Bell Canada, Canada’s largest communications company, recently announced plans to acquire Ziply Fiber, a fiber-internet provider in the Pacific Northwest. The C$7 billion deal represents Bell’s strategic play to expand its fiber footprint into the United States and to capitalize on growth opportunities in what it sees as an underserved U.S. fiber market.
The proposed acquisition is not, however, without its challenges. As Bell Canada looks to integrate Ziply into its operations, it must first navigate a web of regulatory hurdles that could slow or halt the deal. It must then survive an increasingly competitive landscape.
The Regulatory Gauntlet
The Ziply acquisition will require approval from several key regulatory bodies, both at the federal and state levels. First up is the Federal Communications Commission (FCC), which regulates interstate and international communications. Bell and Ziply would need to convince the FCC that the deal does not substantially lessen competition in the broadband market and that it serves the public interest.
There’s little likelihood that the acquisition will reduce competition. If ultimately approved, the proposed Ziply acquisition would be Bell Canada’s first step into the U.S. broadband market, although the Globe and Mail reports the company did attempt (unsuccessfully) to acquire Frontier Communications earlier this year. Acquiring Ziply will not reduce the number of competitors, but merely change the ownership of an existing competitor. Moreover, if Bell Canada continues Ziply’s focus on serving rural and underserved communities, the acquisition could increase competition in these areas.
Bell Canada would also need to gain approval from the public-utility commissions in each state where Ziply operates—Washington, Oregon, Idaho, and Montana. These state-level regulators will conduct their own reviews to determine if the deal serves the public interest. Some of these states have traditionally had a less-than-friendly view of mergers.
Whether these regulatory hurdles are speedbumps or roadblocks remains to be seen. The review process can take months or even years, and the outcome is uncertain. If regulators determine the deal poses unacceptable risks to competition or does not serve the public interest, they could outright reject it or impose conditions that make the transaction less attractive for Bell Canada.
Funding the Acquisition
Securing the necessary regulatory approvals is just one piece of the puzzle. Bell Canada also needs to figure out how to fund this $7 billion acquisition.
The company plans to use the proceeds from the sale of its stake in Maple Leaf Sports & Entertainment (MLSE)—expected to close in mid-2025—to cover a large portion of the deal. If that MLSE sale doesn’t close as planned, Bell has a $3.7 billion backup loan lined up.
Additionally, Bell intends to utilize a discounted treasury-dividend reinvestment program, or “DRIP,” to raise more capital. A DRIP allows shareholders to reinvest their dividends into new shares issued directly from the company’s treasury at a discount to the average market price. This approach could end up diluting existing shareholders, which has already drawn some skepticism from investors.
Bell has announced a pause on dividend growth until it can get its debt and dividend payout ratios back on track. Some analysts have expressed concerns about the deal’s potential impact on Bell’s free cash flow in the short term.
Ziply’s Challenges: Costly Deployment, Growing Competition
Ziply has been clear that its mission is to provide fast and reliable internet connections to rural communities. Toward this end, Ziply is actively investing hundreds of millions of dollars to build a 100% fiber network in suburban and rural communities across the Northwest that have been underserved with internet access. The company is willing to build in towns with populations as small as 500, and has announced new fiber-construction projects in more than 100 cities and towns across the Northwest—many of them small and rural.
While this approach may help to gain regulator approval for the deal, focusing on rural and underserved areas poses economic and technical challenges. The International Center for Law & Economics (ICLE) noted in an issue brief that population density is widely acknowledged to be the most important cost factor driving broadband-deployment decisions. For example, the U.S. Government Accountability Office (GAO) reports that population density is the “most frequently cited cost factor” and “a critical determinant of companies’ deployment decisions.”
To be fair, Ziply acknowledges that building fiber in certain areas can be uneconomical, and has explored grants and partnerships with local municipalities to address these high-cost locations. While that approach demonstrates the company’s commitment to serving rural areas, it also suggests a reliance on federal, state, and local government funding to support that commitment.
In addition, Ziply faces competition from established players and emerging wireless alternatives in the markets in which it operates. As reported in an ICLE white paper: “By all relevant measures, U.S. broadband competition is vibrant and has increased dramatically since the COVID-19 pandemic.”
Cable companies are well-established in many rural areas, offering internet service over their existing coaxial cable networks. Fixed wireless access (FWA) is a growing alternative to wired internet service, using radio signals to transmit data between a base station and a customer’s location. FWA can be deployed more quickly and cost-effectively than fiber, especially in areas with challenging terrain. While fiber can be much faster than conventional cable or FWA, it is not clear that many consumers demand ultra-fast fiber speeds.
Satellite internet such as Starlink and the soon-to-be-launched Kuiper is another option available in many rural areas. Starlink already covers nearly the entire country, delivers speeds acceptable to many users, and can be set up and deployed by consumers in minutes.
In the grand scheme, regulatory hurdles may be among the least of the challenges facing Bell Canada’s proposed acquisition of Ziply. The U.S. broadband market is competitive and dynamic. It’s not clear that Ziply’s “fiber first” strategy can be profitable in the face of competition from more flexible technologies that deliver “good enough” internet service for a much lower price, and that do not require subsidies from federal, state, or local governments.
