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Without BCE's Wireless Operations, Telus Bid Seen As Odd
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TORONTO -(Dow Jones)- Telus shareholders are likely a lot more nervous about their company Thursday than they were Wednesday.
Until last night, most investors didn't foresee Telus taking on the risk of trying to acquire rival BCE, Canada's largest phone operator, for likely more than C$32 billion (US$30 billion). But now this prospect is likely top of mind after the Vancouver-based phone company said it had started non-exclusive talks with BCE about a possible "business combination."
Fueling the concerns of Telus investors is uncertainty over whether Telus would pursue an acquisition if it meant giving up its own fast-growing wireless-phone business or that of BCE to complete a deal.
Many in the market had expected Telus to stay on the sidelines, believing Canada's Competition bureau would never allow Telus to retain BCE's mobile-phone business. As one, BCE and Telus would have more than 50% of the wireless subscribers in all but two provinces, according to a note by Genuity Capital Markets analyst Dvai Ghose. The analyst's figures are from 2005 based on the July 2006 Canadian Radio-Television and Telecommunications Commission Telecommunications monitoring report.
The market has taken the view that Industry Canada wants increased competition in the wireless market, yet the number of competitors would be reduced to two from three if Telus acquired BCE's wireless business. In the wake of Telus' announcement regarding BCE, some suggest Telus has received some indication that the Canadian government might be more open towards a deal than first thought.
A Telus spokesman couldn't comment on this possibility and a spokeswoman for Canada's Competition bureau wasn't immediately available.
The third large wireless player in Canada is Rogers Communications.
Telus is now the fourth group contemplating a bid for Montreal's BCE. The others are a group led by CPP Investment Board and U.S. buyout firm Kohlberg Kravis Roberts, another led by Ontario Teachers' Pension Plan and U.S. partner Providence Equity Partners and a third group headed by Cerberus Capital Management, another big U.S. private-equity firm.
In its release, Telus suggests the combination of its national wireless and wireline businesses with those of BCE would not only make strategic and financial sense but would also represent a way to keep BCE in Canadian hands.
Telus' emphasis on proposing an "all-Canadian solution" addresses concerns by some about the potential hallowing out of corporate Canada in the wake of a slew of takeovers of big Canadian companies by foreigners and the participation of foreign investors in three of the potential bidding groups for BCE.
Bids Seen Submitted By Month-End
BCE has requested that bids for the company be submitted by the end of this month, according to market sources.
Currently, foreigners are prevented from owning a majority stake in a Canadian telecommunications company. That means BCE would still be controlled by Canadian investors if any of the known groups other than Telus won a bidding contest. Still, some fund managers suggest Telus has likely made a case to the Canadian government that the U.S. investors in the other bidding groups, because of their greater knowledge of the telecommunications industry through other non-Canadian investments in the sector, would effectively be running BCE.
"It's a similar situation to CanWest Global Communications and its acquisition of Alliance Atlantis Communications," said one BCE institutional investor. Though CanWest, a conventional-television operator and newspaper publisher, is acquiring the specialty-channel broadcaster, its U.S. partner Goldman Sachs Group is seen as "really running the show" because it is funding the bulk of the C$2.3 billion deal.
Patrick Kim, a fund manager at KBSH Capital Management and a Telus shareholder, said he would only support a Telus bid for BCE if Telus could keep both its wireless business and that of BCE.
"I don't know how you justify it if you don't keep Bell Mobility because it is where the majority of synergies," or cost savings could be achieved, Kim said.
Because there is a lot of overlap between the national wireless networks of Telus and BCE, big cost savings could result by either eliminating BCE's wireless network or combining the best parts of each network and shutting down the rest. By comparison, the cost savings from combining the companies' wireline assets are less significant. Telus' residential wireline business is based in Western Canada while the same business for BCE is centered in Ontario and Quebec, so there is relatively little overlap.
Some fund managers stress that Telus would need to generate large cost savings to justify paying the already hefty takeover premium built into BCE's stock price. Before speculation over the possibile privatization emerged earlier this year, BCE's stock was trading around C$30.
In Toronto Thursday, BCE is up 2.8% to C$40.27. This represents increase in market capitalization of about C$8.09 billion since BCE became the subject of a possible bid.
To address any government concerns about concentration in the wireless market, Bill Procter, a manager of a number of dividend funds at Mackenzie Financial Corp., suggests Telus could spin off its wireless customers in Eastern Canada and BCE could do the same in Western Canada to create a new public wireless company, or sell the assets to another group and create a competitor that way.
Citing company policy, Procter couldn't say if he owned BCE and/or Telus stock.
Another BCE and Telus shareholder questioned this scenario. "Who is going to buy the other entity; it's just a mish mash of least profitability customers," the institutional investor argued.
In Toronto, Telus is down 0.6% at C$65.36.
-Ben Dummett, Dow Jones Newswires; 416-306-2024; ben.dummett@dowjones.com
(END) Dow Jones Newswires"
Tags: [telus] [rogers] [pension] [bell mobility] [goldman sachs] [bce] [providence equity] [ontario] [industry canada] [toronto] [toronto]
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