Is the BCE LBO Story Getting Worse or Better?

Is it just me or is the buzz about a multi-billion dollar leverage buy-out of BCE Inc. becoming less attractive by day. The latest bad news was delivered in BCE’s first-quarter results, which show it lost another 107,000 local phone customers, while its wireless unit added a disappointing 13,000 subscribers (By comparison, Rogers added 90,500 while Telus added 85,800).

So tell me again why investment firms such as Kravis Kohlberg & Roberts, Ontario Teachers Pension Plan and Blackstone Capital are so anxious to get their hands on BCE? It’s not like this is a company with a healthy roster of high-growth or even modestly-growing assets. The wireless and local phone businesses suck, the satellite-TV business is barely growing, the high-speed Internet unit is seeing slowing growth, while the enterprise division is battling for business in a highly-competitive market where the margins on new IP-based services are nowhere near as healthy as everyone expected.

Maybe institutional investors see a fertile opportunity to radically restructure the business, even though BCE CEO Michael Sabia has been actively trying to re-invent BCE over the past five years. Maybe investors look at the wireless business, for example, and see all kinds of potential for improvement (as well as the opportunity to spin all of part of it off). Obviously, the number-crunchers see something given they’re apparently willing to fork over $30-billion to acquire BCE (financed, of course, by an awful lot of debt) but, frankly, BCE does little to excite me.

For more check out, Sean Silcoff’s commentary in today’s Financial Post on why Telus is unlikely to get involved in a strategic alliance with BCE.

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http://www.robhyndman.com Rob Hyndman

Buy low, sell high. Unless you believe that telecomm is not a growth business and that the internet is a fad, this is a cheap way to get into a key industry.
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There are two related issues to your question.

First, can the private equity firms (whichever one ends up buying BCE) run it better than current management. On the wireline side, that isn’t clear. The situation is bad but is mostly driven by factors outside of Bell’s control (how aggressive are cable companies, how do regulations evolve, how does technology develop). For wireless, the recent results reinforce the notion that someone ought to be able to run it better. In Canada, we have three very similar players (Rogers is a little larger, and has some benefits from being the only GSM player, but otherwise it’s a pretty even fight). Bell is losing that fight, and has been for some time. That is purely a management issue.

Second, assuming there is some opportunity to improve the operating performance, what is the company worth? Or, more accurately, what can the buyers afford to pay and still generate a decent return. Beyond changes to operations, they will structure the deal to take advantage of the tax treatment of debt as well as possibly spin-off/ sell some operations. This question is more complex (and is what the bankers are all busy working on).

What is clear is that the current strategy and performance isn’t close to what is needed to support a $40 bid for the stock. That means anyone planning to take over has to have some idea of how to improve the strategy and performance.

The Q1 results could be seen as negative for a prospective LBO buyer. On the other hand, they could be seen as indicating the wireline business has stopped getting worse (and could even be improved in the future) and the wireless business just needs better management. A perfect situation for a private equity buyer.

Telus, on the other hand, seems to be performing very well in wireless. (Less so in wireline, but it also doesn’t face competition as aggressive as Bell’s.) This could be a poor LBO candidate because there is less room to improve performance and the market has already priced in it’s superior results. There may be less room to offer a takeover premium than there is for BCE.

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Is the BCE LBO Story Getting Worse or Better?