Mark Evans

Bye Bye, BCE, Bye Bye

It's the end of an era in Canada's telecommunications industry as BCE Inc. is going to disappear - and be replaced by Bell Canada, which will be converted into an income trust. “BCE was a company that was conceived in a different time, for a different purpose - a purpose all about diversification,” Bell Canada CEO Michael Sabia said. “But the strategy we have been pursuing over the last three or four years is not about diversification but about focus with Bell as the centrepiece of that focus.” BCE's demise is the end of an interesting diversification strategy that saw the conglomerate invest in everything from real estate, gas pipelines (TransCanada Pipelines), financial services (Montreal Trust), computer services (CGI Inc.), publishing (Globe & Mail), television (CTV) and sports (Maple Leaf Sports & Entertainment). So now, BCE - er, Bell Canada Income Fund - is just going to be a telecommunications company…really!
  As for the income trust, the question is whether this is the structure for telecom carriers in North America given their growth prospects are, at best, modest. Telus has already done it, Bell Canada spun off its rural assets into an income trust, Bell Canada is going to do it, and Manitoba Telecom Services may do it. From the outside looking in, it looks like a trend. The key issue for carriers who embrace an income trust structure is making sure they have enough cash left (after distributions to unit holders) to invest in innovative services and upgrade their networks at a time when they're facing intense competition from cablecos.  In other words, can Bell still do what it needs to do after kicking out 85% of its profits to investors? I suspect innovation isn't front and centre for BCE as much as it wants to avoid paying income tax ($150-million in 2007 and $800-million in 2008), and the demands from Bay St. to breath some life into its dead in the water stock.
Update: For more thoughts, check out Telecom Trends and Canadian Observer, who points out the income trust will allow Bell Canada to avoid paying $800-million in taxes in 2008. Of course, Bell will also be distributing twice as much money to shareholders, who will be taxed on that money. The National Post has a front page story suggesting Bell's move will prompt the federal government to review the income trust program.