Bell Gets Final Approvals For MTS Buy With Xplornet Added To Mix To Appease Regulators, TELUS Side Deal Adjusted

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1 February 15, 2017 The NBF Daily Bulletin Industry Comment Telecom Services Bell Gets Final Approvals For MTS Buy With Xplornet Added To Mix To Appease Regulators, TELUS Side Deal Adjusted Industry Rating (Telecom Services): Market Weight (NBF Economics & Strategy Group) Adam Shine, CFA adam.shine@nbc.ca Associate: Luc Troiani, CFA luc.troiani@nbc.ca Associate: Ahmed Abdullah ahmed.abdullah@nbc.ca It took 9.5 months, but Bell finally received all approvals for its purchase of MTS which was made possible not only through the previously-telegraphed pending sale of part of MTS postpaid subscribers to TELUS, but also the divestiture of some of MTS wireless spectrum in Manitoba and some low-arpu Bell-related subscribers to Xplornet which stepped into the equation to enable Bell to extract belated approvals from the Competition Bureau and Innovation, Science and Economic Development Canada (ISED, formerly Industry Canada). Some retail stores are also being bought by TELUS and Xplornet. Bell will close MTS on March 17, do its deal with TELUS around April 1 & conclude with Xplornet at the end of Brief Backgrounder On 5/2/16, BCE offered to buy MTS for an EV of ~$3.9B, including the assumption of ~$0.8B of net debt. It s paying $40 per common share of MTS. MTS shareholders can elect to receive $40 in cash or of a BCE share for each MTS share, subject to a pro-ration which results in the consideration being paid 45% in cash and 55% in BCE stock works out to $18 in cash, with fixed exchange ratio for the equity at of a BCE share. MTS shareholders are poised to own ~3% of BCE s equity. Last year, Bell highlighted that the 10.1x EBITDA multiple would move down to 8.2x when adjusting for the use of $300M in tax assets and expected synergies of $50M which was expected to grow the multiple is 7.4x assuming $100M of synergies over coming years. To help finance the MTS purchase and appease regulators, Bell noted a deal with TELUS, which was disclosed concurrent with its announcement, to divest of one third of MTS postpaid subscribers (~140K) and be assigned one third of MTS dealer locations. We estimated this transaction was worth approximately $370M. Given prior regulations put forward by the prior Conservative government which mandated four wireless operators in each Canadian province, it remained to be seen if the Liberals would uphold or change this policy or make an exception out of Manitoba which wasn t likely. Approvals were received from MTS shareholders (6/23/16), Manitoba Court (6/29/16), and CRTC (12/20/16). It became increasingly likely that Bell would need to divest of some spectrum to enable a new player to enter the market as a 4 th operator and, thus, satisfy the Competition Bureau and ISED. The incorrect expectation was that this would be Shaw. Time & Effort Ultimately Leads To Benign Appeasement of Regulators On 2/15/17, Bell announced that it had received approvals from the Competition Bureau and ISED and, therefore, would finally be closing its MTS purchase on 3/1/17, with more details to come and 2017 guidance to be updated for MTS when it reports its 1Q17 on 4/26/17. To get the deal done, its prior arrangement with TELUS was partly modified and, importantly, a deal was struck with Xplornet. We ll elaborate on these further below, but it s worth noting that Bell also committed on its own (not a condition of approval) to maintain current MTS wireless price plans for at least 12 months post-closing. Bell: With the purchase of MTS and sale to TELUS, Bell will add 380 wireless subscribers (321K postpaid, 59K prepaid) to its current 93K (85K postpaid, 8K prepaid) to get to a total of 473K which will drop toward 448K after 24.7K of Bell s Virgin Mobile subscribers are sold to Xplornet. We estimate that Bell s wireless share in Manitoba will jump to 45% from 8%. MTS has 228K Internet and 105K IPTV subscribers as well as 419K residential NAS (221K residential, 198K business). Bell will raise its total broadband service subs by 713K or 5%.

2 Bell adds 1.28M people and 540K households in Manitoba to its expanding market coverage, with its national wireline service footprint growing to over 25M Canadians or 11.2M of the country s 15.4M total households. Bell Business Markets adds MTS data centre in Winnipeg which brings its total centres to 27. Bell MTS will operate 69 retail locations in Manitoba. Bell jumps into MTS network sharing partnership with Rogers which runs for 20 years. It will no longer be part of its network sharing arrangement with TELUS in Winnipeg, Brandon, and the corridor in between the province s two biggest cities. TELUS will only have access to the Bell MTS network in rural Manitoba (rural Manitoba becomes a Bell service area under the national Bell-TELUS network sharing partnership). Bell expects to extract $100M of synergies from the MTS deal, up from $50M, though this will evolve over multiple years. Savings will come from wireless roaming and network sharing, reduced backhaul costs, increased wholesale revenue, scale efficiencies, and lower costs to provide enterprise business services & network connectivity in Manitoba to at least half of Bell s 100 largest business customers. TELUS: Bell will receive about $300M from TELUS, as the latter acquires 25% (not a third) of MTS postpaid subscribers or roughly 110K and 13 retail locations. The price is based on a multiple of 8x-9x which points to $33M-$38M of EBITDA net of deferred wireless costs. We have TELUS wireless share in Manitoba rising to 21% from 10%. As reflected above, TELUS will operate its own network in urban Manitoba and capitalize on its sharing arrangement with Bell for the rural parts of the province. Xplornet: The lesser, if not least evil solution to producing a new 4 th wireless operator in Manitoba. Shaw would have inevitably represented greater competition from a deeperpocketed multi-product operator. Xplornet, a privately-held New Brunswick-based company, is Canada s 8 th largest Internet service provider and largely caters to rural markets. Bell is selling Xplornet 40 MHz of MTS spectrum (10 MHz of AWS-1, 10 MHz of 700 MHz, 20 MHz of 2500 MHz), 24.7K low-arpu Virgin Mobile subscribers, and 6 retail locations for an undisclosed amount. Of note, Xplornet already has 30 MHz spectrum, so it will give back 10 MHz of 2500 MHz spectrum to ISED. Explains different numbers in Bell & Xplornet releases. Bell will provide Xplornet with remedy network access in urban markets in Manitoba. For three years, Xplornet will have transitional access to use the Bell MTS network in Winnipeg, Brandon, and highway between the two cities. This arrangement will not get extended, as Xplornet is expected to launch its wireless service by the end of 2017 and further build out and improve its network. The companies also entered into a roaming agreement for nonurban areas across the province. The transaction with Bell won t close until the end of Xplornet noted in its release that it will deploy LTE to offer mobile & fixed broadband services. We estimate that Xplornet will have an initial 2% wireless share in Manitoba. Rogers: Greater upside in its shares was enjoyed by the other Big 3 wireless player than perhaps otherwise would have been expected on today s news. Driving some of the upside was the more benign 4 th player dynamic noted above and perhaps Bell stepping into MTS network sharing partnership with Rogers. Although some may have expected a more draconian approach by the regulators, this really wasn t likely. On the flipside, some interpreted today s disclosures as precluding Rogers from acquiring spectrum from other parties. We ll address this further under the Quebecor section. We have Rogers wireless share in Manitoba unchanged at approximately 31%. Quebecor: Not a part of the MTS deal nor active in the Manitoba market, but tangentially relevant is Quebecor which sits with wireless spectrum outside of Quebec with a book value of just under $300M, $100M of which relates to still unused AWS-1 spectrum in Toronto which is part of a put arrangement with Rogers and whose 10-year licence matures in late Did the MTS deal render Shaw as the only possible buyer of Quebecor s spectrum? Not necessarily so. The Liberal government s MTS decision seemingly focused on keeping 4 players in Manitoba. The coming divestiture by Xplornet of its extra 10 MHz of 2500 MHz spectrum may reflect some more rigid thinking on the part of the government. That said, any spectrum sale by Quebecor isn t going to eliminate a 4 th player in any market. Beyond just Shaw, Rogers may still be in the mix, but we ll only know once a deal is put to the regulators.

3 Telecom/Cable Universe (all figures in millions, except per share) Manitoba BCE Cogeco Telecom Quebecor Rogers Shaw TELUS Symbol BCE CCA MBT QBR.b RCI.b SJR.b T Stock Rating Sector Perform Sector Perform Sector Perform Outperform Outperform Outperform Outperform Risk Rating Below Average Average Average Average Below Average Average Below Average Target Price $59.00 $67.00 $40.00 $43.00 $62.00 $29.00 $46.00 Total Potential Return 5.5% -5.1% 1.2% 10.6% 13.1% 7.8% 11.4% Market Statistics Price (2/15/17) $58.65 $72.41 $39.52 $39.04 $56.53 $28.00 $ Week High $63.41 $73.69 $39.07 $41.22 $58.99 $28.42 $ Week Low $56.69 $60.12 $31.39 $31.53 $47.28 $22.86 $38.08 % change from High -7.5% -1.7% 1.2% -5.3% -4.2% -1.5% -3.1% % change from Low 3.5% 20.4% 25.9% 23.8% 19.6% 22.5% 13.0% Shares O/S Float Market Capitalization $51,067 $3,577 $2,940 $4,775 $29,102 $13,699 $25,393 Year End Dec. Aug. Dec. Dec. Dec. Aug. Dec. Yie ld & Return Dividend $2.87 $1.72 $0.00 $0.18 $1.92 $1.19 $1.92 Dividend Yield 4.9% 2.4% 0.0% 0.5% 3.4% 4.2% 4.5% Book Value (LTM) $15.55 $29.28 $9.62 $6.65 $10.23 $11.77 $13.45 Price / Book Value F2016A/E Free Cash Flow 1 $3,226 $281 $176 $302 $1,705 $483 $141 F2017E Free Cash Flow 1 $3,519 $351 $181 $315 $1,765 $426 $996 F2018E Free Cash Flow 1 $3,678 $376 $189 $374 $1,849 $650 $1,254 F2016A/E FCF Yield 6.3% 7.9% 6.0% 6.3% 5.9% 3.5% 0.6% F2017E FCF Yield 6.9% 9.8% 6.1% 6.6% 6.1% 3.1% 3.9% F2018E FCF Yield 7.2% 10.5% 6.4% 7.8% 6.4% 4.7% 4.9% F2016A/E ROA 5.2% 5.2% 6.1% 3.2% 5.1% 3.9% 4.4% F2017E ROA 5.0% 5.7% 3.9% 3.8% 5.6% 3.6% 5.4% F2018E ROA 5.0% 5.7% 4.9% 4.1% 5.9% 4.3% 5.5% F2016A/E ROE 16.7% 18.0% 6.7% 23.9% 15.2% 9.8% 15.5% F2017E ROE 16.9% 19.9% 11.2% 22.4% 28.7% 9.0% 19.1% F2018E ROE 16.3% 18.8% 13.4% 20.2% 27.8% 11.0% 19.9% Current Leverage: Net Debt 2 $24,610 $2,877 $819 $4,839 $15,328 $5,370 $12,652 Net Debt/Capital 41.7% 66.7% 53.4% 80.5% 54.1% 48.4% 61.6% Net Debt/LTM EBITDA F2016A/E Leverage: Net Debt 2 $24,610 $2,802 $809 $4,704 $15,351 $5,207 $12,652 Net Debt/Capital 41.7% 65.2% 52.7% 78.9% 54.2% 45.3% 61.6% Net Debt/LTM EBITDA F2017E Leverage: Net Debt 2 $24,700 $2,647 $720 $4,431 $14,679 $5,369 $13,493 Net Debt/Capital 39.2% 62.5% 48.1% 72.9% 50.4% 47.0% 62.8% Net Debt/LTM EBITDA F2018E Leverage: Net Debt 2 $23,755 $2,396 $560 $4,098 $14,091 $5,031 $13,824 Net Debt/Capital 37.5% 57.2% 38.7% 66.2% 47.8% 44.1% 63.0% Net Debt/LTM EBITDA FD EPS (ex-unusuals) 5 F2016A/E $3.46 $5.23 $1.31 $2.28 $2.86 $0.92 $2.44 F2017E $3.51 $5.72 $1.52 $3.02 $3.20 $1.25 $2.60 F2018E $3.60 $5.87 $1.69 $3.45 $3.45 $1.32 $2.77 P/E F2016A/E F2017E F2018E EBITDA F2016A/E 4 $8,788 $983 $474 $1,492 $5,092 $2,163 $4,493 F2017E $9,320 $996 $483 $1,580 $5,296 $2,175 $4,833 F2018E $9,460 $1,009 $490 $1,671 $5,502 $2,263 $5,023 EV /EBITDA F2016A/E F2017E F2018E P/FCF F2016A/E F2017E F2018E FCF estimates for BCE, MBT, QBR, RCI, and T exclude spectrum purchases & voluntary pension prepayments. 2 Net debt includes preferred shares/securitizations. QBR Net Debt excludes derivative liabilities/assets however they are included for EV/EBITDA. 3 BCE and Shaw 's leverage calculation includes 50% of pref erreds. MBT net debt as reported (excludes letters of credit). EPS is exclusive of PPA. 4 SJR 2016A EBITDA is PF INetU/Freedom Mobile (Wind)/Shaw Media transactions. 5 MBT multiples include deferred wireless costs. MBT figures exclude Allstream. SJR EPS for continuing ops only. Source: Company reports, Thomson Reuters, Bloomberg, and NBF estimates Adam Shine, CFA, National Bank Financial (514) Associate: Luc Troiani, CFA, (416) Associate: Ahmed Abdullah, (514)

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5 ADDITIONAL COMPANY RELATED DISCLOSURES BCE 2,3,4,5,6,7 CCA 6,7 * MBT 6,7 QBR.B 6,7,10 RCI.B 6,7 SJR.B 6,7 T 2,3,4,5,6,7 LEGEND FOR COMPANY RELATED DISCLOSURES: 2 National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months. 3 National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months. 4 National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 5 National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 6 National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months. 7 The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months. 8 National Bank Financial Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services from this issuer in the next 3 months. 9 As of the end of the month immediately preceding the date of publication of this research report (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), National Bank Financial Inc. or an affiliate beneficially own 1% or more of any class of common equity securities of this issuer. 10 National Bank Financial Inc. makes a market in the securities of this issuer, at the time of this report publication. 11 A partner, director, officer or research analyst involved in the preparation of this report has, during the preceding 12 months provided services to this issuer for remuneration other than normal course investment advisory or trade execution services. 12 A research analyst, associate or any other person (or a member of their household) directly involved in preparing this report has a financial interest in the securities of this issuer. 13 A partner, director, officer, employee or agent of National Bank Financial Inc., is an officer, director, employee of, or serves in any advisory capacity to the issuer. 14 A member of the Board of Directors of National Bank Financial Inc. is also a member of the Board of Directors or is an officer of this issuer. * Patricia Curadeau-Grou is an officer, director or employee or a member of the Board of Directors of this company or an advisor or officer of this company.