Editor’s Note: Please see our analysis of the latest news from our Dividend Champions in the Portfolio Update section following the article below.

Our favorite oligopoly just got more exclusive. Canada’s Big Three–the telecom triumvirate of BCE Inc. (TSX: BCE, NYSE: BCE), Telus Corp. (TSX: T, NYSE: TU) and Rogers Communications Inc. (TSX: RCI/B, NYSE: RCI)–actually have a smaller competitor who’s a distant fourth: Manitoba Telecom Services Inc. (TSX: MBT, OTC: MOBAF). But not for much longer.

Last September, we wrote about how speculation was heating up that BCE might make a bid for Manitoba Telecom (MTS). Canada’s fourth-ranked telco had previously announced a comprehensive strategic review that prompted analysts to wonder whether the whole company might be in play.

At the time, BCE was tipped as the most likely buyer. With the divestiture of its troubled Allstream unit, which was completed in January, a leaner MTS offers a perfect complement to BCE, which has no wireline assets in Manitoba and controls just 6% of the province’s wireless market.

In fact, BCE doesn’t own any wireless assets in Manitoba either, instead partnering with Telus, which allows its competitor to piggyback on its network there.

Well, this week finally came the news that BCE plans to acquire MTS in a C$3.1 billion cash-and-stock deal that’s equivalent to C$40 per share, or a nearly 22% premium to the stock’s closing price prior to the announcement.

For trivia buffs, the deal comes full circle: The entity that preceded MTS was created from assets that Bell Canada sold to the provincial government back in 1908.

BCE is funding the cash portion of the deal in part by selling one-third of the MTS wireless postpaid subscriber base to Telus, along with the assignment of one-third of MTS dealer locations in Manitoba.

The deal is expected to close by the end of the year or early 2017 at the latest. And BCE management says the combination will be immediately accretive on a free cash flow per share basis.

Following the consummation of the deal, BCE plans to invest C$1 billion in Manitoba over the next five years to expand and enhance its broadband infrastructure there.

More M&A on the Way?

From a sector perspective, the deal sets an intriguing precedent that may very well upend what had been the previous government’s longstanding pursuit of a fourth national wireless carrier. Their hope was that greater competition would result in lower prices and better service.

To that end, the Conservative Harper government, which governed Canada for nearly a decade until it was ousted by the Liberals late last year, had been using government auctions of wireless spectrum as a policymaking tool. Instead of allowing the Big Three to gobble up all the most valuable spectrum, which is the lifeblood of the wireless industry, the Conservatives created set-asides at steep discounts for smaller players.

The problem for the Big Three’s upstart competitors has always been that controlling a swath of wireless spectrum at heavily subsidized prices only gets you halfway there. Companies must then have the ability to invest in capital-intensive network infrastructure, while also stealing customers away from the Big Three. Ah, the power of incumbency.

Cannacord analysts believe that if regulators approve BCE’s deal to acquire MTS, then that could give a green light to Quebecor Inc. to sell its wireless spectrum outside Quebec, or even let Shaw Communications Inc. (TSX: SJR/B, NYSE: SJR) sell Wind Mobile to another carrier.

Of course, we still don’t know how the government will respond to BCE’s bid. However, given Canada’s economic travails at the moment, it might not be as fixated on spurring greater wireless competition as its predecessor was. As one columnist quipped, the Liberals’ telecom policy thus far “can be summarized in one word: non-existent.”

But consolidation proponents shouldn’t crow just yet. The deal will require the government’s sign-off, and that may prompt the sort of scrutiny that reins in further empire-building. After all, it only takes one or two government bureaucrats to cause everything to grind to a halt.

The Dividend Champions: Portfolio Update

By Deon Vernooy

BCE Inc. (TSX: BCE, NYSE: BCE), the top holding in the Dividend Champions Portfolio, delivered another steady quarter, with growth more or less aligned with our projections.

Revenues increased marginally, and operating expenses were well contained, resulting in a 3.3% increase in EBITDA (earnings before interest, taxation, depreciation and amortization).

The wireless division remained the star performer, with a 6.9% increase in EBITDA, as the number of subscribers rose, while customers paid more on average for the use of their devices. Critically important, the average revenue per user rose by 3.6%, while the more profitable postpaid subscriber base also increased by 3.6%.

The secular trends in the wireline division continued, with landline connections declining, while cable TV and high-speed Internet connections increased by 3.4% in both cases. EBITDA in this division climbed 1.3%.

Management left their guidance for the full year unchanged, with earnings per share expected to be about 4% higher than last year, while the dividend is expected to increase by 5%. The balance sheet remains somewhat stretched, but cash flow is excellent.

In addition to first-quarter results, BCE also announced the proposed acquisition of Manitoba Telecom Services for C$3.9 billion (equivalent to 5% of BCE’s current enterprise value) on an above-market EV/EBITDA (enterprise value to EBITDA) multiple of 10.1 times. The transaction, which is expected to close by the end of 2016 or early 2017, will be paid partly in cash and BCE shares, while a portion of the postpaid wireless subscriber base will be sold to Telus.

BCE indicates that the transaction will be cash-flow positive, with significant operational synergies of around C$50 million annually along with additional tax savings. BCE managed to extract considerable synergies from the Bell Aliant acquisition in 2014, so we would expect the same following this transaction, assuming it gets approved by regulators and shareholders.

The BCE valuation remains attractive in absolute terms, with an EV/EBITDA ratio of just over 8 times and a dividend yield of 4.7%. We estimate the fair value of the stock at C$64, or US$51.

WestJet Airlines Ltd. (TSX: WJA, NYSE: WJAVF) delivered lower first-quarter 2016 profits compared to an all-time record quarter last year. Earnings per share declined by 35%, while the dividend was kept unchanged.

Despite an increased seat capacity, more passengers, and a higher load factor, revenue was 5% down in the quarter as pricing pressures eroded profit margins. Operating expenses were slightly higher, resulting in an EBITDA (earnings before interest, taxation, depreciation and amortization) decline of 19%.

The outlook for the rest of the year seems to be somewhat better, with consensus estimates indicating an 18% decline in earnings per share for the full year and a decent bounce in 2017. If that forecast proves correct, then the company will still be producing its second-highest annual profit on record. The dividend may increase marginally this year, but should resume a stronger growth trajectory in 2017.

The valuation remains reasonable, with a forward price-to-earnings ratio of 8.4 times, while the dividend currently yields 2.8%. We estimate WestJet’s fair value at C$23, or US17.

TransCanada Corp. (TSX: TRP, NYSE: TRP) reported a 6% increase in adjusted earnings per share for the first quarter of the 2016 financial year. The dividend was 9.6% higher than a year ago.

The pipelines division increased profits by 2%, while profit in the volatile energy division dropped by 20%, pulled down by the U.S. power component. Overall, earnings before interest and taxation were 4% lower than a year ago.

A key focus for the company is the conclusion of its $13 billion acquisition of Columbia Pipeline Group. Subject to shareholder and regulatory approvals, the deal is expected to close in the second half of 2016. Despite management assurances that the deal will be accretive to earnings, we remain skeptical about the rationale for the acquisition, which seems to carry a high price tag.

TransCanada’s balance sheet is fully levered, with a debt-to-capital ratio of 65%, though the firm’s credit rating remains high investment grade.

Adjusted earnings per share for the full year are expected to grow 3%, while the dividend is forecast to rise 9%. TransCanada’s valuation remains below its core peer group, and its well-covered dividend yields an attractive 4.3%.

The full extent of the energy crash was evident in Suncor Energy’s (TSX: SU, NYSE: SU) first-quarter results: Operating cash flow per share dropped 56% year over year. However, courtesy of a strong balance sheet, the dividend was 3.5% higher than a year ago.

Despite higher production and sharply lower costs, cash flow from operations in the Oil Sands division declined by 50%, as average price realizations came in 36% below the same quarter last year. The Refinery division also experienced a considerable decline in cash flow, with lower refinery utilization, lower refining margins, and FIFO losses (more expensive stock refined first).

The balance sheet remains in decent condition, with a debt-to-capital ratio of 30%. However, both Moody’s and S&P recently downgraded their outlook for the company, though ratings remain at a high investment-grade level.

After the end of the quarter, Suncor acquired a further 5% interest in Syncrude, which together with the previously held interest (partly from the Canadian Oil Sands acquisition) will push its working interest in Syncrude to 54% and add a total of 146,000 barrels of oil to its daily production.

We are holding Suncor in the Dividend Champions Portfolio for its ability to sustain its dividend during commodity down cycles. This ability is now severely tested, but we remain confident that better days will come again for the company as energy prices recover. The dividend yield is currently 3.2%, with prospects for growth largely dependent on energy prices.

Fortis Inc. (TSX: FTS, OTC: FRTSF) reported first-quarter adjusted earnings per share that were 3% higher than a year ago. The dividend was 10% higher than last year.

Revenue was 8% lower than last year, as energy-supply costs declined on the back of lower commodity prices, while the sale of the commercial property portfolio during the year also affected revenues.

Operating results from the various divisions were a mixed bag, with the one outstanding contribution courtesy of the firm’s Caribbean regulated utilities, which saw profits double. The weaker Canadian dollar and the commissioning of the Waneta hydroelectric facility in British Columbia also made positive contributions.

A key focus for Fortis is the completion of the US$11.3 billion acquisition of ITC, the U.S. Midwest transmission business. Financing arrangements for the transaction received a major boost with the sale of a 19.9% interest to the Singapore Wealth Fund for US$1.2 billion. Closing is expected in late 2016.

The company’s balance sheet remains in good shape, with a debt-to-capital ratio of 55%, though S&P put its “A-” credit rating on a negative outlook after the announcement of the ITC acquisition.

Share of Fortis currently yield 3.7%, and the company intends to grow its dividend 6% annually for the foreseeable future. We estimate fair value at C$41, or US$32.

RioCan REIT (TSX: REI-U, OTC: RIOCF) reported first-quarter operating funds from operations per unit (OFFO, a measure of income adjusted for capital or transactional items, such as property sales) were 4.8% higher than a year ago. Distributions per unit were unchanged.

Committed occupancy improved slightly during the quarter, to 94.8%, but is still lower than the 97% achieved before the departure of Target Canada in early 2015. Management reports that it has signed or received commitments from new tenants that will cover 114% of the lost Target base rent.

The sale of the U.S. property portfolio for US$1.9 billion is now expected to conclude in the second quarter of 2016. The net proceeds of around US$0.9 billion will be used to reduce debt and fund the firm’s property development strategy.

Part of the lost revenue will be replaced with the properties purchased from Kimco in 2015, and there will also be a substantial savings on interest cost. However, we estimate the sale of the U.S. properties portfolio will still leave a considerable hole, and it will be interesting to see how the highly regarded management team will address the issue.

RioCan currently has an attractive distribution yield of 5.2%, but we are concerned about the lack of growth, and the sale of the U.S. portfolio doesn’t help matters. We will remain holders of the REIT in the Dividend Champions Portfolio for now.