Shares of Allstream jumped more than 7 per cent in trading on Thursday after Manitoba Telecom Services Inc. (TSX:MBT)said it will pay $1.7 billion in cash and shares for the telecom firm.

The class B shares of Allstream (TSX:ALR.b)were up $5.25 at $74.85 on the TSX. Shares of Manitoba Telecom closed down $5.30 at $48.

Under the terms of the takeover, Allstream shareholders will get $23 in cash plus 1.0909 Manitoba Telecom shares for each share they own. The deal values Allstream at $81.12 per share, based on the closing price for Manitoba Telecom on March 17, the companies said.

Allstream's class A shares closed Wednesday at $68.40, while its class B stock finished at $69.60 on the TSX.

The newly-created company will be a challenger to Bell Canada and Telus. It will have annual revenues of more than $2 billion, over 7,000 employees, a national network infrastructure and more than $2.9 billion in assets.

[The merger] creates a financially strong company with blue chip clients in Canada and the United States, Allstream CEO John McLennan said.

"And it strengthens competition in Canada by creating a strong player in our industry and a more attractive national alternative for customers," McLennan said.

Manitoba Telecom said the deal will immediately boost its earnings per share and cash flow per share. The company expect to save $120 million annually by 2005 through approximately $40 million of operating synergies and $80 million of tax savings from Allstream's $3 billion in unused tax losses.

The deal with Allstream likely means the end of a shareholder proposal to convert Manitoba Telelcom into an income trust.

The board of directors of Manitoba Telecom said it has concluded that an acquisition of Allstream is in the best interest of the company.

BCE Inc., which owns 21 per cent of Manitoba Telecom, issued a statement saying it will consider its alternatives "in light of the proposed transaction with Allstream and the income trust shareholder proposal."