phone subscribers have increased 1.7% year-over-year while phone revenue decreased 3%.

Of course, there is always the possibility of increasing prices to offset revenue decline. It will be interesting to see what strategy Rogers will use going forward.

The post The Battle for Your Home: Rogers Communications Inc. vs. BCE Inc. vs. Telus Corporation appeared first on The Motley Fool Canada.

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The results are in. Rogers Communications Inc. (TSX: RCI.B)(NYSE: RCI) reported Q2 results on July 24. Subsequently, both BCE Inc. (TSX: BCE)(NYSE: BCE), and TELUS Corporation (TSX: T)(NYSE: TU) reported on August 7.

What do investors need to know?

Wireless growth is slowing

Rogers, BCE, and Telus reported net increase of about 182,000 postpaid wireless subscribers in Q2, significantly less than the 294,000 subscribers reported during the same period last year. This is a decline of 38%.

Of the 182,000 subscribers, Telus led the pack with an impressive 43%, followed by BCE at 36% and Rogers at 21%.

A similar story can be found when examining the first half results (Q1 and Q2), where net postpaid wireless subscribers increased by about 266,000 but declined 40% from the prior year.

Remarkably, Telus had 47% of the entire first half amount of net postpaid wireless subscribers, followed by BCE at 38% and Rogers at 15%.

Telus continues to execute effectively in the marketplace and its tactics are resonating with customers, as it has led the industry for four of the five past quarters in postpaid net additions.

Customer retention remains a focus

A big part of the subscriber game is wireless churn, or the percentage of subscribers who discontinue their subscriptions.

While all of the national carriers improved on their retention strategy, Telus led the pack with an impressive 13 basis point improvement, from 1.03% a year prior to 0.9% for postpaid subscribers in Q2. Rogers came in second with a 1.13% postpaid subscriber churn, an improvement of four basis points. Lastly, Bell reported a postpaid subscriber churn of 1.16%, also an improvement from the prior year.

Looking at the first half of this year, Telus continues to dominate in customer retention with a 0.94% postpaid subscriber churn, an improvement from the 2013 full-year churn of 1.07%. Both Rogers and Bell have similar churn numbers at 1.17% and 1.20% respectively, all improving from the prior year.

The industry as a whole continues to focus on customer retention as subscriber growth slows. Telus led the quarter and the first half with an impressive churn rate of under 1%. The company is doing all the right things for the customer.

Blended ARPU is growing

Telus’ dominant performance continues in average revenue per user, or ARPU. It leads the industry with an impressive $62.51 blended ARPU, accounting for both prepaid and postpaid subscribers, growing 2.1% in the quarter compared to the previous year. This is followed by BCE and Rogers at $59.49 and $59.15 respectively.

With a triple combo of leading in net postpaid wireless subscribers, the lowest postpaid churn rate, and the highest blended ARPU, Telus is firing on all cylinders with its mobility strategy.

Rogers remains the largest wireless carrier

While Telus is currently dominating the wireless space, Rogers remains the largest wireless provider in the nation.

As of Q2, its postpaid subscriber market share decreased from 37.7% a year ago to 37.3%, a decline of 40 basis points. Conversely, Telus increased its market share by 30 basis points to 31.6% and BCE increased its market share by 10 basis points to 31.1%.

As previously mentioned, Rogers’ CEO, Guy Laurence, continues to restructure the company into September. Investors may expect short-term volatility as he streamlines operations.

Valuation matters

Not surprisingly, Telus is currently trading at a premium relative to Rogers and BCE, at a forward estimated P/E ratio of slightly above 16. Compare this to BCE’s forward estimated P/E of slightly above 15, and Rogers’ forward estimate P/E ratio of under 14.

While all three national carriers are trading below the general market, Rogers’ valuation remains attractive only if operational improvements can be made.

For Rogers, it is not about making game-changing moves; rather, it is about focusing on improving relationships with existing customers.

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On Wednesday, Tim Hortons Inc. (TSX: THI)(NYSE: THI) released its second-quarter results, with earnings per share increasing 13.6% compared to a year earlier. As a result, shares rose 7.39% to $64.52.

What do investors need to know?

The strategic plan

In March, Tim Hortons identified that it lagged behind its quick service restaurant peers in average bill size in many categories, including a 45% difference in average bill size for evening snacks and 32% for afternoon snacks.

It identified these average bill gaps as opportunities for improvement.

Executing the plan

Management specifically highlighted three products launched in Q1 that drove a higher average bill size in Q2. They were the crispy chicken sandwich, the turkey sausage hot breakfast sandwich, and the improved hash browns.

While not wanting to get into specifics, management strongly hinted that the significant bundling of products at breakfast and lunch is driving more revenue.

Essentially, instead of a customer buying that one cup of coffee, Tim Hortons is having success in upselling customers on additional products.

Leveraging technology

As I wrote about previously and confirmed in this quarterly report, the Tim Hortons Double Double Visa Card, which the restaurant recently introduced, is about more than just loyalty. It will also enable the company to “leverage and aggregate consumer insights” to further understand its customers.

Good capital stewardship

Management continues to leverage a low interest rate, having issued $900 million of new debt while also having repurchased $1 billion worth of shares at an average price of more than $55 per share since August 2013.

Investors should note that, excluding stock buybacks, EPS would have been flat year over year. It just goes to show that stock buybacks remain a key element for shareholder total return.

Where is the volume?

While management has done a good job in upselling customers with additional products, Canadian operations showed lower same-store transactions. This may suggest that while new products have had an impact on existing customers, a more complex menu may have led to slower service, leading to turned off customers.

Ultimately, Wednesday’s rise in stock prices reflects enthusiasm in new products that may continuously drive existing customers to spend more in the morning and at lunch times. This, coupled with a good capital allocation policy, at current valuations, means that Tim Hortons should continue to outperform the market in the short term.

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Just recently, BCE Inc (TSX: BCE)(NYSE: BCE) announced its acquisition of Bell Aliant Inc (TSX: BA) by offering existing public minority shareholders a choice of cash, BCE shares, or a combination of both.

What is BCE getting by acquiring Bell Aliant?

Lower capital expenditure

Excluding a one-time pension funding outlay in 2011, Bell Aliant has consistently generated over $1 billion in cash from operations over the past few years.

BCE has stated that it plans to spend $2.1 billion on capital expenditures, or capex, across Atlantic Canada over the next five years, averaging $420 million per year.

As a stand-alone company, Bell Aliant has invested $578 million in capex over the past three years.

Quick math shows that about $160 million — that is, $578 million minus $420 million — in cash would be freed up in the form of less spending in capital expenditure.

Dividend savings

Currently, BCE’s equity interest in Bell Aliant is 44%, as it owns 100.4 million out of a total of 227.9 million shares.

Bell Aliant has been consistently paying $0.475 per share in dividends every quarter, for a total of about $108.25 million per quarter, or $433 million per year.

Quick math again shows that about $242 million in dividend cash — that is, $433 million minus BCE’s existing annual dividend of $191 million — would be freed up as result of this acquisition.

Cash accretion

As of May 2014, BCE was paying a dividend of $0.6175 per quarter with common shares outstanding of 777.3 million, for a quarterly dividend payout of about $480 million per quarter, or $1.92 billion per year.

Assuming all of Bell Aliant’s 127.5 million public minority shares elect to convert to BCE common shares, using a conversion rate of 0.6371 from Bell Aliant to BCE shares, this would result in an additional 81.23 million shares. This would cause an incremental payment of $50.16 million per quarter in extra dividend spending, or about $200 million per year.

Taking into account the $160 million in capex and the $242 million in dividend savings, and then subtracting the $200 million in newly issued shares, the deal looks to be a $200 million cash accretive merger for BCE annually.

The big picture

This figure of $200 million is about 10.4% of BCE’s entire annual dividend outlay. Its current dividend growth rate is between 5% and 6% annually, slightly below the 10-year average of 6.9% as of 2013.

Assuming the entire $200 million is not distributed to shareholders all at once, this acquisition could add up to 2% annually to its existing dividend growth run rate over the next five years, resulting in a respectable dividend growth rate of 7% to 8%.

Don’t expect too much synergy

Currently, Bell Aliant’s EBITDA margin is a healthy 53%, higher than both BCE’s home phone, internet, and TV services’ one of 38% and its wireless service’s one of 40%. While there may be some operating synergies, investors should not expect significant savings here.

Ultimately, with BCE’s dividend growth slowing in recent years, it looks like this acquisition may provide BCE with the possibility to boost its dividend, which otherwise would not have been possible had the two companies remained separate entities.

The post What to Expect From BCE Inc’s Acquisition of Bell Aliant Inc appeared first on The Motley Fool Canada.

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• Everything Investors Should Understand About BCE’s Dividend Right Now
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• BCE’s Dividend Is Under the Microscope – Here’s What I See
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As part of the Canadian Radio-Television and Telecommunications Commission’s “Let’s Talk TV” consultation process, Calgary-based Shaw Communications (TSX: SJR.B)(NYSE: SJR) has submitted a proposal to create a national news channel called Global News 1.

So what do investors need to know?

These are not uncharted waters

Over the past few years, Shaw has acquired various media assets. In 2013, it launched BC1, a British Columbian all-news station focused on attracting more regional advertising. Shaw could leverage the best practices from this station and apply them on a national scale.

The under-35 market is tough

There has been a tremendous shift in viewing habits from traditional television to mobile platforms, especially for those under 35. The British Broadcasting Corporation tried to cater to the under-35 market by creating “BBC Three” using UK content and talent. Earlier this year, it was axed as part of cost-cutting plans and will be moved entirely online. Investors should applaud Shaw for not catering only to this segment.

It’s about engagement

Technology continues to transform the media industry, especially in content distribution and viewership. Over-the-top content providers such as Netflix continue to grow while traditional networks try to engage their customers through a “TV everywhere” strategy that allows customers to stream TV anytime and anywhere as long they have an account with their provider. While people may prefer to stream their television shows, they also have a tendency to want the latest news. A national news channel may provide Shaw with a more attractive value proposition.

Currently, BCE (TSX: BCE)(NYSE: BCE) operates CP24, a Toronto-focused news channel with some national and international coverage. Rogers (TSX: RCI.B)(NYSE: RCI) failed to compete with its own CityNews channel because it did not differentiate enough. The success of Global News 1 will be determined by a combination of applying best practices from its regional affiliate, engaging customers through a compelling viewing experience, and differentiating itself from similar competitors.

The post Is Shaw’s Proposed All-News Channel Good for Investors? appeared first on The Motley Fool Canada.

More reading

• 5 TSX Dividend Stocks Worth HoldingThrough the Next 10 Years
• Everything Investors Should Understand About BCE’s Dividend Right Now
• Transform Your TFSA Into a Cash-Creating Machine With $10,000
• BCE’s Dividend Is Under the Microscope – Here’s What I See
• The Very Best Canadian Stocks to Hold Forever in a TFSA