(New throughout, adds CEO comments on Allstream options, takeover speculation, updates share price)
TORONTO, May 7 (Reuters) - Canadian telecom company Manitoba Telecom Services Inc said on Thursday it would cut a quarter of its headcount within its Allstream division, reduce capital expenditures and slash its annual dividend following a strategic review.
Shares jumped nearly 7 percent to C$27.38 in Toronto.
A spiraling defined-benefit pension bill has stung the Winnipeg-based company, which faces tough competition in the sparsely populated Canadian province where it sells MTS-branded telephone and Internet services and nationally where its Allstream fiber optic network connects mostly mid-market companies.
The company said it would cut its annual dividend to C$1.30 per share from C$1.70 a share.
MTS also said it planned to reduce capital expenditure in its Allstream business by 20 to 30 percent.
The review confirmed that Allstream is not core to the company, and by cutting costs and narrowing its focus on key customers, MTS can prepare it for a sale, spinoff, or strategic partnership, said Chief Executive Jay Forbes, who took over this year from retiring CEO Pierre Blouin.
Forbes said in an interview that he has received plenty of unsolicited interest in Allstream during his four months on the job, but would not offer a time frame for MTS' exit.
"The minute you announce something for sale, you're backing yourself into a corner, and taking away some of your option value."
Blouin had brokered a deal to sell Allstream to a company controlled by Egyptian telecom tycoon Naguib Sawiris for C$520 million, but Ottawa blocked the sale in 2013 citing national security concerns.
The lesson learned for MTS is to better understand political sensitivity around telecommunications assets, Forbes said.
The deal was designed to leave MTS as a pure-play regional operator, and some investors and analysts at the time speculated it would pave the way for MTS to be bought by either BCE or Telus.
Forbes said he has received no takeover interest in MTS and expects the company to thrive as a small, agile player.
The company said it has pre-funded C$120 million into its pension plan using its existing credit facilities. It said this one-time move will eliminate the need for solvency payments for 2015 and 2016 under any reasonable economic scenario.
It said some 100 employees have left the Allstream business already and a further 400 have received working notice and will exit the business throughout the current year and into 2016. (Reporting by Euan Rocha in Toronto, Shubhankar Chakravorty in Bengaluru and Rod Nickel in Winnipeg; editing by Kirti Pandey and Franklin Paul)