Mark Evans

Toronto Hydro Bailing Out of Telecom Biz

For all the upbeat talk from Toronto Hydro about its telecom services - wholesale access to corporate customers and a struggling municipal Wi-Fi service - the utility is looking to bail out of the business.

In a press release, Toronto Hydro said “it intends to solicit expressions of interest from third parties with respect to a possible sale by Toronto Hydro Corporation of its wholly-owned subsidiary Toronto Hydro Telecom Inc. which provides fibre optic cable capacity and data communications services to telecommunications carriers, business customers and large institutions in the City of Toronto.”

Translation: Toronto Hydro wants to focus on its core business and/or the business isn’t doing well given the fierce competition from Rogers, Allstream, Telus and Bell.

Technorati Tags: Toronto Hydro, Wi-Fi

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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.

Technorati Tags: Bell Canada

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Why is Bell the Belle of the Ball?

Thoughts for a Sunday morning: Over the past week or so, I’ve read countless stories on how Bell Canada (aka BCE Inc.) has become the target of private equity investors willing to spend as much as $30-billion. As far as I can tell, the biggest motivation for a private equity buy-out is unhapiness among institutional investors about BCE’s stock price, which has sadly lagged behind the performance Telus, Rogers and Shaw in recent years.

There’s also a sense that part of the stock “problem” is BCE senior management’s lack of aggressiveness in restructuring operations. I guess there’s something more that investors want BCE to do in addition to the moves it has made to cut thousands of jobs, sell off non-core assets (CGI, Telesat), reduce operating costs, etc . If private equity investors believe they can spend $30-billion, and still see a healthy return on investment, how are they going to do it? One suggestion is BCE can focus on its high-growth businesses such as satellite-TV and high-speed Internet at a time when its traditional businesses are under competitive siege. The problem with this theory is satellite-TV is not a high-growth business while the high-speed Internet unit has seen its growth go from strong to modest recently. So is the answer simply cutting more jobs or spinning off/improving Bell Mobility, which has struggled over the past couple of years while Rogers and Telus have enjoyed robust growth?

Frankly, the private equity focus on BCE is a mystery. For one, if private equity investors with billions of dollars burning in their pockets want to invest in a Canadian telecom company, they should take a run at Telus. Second, there has to be sexier places for private equity than the Canadian telecom market.

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Will KKR be Michael Sabia’s Legacy?

Since taking over as BCE Inc.’s CEO in 2001, Michael Sabia has had a a pretty rough go of it trying to restructure the company amid increasingly fierce competition. Five years into the job, you have to wonder what Sabia’s legacy will be. Despite a lot of unglamorous blocking and tackling, he hasn’t created much shareholder value, especially compared with how Rogers and Telus have performed. And if you look at BCE’s portfolio, the local phone business is under siege; the satellite-TV unit is being outflanked by cable rivals such as Rogers; and the wireless division has been struggling for several years at a time when the wireless market has been enjoying robust growth.

The question now is whether Sabia’s legacy will be Kohlberg Kravis Roberts amid a report in the Globe & Mail that the New York-based LBO firm may be preparing a friendly takeover bid that could be worth $30-billion. Since KKR is not allowed to acquire BCE due to foreign ownership restrictions, the G&M suggests KKR is trying to recruit Canadian partners such as the Ontario Teachers’ Pension Plan.

If the deal actually materializes, it would be a major development but not terribly surprising given there has been some chatter about leveraged buy-outs of BCE and Telus. One thing you have to wonder about is whether these kind of deals will have any impact on whether foreign ownership rules will be overhauled. If that happens, the telecom market in Canada will be wide open for all kinds of deals.

Update: Bloomberg reports that BCE is not in talks with KKR.

Technorati Tags: Michael Sabia

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BCE’s Early Xmas Gift

Nothing like a pension fund (and a partner) to take a non-core asset off your hands AND give you a lot more money for it than many people expected. Clearly,, BCE CEO Michael Sabia made Santa Claus’ list of people who’ve been good this year as Canada’s Public Sector Pension Investment Board and Loral Space & Communications have agreed to acquire Telesat Canada for C3.42-billion. This is a significantly higher than the average analyst estimate of $2.5-billion. UBS analyst Jeff Fan, who was looking for a $2.1-billion price-tag, said he was surprised by the high valuation but “with little overlap between Telesat and Loral, significant synergies are likely expected”. In terms of how the deal will go down, PSP will own 64% 36% while Lorel will own a 36% 64% stake. (To comply with Canadian foreign ownership rules, Loral’s voting equity will be 33.3%). It should be noted BCE was exploring the idea of IPO-ing Telesat.
With the sale of Telesat, Sabia has completed the overhaul of BCE that he initiated shortly after taking over as CEO from Jean Monty in early-2002. As Sabia had mentioned many times, it has been a lot of “blocking and tackling” as he has tried to focus BCE on core operations while slashing operating expenses to compete with traditional rivals in the wireless, enterprise, high speed and TV markets, as well as emerging competition from online players. The major challenge now is finding ways to jump-start revenue at a time when the pricing environment is volatile. This is the job of COO George Cope, who bullishness told investors last week the company is looking for 3% to 5% revenue growth in 2007. Cope is known as an executive who is disciplined about prices (a.k.a. he’s loathe to reduce prices to compete) but BCE has no choice but to be more creative than raising prices if it wants to see BCE increase revenue, which has been flat in recent years.
For more, check out Bloomberg News and Reuters.

Technorati Tags: M&A, puppy, Wireless

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What Does Darren Entwistle Do Next?

The Report on Business magazine has an interesting profile on Telus CEO Darren Entwistle, which offers some insight into arguably Canada's most dynamic telecom executive. It includes the surprising contention the 44-year-old may have plans to walk away from telecom in four or five years to teach strategy and leadership at a U.K. university - as opposed to moving on to bigger and better things such as CEO of a U.S. RBOC. The only thing I would quibble about in the story is the claim Entwistle “blew some of his regained credibility with a doomed $1.1-billion bid for Microcell” in 2004. Everyone knew Entwistle wanted Microcell out of the wireless game because its discounting tactics were hurting the industry's operating margins. By making the bid, Entwistle put Microcell in play and Telus in a win-win position. If the bid succeeded, Telus would become an even bigger wireless player in a fast-growing market. If the bid failed (which happened when Ted Rogers made a $1.4-billion bid), the market would be consolidated and market conditions would improve. Entwistle didn't blow his credibility; he made a brilliant strategic move that didn't cost Telus a dime.

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Mitel: IPO Deja Vu

For the second time in 27 years, Terry Matthews is taking Mitel public. This time around, the company is apparently looking to raise $150-million for “general corporate purposes”. While Matthews is well-respected as Canada's leading telecom entrepreneur, it is important that potential Mitel investors realize the Ottawa-based company is posting large losses as it pours money into R&D,sales and marketing to compete with heavyweights such as Cisco, Avaya and Nortel in the IP communications market. For history buffs, Mitel originally went public in 1979 after it was started six years earlier by Matthews and Michael Cowpland, who later went on to start Corel Corp.

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Alcatel-Lucent Tie the Knot. Really!

The speculation is over: Alcatel and Lucent have officially merged (unofficially Alcatel is buying Lucent given its shareholders will have 60% of the new entity) to create a $25-billion wireline, wireless and services behemoth. It is interesting that Alcatel is purchasing Lucent at a discount to Friday's closing price. Patricia Russo will become CEO while Serge Tchuruk will be non-executive chairman. AlcaCent also plans to eliminate 8,800 jobs, or 10% of the workforce, to reduce annual costs by $1.7-billion. So can we now launch the consolidation frenzy within the $336-billion equipment industry? How long before Siemens or Nokia pursue Nortel, or Huawei takes a run at Juniper or as Om Malik suggests will Juniper take a run at Huawei? For several years, the telecom equipment market has been waiting - desperately needing? - consoliation among the large players amid fierce competition, soft margins and a dwindling customer base. Perhaps fewer players is what's needed to restore some sense of fiscal health. That said, there is some healthy skepticism emerging. RBC World Markets' analyst Mark Sue said Lucent and Alcatel have distinctly different corporate cultures and any expected synergies will likely not emerge for a year. IP Democracy also has concerns about the French ownership of Lucent's Bell Labs operation, which does work for the U.S. government and security agencies.

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Is Alcatel-Lucent Just the Beginning?

So, Alcatel and Lucent are thinking about doing a $34-billion merger? While they will only admit to be “discussions”, a deal could have huge ramifications on the telecom equipment landscape. Nortel, for example, would find itself with a formidable competitor in “Alcacent” and the speculation about Nortel doing a dealing itself - possibly with Siemens - could intensify. The Alcatel-Lucent deal, which has been rumoured before, is the kind of transaction the telecom equipment industy has expecting for the past several years because it is widely believed the market has to consolidate. So far, however, everyone has been afraid to make the big leap. That said, there have a series of joint ventures (Nortel-Huawei, for example) established, which suggests there's a lot of dating happening but everyone is still commitment-phobic and refuses to get married.
Update: The Networking Stock Blog has a nice round-up of buzz within the blogospher of the Alcatel-Lucent talks, while Om Malik provides an in-depth analysis of why the deal makes sense, and Mark Goldberg looks at how the consolidation within the telecom equipment would impact R&D activity in Canada.

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What AT&T Breakup?

The telecom industry sure moves in strange and mysterious ways in light of the Wall St. Journal report that AT&T will unveil the purchase of BellSouth for $65-billion. It was only 22 years ago, that the old AT&T was split into seven “Baby Bells” in wake of the Department of Justice's anti-trust suit. You can't help but ask what the AT&T break-up exercise was really all about now that Humpty Dumpty has been put back together again. If this mega-deal - a foregone conclusion says Om Malik - is completed, you'll essentially have AT&T and Verizon as the last guys standing what with AT&T/SBC having snapped up Ameritech, Southwest Bell, Pacific Telesis Group and BellSouth, while Verizon acquired Bell Atlantic and NYNEX. (Qwest bought U.S. West). So what does it mean from a competitive standpoint? It certainly sets the stage for an even more consolidation in the industry as Qwest could become the next (and last) big carrier to fall. It will also create an even more fierce carrier-cable war as they wage the “Battle of the Bundle” for consumers. Perhaps it will prompt some consolidation in the cable industry if some cablecos start to believe they need to become even bigger to compete effectively with the carriers. The deal will also have an impact on the already-fragile telecom equipment market as yet another large customer gets taken out of the picture. And another angle to the deal is it will allow AT&T CEO Ed Whitacre and BellSouth CFO William Smith to continue their crusade against Net Neutrality in an even more united way. At the end of the day, the question is whether the deal is good for the U.S. telecom sector. Will it allow carriers (well, at least Verizon and AT&T) to become more efficient and competitive with cable rivals? Will this be good for residential and business consumers? Only time will tell.
From a Canadian perspective, telecom consolidation has also been in progress with several carriers (Sprint Canada, GT Telecom, 360 Networks) acquired in recent years. The question is whether there's an indepedent future for small carriers such as Manitoba Telecom Services and SaskTel? Will the market eventually be BCE, Telus and a handful of small, rural exchanges?
Update: IP Democracy highlights the combined access and DSL lines of AT&T and BellSouth, and wonders if this is what the federal government had in mind with the 1996 Telecom Act.

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