Should Bell Sell Off MLSE To Tackle Its Debt Problem?

Bell has a debt problem.

The company, formally known as BCE Inc (TSX: BCE), has seen its net debt leverage ratio rise in recent years. Internally, Bell has a net debt leverage ratio target of 3.0, but that figure has grown dramatically over the last decade and a half. In 2010, the company had a target net debt leverage ratio range of 1.5 – 2.0, but that range has steadily increased as the company failed to actually hit the target.

What is the net debt leverage ratio? Bell calculates the figure by dividing its net debt by its adjusted EBITDA, both figures of which don’t fall under GAAP accounting standards. As of December 31, 2023, Bell’s net debt is reported as $36.2 billion, while adjusted EBITDA for the year came in at $10.4 billion, giving the company a net debt leverage ratio of roughly 3.48 for 2023.

Concerning for shareholders, is that while net debt grew by 7.5% in 2023, Bell’s adjusted EBITDA grew by just 2.1%. The result, is that the ratio jumped from 3.30 to 3.48 over the course of 2023, a 5.45% increase year over year. The growth of debt in 2023 outperformed all other financial metrics reported by Bell – revenue grew 2.1%, net earnings declined 20.5%, free cash flow grew 2.5%. It also outgrew customer segments, such as the 5.0% gain seen in retail high-speed internet customers, and the 3.4% gain seen in total mobile phones.

The growth of this debt isn’t exactly new however, with this ratio, along with the target ratio, steadily growing since 2010. In fact, during this time period, only once has the net debt leverage ratio actually declined relative to the prior year. And only once (in 2010) has the company actual reported a ratio lower than the top end of its target range.

What’s more, is that this ratio is only going to get worse going forward. Post year-end, the company issued C$945 million in 5.20% Series US-9 notes, and C$1,009 million in 5.55% US Series-10 notes, which is partially offset by the repayment of US$600 million in Series US-3 Notes that were due March 17, 2024, at an estimated cost of C$814 million.

On the balance, its estimated that Bell’s net debt increased by $1,140 as a result, which would place its net debt leverage ratio at an estimated 3.59.

So, what’s the solution here?

Reigning in costs

The easiest way for Bell to start to take control of its debt problem, by and large, is by cutting or suspending the dividend. But we know that won’t happen.

BMO Capital Markets doesn’t see a dividend cut as likely either, outlining in a note this week that despite forecasted declines in EBITDA, free cash flows, and revenue, that they do not expect a cut “despite elevated payout ratios through 2025E.” BMO in turn did its own cuts, dropping the price target from $54 to $46 for BCE, while saying they do not foresee “a fundamental catalyst to revise estimates higher in the near term.”

The next easiest method of debt reduction, in Bell’s eyes, is the reduction of other expenses, such as employees. That’s probably why Bell Media, a subsidiary of BCE, has cut 1 in 4 positions since 2020, with the latest round of layoffs occurring just last month when the oligopoly laid off hundreds of employees with virtual meetings.

But you can only cut so many employees before the whole thing comes crashing down.

There is another option available however.

The sale of MLSE

One option on the table for Bell to generate some cash is the sale of its stake in Maple Leaf Sports & Entertainment, which owns the Toronto Maple Leafs, the Toronto Raptors, Toronto FC, the Toronto Argonauts and a handful of real estate and entertainment assets. The company currently holds a 37.5% indirect equity interest in MLSE.

As far as determining a value for the entity, there is a recent comp. In November OMERS, a defined benefit pension fund, acquired a 5% indirect stake in MLSE by taking a stake Kilmer Sports. Kilmer owns 25% of MLSE. By acquiring a 20% interest in Kilmer for US$400 million, OMERS took a 5% indirect interest in MLSE, while also providing a current valuation for the sports entity.

The transaction implies a total value of US$8.0 billion for Maple Leaf Sports & Entertainment. For Bell, this implies their stake is worth about US$3.0 billion, which in Canadian dollars is about $4.07 billion. While it wouldn’t solve Bell’s debt problem per se, it would at least drop the net debt leverage ratio to somewhere in the neighbourhood of 3.10, based on the net debt as of December 31 and assuming about $4.0 billion of those proceeds would actually be put towards paying off debt. The figure is still above the target range, but it would be the first time since 2015 that the ratio would have declined, so it’s not nothing.

But then again, it’s not like the failure to hit the target has had much of an impact on management compensation, so they probably don’t care a whole lot anyways.

Bell’s stock hit another 52 week low today trading as low as $43.96. Looks to me like some investors are anticipating that dividend cut to happen after all.

Information for this story was found via the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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