TORONTO (Reuters) - Manitoba Telecom Services Inc MBT.TO will sell its Allstream fiber optic network to a company controlled by telecom tycoon Naguib Sawiris for C$520 million (US$503 million), a deal that signals the Egyptian magnate is still keen on Canada.

Under an agreement announced on Friday, Accelero Capital Holdings, which was founded by Sawiris and is stacked with executives from telecom companies he owns or in which he is invested, gets Allstream landline network and its 50,000 business customers.

Investors cheered the deal, which marks a re-entry of sorts for Sawiris into the Canadian market, sending MTS’s stock up more than 5 percent to C$33.93.

“Immediately it removes a couple of clouds from the stock, one relating to Allstream and just how long it would take to turn them around, and two, they can use the proceeds to help fund their pension deficit,” said Ryan Bushell, a portfolio manager at Leon Frazer & Associates in Toronto, which manages more than C$2 billion and is one of MTS’s top shareholders.

The deal’s value includes debt assumed by the buyer. MTS expects its roughly C$405 million in proceeds to help it pay around C$130 million into its pension plan and eliminate all pension solvency funding until 2016.

The deal leaves MTS as a "pure-play" regional player and some investors think this makes it an attractive takeover target for larger companies such as BCE Inc BCE.TO or Telus Corp T.TO.

“This transaction makes MTS a stronger, more focused and more valuable company,” Chief Executive Pierre Blouin said, adding that free cash flow would support its dividend policy.

NEW CANADIAN GAMBLE

In a previous foray into Canada, Sawiris's Orascom Telecom ORTE.CA backed upstart Wind Mobile, which launched a wireless service in 2009 that aggressively challenged the pricing plans of Canada's three dominant telecom players: Bell, Telus and Rogers Communications Inc RCIb.TO.

Russia-focused Vimpelcom VIP.N later bought Orascom for $6 billion but is still awaiting regulatory approval to fold in Orascom's Canadian assets. It is widely expected that Vimpelcom will sell Wind Mobile as it has retained UBS to seek possible buyers.

Sawiris and Wind Mobile Chief Executive Anthony Lacavera are in talks to buy back Wind from Vimpelcom, a source with knowledge of the talks said on Friday. Such a deal could allow them to combine Allstream’s business customers and extensive infrastructure with Wind’s consumer wireless base.

A separate source close to the Allstream deal said, however, that the asset is independent of Accelero’s ambitions for Wind Mobile. The source said talks between Accelero and Wind’s current owners have not advanced significantly.

“In our view, this transaction increases the probability that Accelero will look to acquire Wind Mobile given the likely synergies on backhaul and a renewed commitment to Canada,” RBC Capital Markets analyst Drew McReynolds in a note to clients.

COMPETITION CONCERNS

The return of Sawiris to the Canadian market reverses a recent trend that has seen the dominant domestic players buying up assets and undermining the Canadian government’s attempts to increase competition in the sector.

“This investment reflects Accelero’s long-term commitment to the Canadian telecommunications market, and our belief in the opportunity that exists to provide capital to enhance the competitive landscape in Canada,” Sawiris said of the Allstream deal in a statement.

The federal government has said it wants four telecom competitors in each of Canada’s regions.

Wind and smaller rivals such as Mobilicity have so far struggled to build profitable businesses in Canada, a factor that has forced them to explore alternatives.

Telus, Canada’s No. 2 wireless operator by subscribers, earlier this month agreed to buy Mobilicity, arguing that the deal would save the upstart from bankruptcy.

BMO Capital Markets was Accelero’s financial adviser and Torys LLP served as legal counsel. CIBC World Markets and Morgan Stanley acted as financial advisers for MTS and Stikeman Elliott acted as legal counsel. The transaction is expected to close in the second half of the year.