BCE INC. $23 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 806.2 million; Market cap: $18.5 billion; SI Rating: Above average) provides telephone service to over 7.5 million residential and business customers in Ontario and Quebec. BCE also provides wireless service to 6.4 million subscribers across Canada. In June, 2007, BCE accepted a $42.75-a-share all-cash takeover offer from a private consortium led by the Ontario Teachers’ Pension Plan. The deal required auditing firm KPMG to provide an opinion on BCE’s solvency following the takeover. KPMG’s preliminary analysis shows that BCE’s liabilities would probably exceed the value of its assets. KPMG’s report effectively killed the takeover. BCE recently stopped paying dividends on its common shares as part of deal with the consortium to help ensure that takeover would go through. Now that the deal is dead, BCE will probably resume quarterly dividend payments. The previous annual rate of $1.46 would now yield 6.3%.
Lower break-up fee seems likely
The consortium also agreed to pay BCE a break-up fee of $1.2 billion if it withdrew its offer. Since the buyers did not technically back out of the deal, it seems unlikely that BCE will receive the cash. However, the two sides will probably negotiate a lower fee instead of taking the matter to court. Despite the failure of the takeover, we still like BCE’s long-term prospects. The company recently launched a new restructuring plan aimed at streamlining its operations and improving customer service. This plan should save it $300 million a year. To put that target in context, BCE earned $0.60 a share (total $488 million) in the three months ended September 30, 2008. That’s up 11.1% from $0.54 a share ($442 million) a year earlier. These figures exclude unusual items. Revenue slipped 0.4%, to $4.46 billion from $4.48 billion, largely due to the sale of a subsidiary. BCE will get most of future growth from its wireless operations, which now supply about 40% of its earnings. In the latest quarter, wireless revenue grew 9.3%, while the number of subscribers rose 7.1%. BCE now aims to spur more growth at its wireless division. It recently agreed to share the costs of a major upgrade with rival phone company Telus Corp. Right now, both companies use the CDMA (code division multiple access) wireless standard, which is common in North America. However, most of the world uses the GSM (global system for mobile communications) standard. The two companies now plan to overlay their existing networks with new technology that will work with GSM phones. That will let them capture more roaming fees from foreign tourists and business travelers who use GSM phones while in Canada. This project will cost each company about $500 million.
Higher pension costs manageable
The recent stock market downturn probably increased the deficit in BCE’s pension plans, from $1 billion to about $3 billion. However, BCE’s steady cash flows should help it make up this shortfall. As well, Ottawa now plans to give companies 10 years to eliminate deficits in their pension plans, up from five years. BCE should earn $2.21 a share in 2008, and the stock trades at 10.4 times that estimate. That’s reasonable in light of its high market share and improving prospects. BCE is a buy.
