Comments on: Is the BCE LBO Story Getting Worse or Better? http://www.markevanstech.com/2007/05/03/is-the-bce-lbo-story-getting-worse-or-better/ A Canadian Take on the Web Sun, 07 Sep 2008 05:14:19 +0000 http://wordpress.org/?v=2.6 By: b http://www.markevanstech.com/2007/05/03/is-the-bce-lbo-story-getting-worse-or-better/#comment-5311 b Fri, 04 May 2007 03:23:44 +0000 http://markevanstech.com/2007/05/03/is-the-bce-lbo-story-getting-worse-or-better/#comment-5311 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. 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.

]]> By: Rob Hyndman http://www.markevanstech.com/2007/05/03/is-the-bce-lbo-story-getting-worse-or-better/#comment-5304 Rob Hyndman Thu, 03 May 2007 19:05:27 +0000 http://markevanstech.com/2007/05/03/is-the-bce-lbo-story-getting-worse-or-better/#comment-5304 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. 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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