Bell Aliant Regional Communications Income Fund $32 – Toronto symbol BA.UN

BELL ALIANT REGIONAL COMMUNICATIONS INCOME FUND $32 (Toronto symbol BA.UN; Conservative Growth Portfolio, Utilities sector; Units outstanding: 130.8 million; Market cap: $4.2 billion; SI Rating: Above average) is the main provider of telephone services in Atlantic Canada. It also serves rural parts of Ontario and Quebec. BCE Inc. controls 43.4% of Bell Aliant. As part of the deal that created Bell Aliant, the fund transferred the bulk of its wireless business to BCE. Without these operations, the fund now aims to spur growth by expanding the availability and capacity of its high-speed Internet service. Just 20% of Bell Aliant’s customers use its high-speed Internet service, so there’s plenty of room to grow. In the three months ended June 30, 2007, Bell Aliant earned $0.25 a unit (total $45.5 million) from continuing operations. The fund took its present form on July 7, 2006, so it did not report earnings for the year-earlier quarter. Revenue on a pro forma basis, which assumes Bell Aliant began operations at the start of 2006, grew 1.3%, to $825.4 million from $814.9 million. Higher revenue from Internet users helped offset lower local and long-distance revenue. Bell Aliant pays monthly distributions of $0.235 a unit; the annual rate of $2.82 yields 8.8%. That’s about 90% of its cash flow, but Bell Aliant should have enough left over to meet its capital spending targets. Bell Aliant is also using its excess cash to buy back units. It spent $208.5 million on repurchases in the first half of 2007, which helped offset the dilution from units it issued as partial consideration for an acquisition. The units now trade at 13.4 times the $2.39 a unit Bell Aliant should earn in 2007. It’s possible that BCE’s new owners could sell their Bell Aliant stake to help pay for the takeover. The extra units on the market could depress the unit price, at least temporarily. However, the lack of a controlling investor could then turn Bell Aliant into a takeover target. Bell Aliant is a buy.