merger

ALCAN INC. $103 (Toronto symbol AL; Conservative Growth Portfolio, Resources sector; Shares outstanding: 360.0 million; Market cap: $32.8 billion; SI Rating: Average) has accepted a $101 U.S.-a-share ($106.40 Canadian) all-cash takeover offer from Anglo-Australian mining company Rio Tinto Ltd. The new offer is roughly 33% higher than U.S.-based Alcoa Inc.'s hostile cashand- stock bid, which is currently worth $80 (Canadian). Alcoa is a leading producer of bulk aluminum and specialized products, so it would face more scrutiny from competition regulators than Rio Tinto. But it could undoubtedly satisfy the regulators by selling some assets. The potential savings from an Alcan takeover could spur Alcoa to raise its offer, which now expires on August 10, 2007. However, Alcan has agreed to pay Rio Tinto a $1.05 billion U.S. (roughly $3 U.S. a share) break-up fee if does not go through with the merger. That may scare off Alcoa and other potential bidders....

TORONTO-DOMINION BANK $72 (Toronto symbol TD; Conservative Growth Portfolio, Finance sector; Shares outstanding: 719.9 million; Market cap: $51.8 billion; SI Rating: Above average) is the third-largest bank in Canada, with assets of $396.7 billion. It operates over 1,000 branches in Canada. Like Royal, TD is expanding in the United States. It recently paid $3.2 billion U.S. for the 41% of subsidiary TD Banknorth that it did not already own. Banknorth operates about 600 branches in the U.S. northeast. It has struggled lately in the face of strong competition from larger banks. TD has a long history of successfully integrating acquisitions. Owning all of Banknorth should make it easier for it to close under-performing branches and cut credit losses....

All five of Canada’s biggest banks have been exceeding investor expectations since at least the mid-1990s. Investors always worry too much about the impact on the banks of each new ripple in interest rates and business statistics. Bank profits and loan losses do go through swings, of course. In the late 1990s, banks suffered along with the economic turmoil in Asia. Early in this decade, they suffered due to problems in telecom and other areas. But when the problems end, you’ll find the banks have managed to contain their losses and have begun a new profit expansion. All five banks are still cheap in relation to earnings, and they provide above-average yields. Every Canadian investor should own one of them, if not several....

DOW JONES & CO. INC. $55.00, New York symbol DJ, moved a step closer to selling itself to News Corp. after its directors advised stockholders to accept News Corp.’s $60-a-share cash offer. However, the deal requires the approval of the Bancroft family, which controls 64% of Dow Jones’ voting power through class B shares that carry 10 votes each. The family will probably make a final decision next week. So far, no other bidder for Dow Jones has emerged. If the family turns down the News Corp. offer, the stock will probably drop back to its pre-bid level of about $35. That would increase the likelihood of a class-action lawsuit, but that would probably be more an annoyance than an economic threat. The family isn’t obliged to sell simply because an offer came in above the market. We feel investors should hold....

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....

AT&T INC. $40 (New York symbol T; Income Portfolio, Utilities sector; Shares outstanding: 6.2 billion; Market cap: $248.0 billion; WSSF Rating: Average) provides telecommunication services to over 65.4 million customers in 22 states. In December 2006, AT&T bought rival phone company BellSouth Corp. for $66.8 billion in stock. That gave it full ownership of AT&T Mobility (formerly Cingular), the largest wireless provider in the United States with more than 62.2 million subscribers. Thanks to the new operations, income doubled in the first quarter of 2007, to $2.8 billion from $1.4 billion a year earlier. Per-share earnings grew just 21.6%, to $0.45 from $0.37, due to the extra shares outstanding. Due to the timing of the merger, its revenue grew 83.5%, to $29.0 billion from $15.8 billion. If the company had completed the merger at the start of 2005, revenue would have risen just 1.7% in 2006....

WINDSTREAM CORP. $15 (New York symbol WIN; Income Portfolio, Utilities sector; Shares outstanding: 477.2 million; Market cap: $7.2 billion; WSSF Rating: Average) provides local telephone and other communication services to over 3 million customers in 16 states. Most of its customers are in rural areas. Windstream took its present form in July 2006 when Alltel Corp. merged its traditional telephone operations with Valor Communications Group Inc. In the three months ended March 31, 2007, earnings fell 11.4%, to $99.9 million from $112.8 million a year earlier. Per-share income fell 25.0%, to $0.21 from $0.28, due to an 18% jump in the number of shares outstanding. Revenue grew 11.5%, to $783.7 million from $703.0 million. If you assume the merger occurred at the start of 2005 and disregard restructuring costs, Windstream’s revenue would have grown 1.9%....

In the late 1990s, phone companies spent heavily upgrading their networks to handle Internet traffic. But they over-estimated the growth of the Internet, and these costs weighed on their earnings for several years. Despite the setbacks, these three well-managed telecoms kept paying above-average dividends. Their network investments are now starting to pay off. Online video and music content has spurred strong demand for high-speed Internet access. Demand for high-speed wireless access is also growing, and helping them compete with cable companies and other new Internet-based phone services. VERIZON COMMUNICATIONS INC. $41 (New York symbol VZ; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 2.9 billion; Market cap: $118.9 billion; WSSF Rating: Average) provides local and long distance telephone service to over 45 million customers in 28 states....

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....

INTERNATIONAL BUSINESS MACHINES CORP. $105.33, New York symbol IBM, has agreed to pay $745 million for Telelogic AB of Sweden. The price is equal to 40% of the $1.8 billion or $1.21 a share that IBM earned in the first quarter of 2007. Telelogic’s software helps its customers in the aerospace, defense, telecommunications and automotive industries streamline and test complex engineering projects. This is IBM’s 43rd software acquisition since 2001. Expanding by acquisition adds risk, but these purchases nicely complement IBM’s computer hardware and services businesses, and expand its client base. Software will probably account for half of IBM’s profit by 2010. IBM is a buy....