BCE Inc.

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.

Profit from confusion

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.

BELL ALIANT REGIONAL COMMUNICATIONS INCOME FUND $25 (Toronto symbol BA.UN; Conservative Growth Portfolio, Utilities sector; Units outstanding: 127.0 million; Market cap: $3.2 billion; SI Rating: Above average) is the main provider of telephone service in Atlantic Canada and rural areas of Ontario and Quebec. Bell Aliant transferred its wireless operations to BCE Inc. as part of the deal that created the trust in July, 2006. BCE owns about 45% of Bell Aliant. Under a new deal, Bell Aliant will now help BCE upgrade its wireless networks in Atlantic Canada and rural areas of Ontario and Quebec. These upgrades will improve the speed and reliability of connections between BCE’s 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....

We recommend few income trusts. That’s because most trusts involve substantial risk, such as focusing on a single commodity or geographic area. Here are four trusts we do see as buys. Despite Ottawa’s plan to start taxing trust distributions in 2011, they should continue to pay above-average yields for years to come. These four trusts should also appeal to BCE investors seeking new sources of income, assuming that the BCE privatization goes through as planned (see box this page). However, you should continue to limit income trusts to no more than, say, 15% of your total portfolio....

One of the brightest signs in today’s market is that many great stocks now trade below 10 times earnings. That’s especially true of high-quality technology issues, since they spend so heavily on research, which gets written off against earnings like a routine expense. Low p/e ratios are also particularly appealing at times when interest rates are low, as they are now. Of course, earnings could drop next year and push up those p/e ratios. Stock prices could move lower, for a variety of reasons. But that’s always a risk. To profit best, you need to invest mainly in well-established companies that are likely to recover from the economic downturn and go on to produce still higher earnings in the future. BCE INC. $25.25, Toronto symbol BCE, fell 34% on Wednesday on fears that the $42.75-a-share takeover offer from a consortium headed by the Ontario Teachers’ Pension Plan may be dead....

TECK COMINCO LTD. $6.35, Toronto symbol TCK.B, fell 50% this week largely due to concerns over its ability to carry a $5.8 billion U.S. short-term loan it used to finance its recent $15.0 billion U.S. takeover of Fording Canadian Coal Trust. That loan itself is now equal to roughly 2.3 times Teck’s market cap. Falling prices for zinc, copper and gold could hurt Teck’s ability to quickly repay the new debt. The company may have to cut or eliminate its $1.00 dividend, which now yields a high 15.7%. It may also have to issue new shares at depressed prices. Teck feels it can pay down a big part of this loan in 2009. It will receive a $1 billion (Canadian) tax refund on the Fording transaction. It also plans to raise cash by selling some of its operations. This could include its gold mining businesses. As well, Teck will delay capital spending on several new projects....