bce

TELUS CORP. (Toronto symbols T $36 and T.A $33; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 317.8 million; Market cap: $11.4 billion; SI Rating: Above average) had considered acquiring BCE before BCE accepted the offer from the Ontario Teachers’ Pension Plan. Even though the BCE privatization has failed, Telus will probably not launch a new takeover offer. That’s mainly because the credit crisis would make it difficult for Telus to borrow the cash it would need. Telus may instead try to merge its wireless operations with those of BCE into 50-50 joint venture. There is little geographic overlap between the two systems, so a partnership with BCE would probably win regulatory approval. Combining the technical and marketing operations could also lead to substantial cost savings. Lower costs would help the combined operation compete with new companies that plan to enter Canada’s wireless market in 2009. Telus is a buy. The cheaper, non-voting ‘A’ shares are the better choice.

Conservative investors have little need to dabble in risky stocks these days, since many conservative favourites are unduly cheap. BCE Inc. plunged last month after its $42.75 takeover by a private consortium fell through. That happened because BCE failed the ‘solvency test’, which was a condition of the deal. Analysis showed that, post-takeover, BCE’s tangible assets (that is, excluding goodwill or ‘value-as-a-going-concern’) would fall short of BCE’s post-takeover debt of $43 billion. This was mainly because of the plunge in stock-market values since the deal’s June, 2007 signing, near the market peak....

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%....

We continued to recommend BCE for the past year and a half, despite the risk that its $42.75 takeover might fall through due to the developing credit crisis and bear market. That’s because, either way, we felt BCE still offered an attractive investment opportunity. Now that the possibility of a takeover (at a price anywhere near $42.75) has ended, BCE seems unduly depressed. This partly reflects dumping by traders who only held the stock because they wanted to profit from the takeover. It may also be partly due to a misunderstanding by some investors of BCE’s financial situation. Even without the likelihood of a takeover, BCE still has strong appeal. Its businesses continue to generate steady cash flows. A new restructuring plan will also give BCE more cash to invest in its high-growth operations, particularly wireless and high-speed Internet access. BCE could also unlock some of its value by spinning off or selling some of its operations....

BCE INC. $21.23, Toronto symbol BCE, has confirmed that its $42.75-a-share takeover by a private consortium led by the Ontario Teachers’ Pension Plan will not proceed. The deal required auditing firm KPMG to provide an opinion on BCE’s solvency following the takeover. KPMG concluded that BCE would fail this test. BCE disagreed with KPMG’s assessment, and hired a second auditing firm, PricewaterhouseCoopers, to help it address specific items in KPMG’s report. However, KPMG did not change its opinion, and the deal died....

BELL ALIANT REGIONAL COMMUNICATIONS INCOME FUND $22.70 (Toronto symbol BA.UN: Shares outstanding: 127.0 million; Market cap: $2.9 billion; SI Rating: Above average) has agreed to help BCE upgrade the connections between Bell Mobility’s wireless networks in Atlantic Canada and certain rural areas of Ontario and Quebec. Bell Aliant transferred most of its wireless operations to BCE Inc. as part of the agreement that formed the current trust in July, 2006. BCE continues to own 45% of Bell Aliant. The upgrades will also improve the speed and reliability of connections between BCE’s Bell Mobility wireless networks and Bell Aliant’s traditional phone systems. That should help Bell Aliant profit from rising use of mobile devices to receive email and connect to the Internet....

ISHARES CDN LARGECAP 60 INDEX FUND $12.71 (Toronto symbol XIU; buy or sell through a broker) (units split 4-for-1 in August, 2008) is a good low-fee way to buy the top stocks on the TSX. The units hold a basket of stocks that represent the S&P/TSX 60 Index. The index is made up of the 60 largest and most heavily traded stocks on the TSX. Expenses on the units are just 0.17% of assets. Most of the 60 stocks in the index are good quality companies. However, to meet the requirement that all sectors are represented, the index holds a few firms we wouldn’t include, such as Biovail Corp. The index’s top holdings are: Royal Bank, 7.5%; EnCana Corporation, 5.8%; TD Bank, 4.8%; Bank of Nova Scotia, 4.7%; Manulife Financial, 4.6%; Barrick Gold, 4.3%; Canadian Natural Resources, 3.6%; Research in Motion, 3.5%; Suncor Energy, 3.5%; Goldcorp, 3.3%; Potash Corporation, 3.2%; Canadian National Railway, 2.8%; BCE Inc., 2.6%; Rogers Communications, 2.5%; and Bank of Montreal, 2.5%....

We still think high-quality mutual funds with a long-term focus will beat indexes over long periods. If funds invest as we advise — sticking with well-established companies and spreading their assets out across the five main economic sectors — they will tend to lose a lot less than the market indexes in periods when the indexes fall sharply. That’s because big market slides are particularly hard on the hottest, most popular stocks of the preceding market rise, and investing as we do leads you to avoid excessive investment in the hot stocks. Index funds, in contrast, do tend to load up on the hottest, most popular stocks as they rise. That’s because, as they rise, these stocks make up a rising proportion of the index. The most recent example is Potash Corporation of Saskatchewan, which had the highest market cap on the Toronto exchange in June, 2008, on the strength of soaring fertilizer and agriculture prices. The shares have since dropped 70%....

BCE $21.90 (Toronto symbol BCE; Shares outstanding: 806.2 million; Market cap: $17.7 billion; SI Rating: Above-Average) was bound to drop following news that its $42.75 takeover bid appears to have died. But it may have dropped more than it deserved. Due to the high price of the takeover and the plunge in stock market values since the setting of that price, accounting firm KPMG felt that, post-takeover, BCE’s tangible assets (that is, excluding goodwill or ‘value-as-a-going-concern’) would fall short of BCE’s post-takeover debt of $43 billion. So it couldn’t provide the solvency opinion that the deal required. That could (and probably will) kill the takeover. It’s worth noting that many successful companies would fail this test if you excluded the value of their goodwill. But it only matters here since the takeover needs a favourable opinion to go through, and KPMG couldn’t provide one....

BCE INC. $37 (Toronto symbol BCE; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 806.2 million; Market cap: $29.8 billion; SI Rating: Above average) continues to trade 13.5% below the $42.75-a-share takeover offer from a group headed by the Ontario Teachers’ Pension Plan. That’s mainly due to concerns that the credit crisis will prompt lenders to break their commitments to provide the necessary financing. However, we still feel the takeover will close as planned by December 11, 2008. If the deal does fall through, the consortium would have to pay BCE a break-up fee of $1.2 billion. BCE would probably use the cash to resume quarterly dividend payments of $0.365 a share, for a current yield of 3.9%. The company could also buy back stock. BCE is a buy.