This article was originally published in Maclean's Magazine on May 7, 2007
Takeover Rumoured for BCE
When Alexander Graham BELL devised an "apparatus for transmitting vocal or other sounds telegraphically," he had no inkling of the wonders it would eventually unleash - mass communications, globalization, and a knock-down, dragged-out, ego-fuelled bidding war for Canada's lumbering phone giant BCE. Those stalking Ma Bell haven't submitted their bids yet. But it's expected BCE could ultimately fetch more than $32 billion, making it one of the largest buyouts in history. And then come the real questions.
In the almost seven years since Michael Sabia was named chief executive, BCE has been a perennial plodder, and a new ownership structure won't solve all its many ills. Analysts say a major restructuring, likely to include major job cuts, is in order regardless of who ends up buying the company. "Even if you're the smartest pension fund or vulture capitalist, the problems Sabia faced aren't going away," says Iain Grant, a telecom analyst with Seaboard Group. "I hope they're coming into this with their eyes open."
For now, dollar signs are in their eyes. The Ontario Teachers Pension Plan, which owns five per cent of BCE's stock, got fed up watching the share price flatline and triggered the buyout talks. An alphabet soup of pension funds and high-powered U.S. private equity investors, including Kohlberg Kravis Roberts & Co. (KKR), soon piled in. All have pockets deep enough to do a deal, which could be announced any day now.
They'll need every penny they've got. BCE's copper wires, which served it well for a century, don't cut it now. The company has started to link neighbourhoods using fibre optic cables, but even that effort looks pokey. Last month Vidéotron said it will roll out a super-high-speed Internet service to residential customers in Quebec that will be three times faster than what BCE plans to offer. Grant figures BCE needs to inject billions of dollars more just to stay in the race. At the same time, it's losing tens of thousands of traditional phone customers every quarter to cheaper Internet phone offerings.
Admittedly, those are the kind of odds private equity investors wake up for each morning. Firms like KKR, famous for slashing costs, often see value where others don't. BCE definitely has huge annual cash flows, and plenty of assets that can be hived off, like stakes in the Bell Aliant Income Fund, Whitehorse-based NorthwestTel, and the company's inside wiring division. But Sabia has already done much of the easy work, slashing 4,000 jobs and refocusing the business. Analysts say it will take more than just a machete to make the big-ticket buyout deal payoff.
That's why the name Telus keeps coming up. Some observers think a better strategy is for one or more of the funds to team up with the Vancouver-based phone and Internet company to make a bid. Such a deal would allow for deeper cost savings - or as they say in the merger world, "synergies" - while giving the company more clout. And analysts simply love what CEO Darren Entwistle has done with Telus. "At some point," says Eamon Hoey, a telecom consultant in Toronto, "all these [fund managers] will be taking their private planes out to visit Darren."
The optics of giant U.S. investment funds grabbing up a chunk of yet another Canadian corporate icon certainly don't look good. Even though American investors would be limited to a 30 per cent stake in the company, many analysts believe the real seat of power would shift south of the border. Entwistle, however, isn't keen to rush into any deal - in part because any combination of BCE and Telus would need the green light from competition regulators. Hoey argues that advances in technology mean there's plenty of competition now. But Telus would probably have to sell BCE's wireless business, the only real bright spot in its portfolio.
There's another reason it makes more sense for a private equity or pension fund to buy BCE: the bliss of life away from the spotlight. The knock against Sabia is that's he's been too timid to act. Every quarter, executives have had to go before investors and justify their every move. Being privately owned would allow BCE to make dramatic changes for the long term. "A stealth BCE will be a far more effective competitor than a BCE that has to parade its deepest darkest secrets," says Grant. Which means that soon, investors won't have Michael Sabia to kick around anymore.
Maclean's May 7, 2007