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BCE-Manitoba Telecom deal seen facing tough regulatory scrutiny

By Euan Rocha and Arathy S Nair

(Reuters) - BCE Inc's C$3.1 billion ($2.5 billion) friendly bid for Manitoba Telecom Services (MTS) , the latest in a string of major Canadian telecom deals, is expected to test regulatory bounds and may need further concessions to win approval.

Canada's largest telecom and media player, BCE, said on Monday the C$40 a share cash and stock deal would significantly expand its western Canadian footprint.

While a move on MTS was widely expected after the company sold its Allstream unit to U.S.-based Zayo Group last year for C$465 million, winning approval will be no cinch, according to industry insiders.

"We do not believe regulatory approval will be automatic," said Desjardins analyst Maher Yaghi in a note, adding he expects scrutiny to be as high as that on BCE's takeover of media rival Astral. That deal was originally blocked by regulators before getting the nod after BCE agreed to sell some assets.

Despite regulatory concerns, the 22 percent premium offered by BCE was cheered by MTS investors, and shares in the company rose 15.4 percent to C$37.90 in afternoon trading, while those in BCE slid 30 Canadian cents to C$58.54.

Yaghi noted that the deal would reduce wireless competition in the province of Manitoba and give BCE close to a 30 percent national share of Internet and television subscribers.

Despite this, BCE and MTS said they were confident that a deal will be approved, but warned the review process is likely to take 9 to 12 months to complete.

BCE, which operates as Bell, said it would divest one-third of MTS's post-paid wireless subscribers to Telus after the close of the initial deal to allay regulatory concerns and trim its cash outlay.

"Bell have certainly set-up a plausible premise for regulators to consider," MTS Chief Executive Jay Forbes said in an interview.

Still, at least one Canadian competition lawyer, speaking on condition of anonymity to safeguard client relationships, said this move alone may not be enough.

"I do think that BCE, in addition to giving up subscribers, may be required to sell some of its spectrum in the province in order for this to be approved," said the lawyer, who sees an approval potentially opening the doors to some much larger deals in the sector including a tie up between Bell-Telus; or Rogers Communications and Shaw Communications .

The combined company's Manitoba operations will be known as Bell MTS and Winnipeg, Manitoba will become BCE's Western Canada headquarters.

(Editing by Maju Samuel, Saumyadeb Chakrabarty and Shounak Dasgupta)