Still Don’t Get BCE LBO

Maybe I’m missing something here but I still don’t get the bidding war for BCE Inc. (aka Bell Canada) now being orchestrated by BCE senior management. So, what you’ve got a low-growth telecom carrier scrambling to jump-start its financial prospects (mostly through cut-cutting) in an increasingly competitive marketplace…and apparently several private-equity players willing to cough up $30-billion +. And if a deal goes through, the new owner will be saddled with a pile of debt and a highly-leveraged balance sheet, which could stifle BCE’s ability to make the investments needed to compete against aggressive cable rivals such as Videotron, Rogers and Cogeco.

I’m not a number-cruncher but let’s take a look at BCE’s business units:
- local telephone: more competition from cablecos who are using television and local phones as key tools within bundles, while Bell struggles to get IP-TV out the door.
- wireless: the market has lots of room for growth so that’s a positive for Bell Mobility. But the business has been struggling in recent years amid billing woes and management turnover. Now, it looks like a new rival will enter the scene with Quebecor’s announcement yesterday to do business in Quebec.
- satellite-TV: low growth with revenue driven mostly by price increases.
- high-speed Internet: modest growth with penetration rates now above 50%. Again, most growth driven by prices increases.
- enterprise: extremely competitive marketplace with lots of players (Allstream, Rogers, Telus) driving hard for business.

Given BCE has already slashed thousands of jobs, what are potential buyers focused on? Are there plans to slash thousands more jobs? Or do they think spinning off assets such as Bell Mobility and ExpressVu will unlock oodles of value? One thing to keep amid all this M&A frenzy is mind is how much money there is to be made by investment banks involved in any deals. This explains why there’s so much interest in the future of Telus, Shaw and Quebecor. It’s all about the money, baby.

Update: Jim Courtney provides some nice insight into Bell’s various business units – in many ways supporting my “I Don’t Get It” theory.

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  • B

    so ur saying..these people will spend billions of dollars so that the investment banks can make their fees..i dont think so..

    i do however believe that people are speculating at too high a price for BCE! If it goes through i am looking at $38-40. I think what Ontario Teachers said about them looking at a competing bid, is just liars poker. Having said all this, what do you think will happen with Telus. I dont knw and dont think a merger is possible!! Its price decreased last few sessions? going back to $59?

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  • Eric

    Perfectly right, its all about the money. Many have written also about the pressure on KKR to use their considerable assets to create investor value. These types of companies used to go for higher yield acquisitions but now that their fortunes have expanded over the last few years they are under a lot of pressure to use their money to make more money. Even though BCE will not offer KKR as high a yield as it usually like to have, it will prove to be a safe and profitable investment if it can get partners in canada with the same vision as it has. I also beleive that they will break up the land line companies from the other entities. Only time will tell.

  • Rob Hyndman

    Well, they control two businesses that have deep customer relationships with costly services that will be at the core of telecom for years to come. Cripes, I now spend more on celphone and ‘net access than I spent on food not that long ago.

    And the more we get plugged into the grid the more important these services will be. Every form of media – every bit of information we get – will come to us from mobile wireless or the pipe that feeds into the house. Matrix indeed. This is one of the big household budget items, and it will get bigger, and regardless of the destruction that Sabia and his predecessors managed to inflict by their deer-caught-in-the-headlights policies, there is still an enormous market opportunity there.

    I think it’s at its core a great asset.

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