bce

TRANSALTA CORP. $29.89 (Toronto symbol TA; SI Rating: Average) jumped as high as $32.36 in July on speculation that the company may follow BCE and Alcan as a takeover target. Luminus Management, a New York-based private equity firm, now owns 6.7% of TransAlta. The recent stock market setback may make it harder for a potential buyer to raise debt and/or equity financing for a takeover. But while a sale is far from certain, takeover interest helps draw attention to TransAlta’s improving outlook and balance sheet (debt is down to 110% of shareholders’ equity from 180% at the end of 2001). Meanwhile, the stock yields 3.4%. TransAlta is still a buy.

TRANSALTA CORP. $29 (Toronto symbol TA; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 202.6 million; Market cap: $6.1 billion; SI Rating: Average) has gained 15% since late June due to growing speculation that the company may follow BCE and Alcan as a takeover target. Luminus Management, a New York-based private equity firm, now owns 6.7% of TransAlta. TransAlta has done a good job of cleaning up its balance sheet in the past few years. It cut long-term debt from 1.8 times equity in 2001 to a more manageable 1.1 times at the end of 2006. A strong balance sheet makes it easier for a private equity buyer to finance a takeover with new debt. TransAlta’s strong cash flow would also make it easier for new owners to pay down the extra debt. While a sale is far from certain, it helps draw attention to TransAlta’s improving outlook. Meanwhile, the $1.00 dividend yields 3.4%....

SCOTIA CANADIAN GROWTH FUND $72.43 (CWA Rating: Conservative) (Scotia Securities, 40 King Street West, 6th Floor, Toronto, Ontario M5H 1H1. 1-800-268-9 269; Website: www.scotiabank.com. No load — deal directly with the company.) uses fundamental analysis to identify what the managers see as investments that have the potential for above-average growth. The $614.0 million Scotia Canadian Growth Fund’s 10 largest holdings are Manulife Financial, Suncor Energy, Royal Bank, TD Bank, Goldcorp, Nexen, Bank of Montreal, BCE Inc., Bank of Nova Scotia and Alcan. Scotia Canadian Growth currently holds 31% of its portfolio in the Financial services industry. Its next-largest holding is Energy at 22%....

CIBC CANADIAN EQUITY FUND $27.77 (CWA Rating: Conservative) (CIBC Securities, 5140 Yonge Street, Suite 900, Toronto, Ontario M2N 6X7. 1-800-631-7008; Website: www.cibc.com. No load — deal directly with the company.) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify companies that trade at reasonable valuations and yet have growth potential. The $662.8 million fund’s top holdings are Petro- Canada, EnCana, Manulife Financial, Teck Cominco, Bank of Nova Scotia, TD Bank, Canadian National Railway, Brookfield Asset Management, BCE Inc. and Alcan. CIBC Canadian Equity holds 38% of its portfolio in Financial services stocks and 25% in Energy stocks....

Here are five large funds run by each of Canada’s big-five banks. Each holds the kind of conservative, well-balanced portfolios of high quality stocks we recommend. All five have a high weighting in Financial services and Energy stocks. However, they stick with high-quality issues with sound fundamentals, so these concentrations don’t add a lot of risk. Each has its quirks, but overall they are well positioned for low-risk returns. TD CANADIAN EQUITY FUND $32.70 (CWA Rating: Conservative) (TD Asset Management, P.O. Box 7500, Station A, Toronto, Ontario. M5W 1P9. 1-800-463-3863; Web site: www.tdcanadatrust.ca. No load — deal directly with the bank) uses a “bottom-up” approach (using fundamentals such as earnings, cash flow and low debt) to identify undervalued companies with strong growth potential. TD Canadian Equity Fund’s 10 largest holdings are Royal Bank, Suncor Energy, TD Bank, Rogers Communications, Alcan, Canadian Oil Sands Trust, CN Railway, Ivanhoe Mines, Goldcorp and EnCana....

BCE INC. $41.32 (Toronto symbol BCE; SI Rating: Above-Average) has accepted a $42.75- a-share all-cash takeover offer from a group led by the Ontario Teachers’Pension Plan. The group will also redeem all of BCE’s outstanding preferred shares and debentures. Two-thirds of BCE investors must approve the transaction at a special meeting later this year. Counter offers are still possible. For example, TELUS CORP. $64.64 (Toronto symbol T.A; SI Rating: Above average) could renew its merger proposal. Telus could afford to pay more for BCE than other potential bidders, since a merger between the two would produce significant savings....

TELUS CORP. (Toronto symbols T $63 and T.A $62; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 334.4 million; Market cap: $21.1 billion; SI Rating: Above average) has gained 15% since BCE confirmed it is talking with potential buyers. Telus could also decide to bid for BCE. However, a BCE-Telus merger would face significant political opposition. Meanwhile, Telus continues to enjoy the benefits of its heavy wireless investments. Thanks to a 17% jump in wireless profits, overall earnings in the three months ended March 31, 2007 rose 50%, to $0.90 a share from $0.60 a year earlier. The most recent earnings figure excludes a non-recurring charge of $0.32 a share. Revenue grew 4.8%, to $2.2 billion from $2.1 billion. The company aims to pay out between 45% and 55% of its sustainable earnings as dividends; the current annual rate of $1.50 yields 2.4%. The payout ratio in the past 12 months was 46%, so Telus will probably increase its dividend before the end of 2007....

MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service. Manitoba Tel’s revenue fell from $909.2 million in 2002 to $824.0 million in 2003. In June 2004, the company paid $1.6 billion for Allstream Inc., a national provider of telecom services to businesses. The purchase doubled the company’s size, and cut its reliance on Manitoba. This business now accounts for 55% of its total revenue. The Allstream acquisition pushed revenue up to $2.0 billion in 2005. Growing competition cut revenue in 2006 to $1.9 billion....

The likely takeover of BCE Inc. has pushed up prices of our two other telecom buys, Manitoba Telecom (see below) and Telus (see box on page 62). Any telecom takeover would face hurdles such as limits on foreign ownership and anti-competition concerns. But regardless of whether any takeovers occur, we feel all three of these stocks offer attractive long-term opportunities. Manitoba Tel is riskier than BCE and Telus, due to its heavy exposure to a single province and falling profits at Allstream, its Canada-wide business communications subsidiary. But the stock yields over 5%, and its profits are also improving thanks to a major restructuring plan. MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service....

PEMBINA PIPELINE INCOME FUND $16.72 (Toronto symbol PIF.UN; SI Rating: Extra risk) has interests in 14 feeder pipeline systems with a total length of 8,350 kilometres. This includes the Pembina System, in operation since 1954. The company also holds a 50% interest in the Fort Saskatchewan Ethylene Storage Limited Partnership. Pembina’s total network is the largest feeder operation in Canada. These pipelines bring oil and gas from fields in northeastern B.C. and western and northern Alberta to refineries, or feed into major pipelines such as the Enbridge Pipeline System....