pension plan

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....

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.

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....

BCE $35.48 (Toronto symbol BCE; Shares outstanding: 806.2 million; Market cap: $28.6 billion; SI Rating: Above-Average) continues to trade below the $42.75-a-share offer from a group headed by the Ontario Teachers’ Pension Plan. However, new liquidity from governments should make it easier for the consortium’s lenders to honour their commitments to complete the takeover on December 11, 2008. Even if the deal does fall through, the group would have to pay BCE a break-up fee of $1.2 billion. That’s equal to 4% of its current market cap of $28.6 billion...

The Dow’s 11.1% gain on Monday was the fifth-biggest percentage gain on record. The 9.8% gain on Toronto the next day was the biggest ever. Markets remain volatile and have moved down since, but my view is that governments around the world are now taking the kind of steps that will contain the crisis and eventually restore liquidity in the banking system. You can only spot market reversals in hindsight, so it’s too early to declare if we are near a bottom. But even if we are, markets are apt to remain volatile and some stocks are bound to go to lower lows....

This downturn is going a lot further down that I ever expected. I still see it as a financial panic, rather than an indicator of the depth of the recession that now seems to have started. In other words, the market drop reflects a drying up in lending activity and fear of a depression, rather than a drying up in business activity. In the depths of a market downturn, some observers always predict that we are on the verge of another 1930s depression. In the 1930s, however, the U.S. and other governments did all the wrong things. They raised taxes, raised tariffs and did nothing to halt bank failures. The U.S. and other governments are doing all the right things to revive lending and credit, in my view. They are injecting funds into the financial system, arranging takeovers of failing financial companies, and moving to protect depositors. Eventually these efforts will pay off. Lending will then swiftly revive, and the market will go through a sharp recovery. There is no way to tell when that will happen, but you can bet that it will spur widespread disbelief, and warnings that it is just a temporary reprieve and that the downturn will soon resume....

Today’s rebound in the market is reassuring, but I expect stocks to remain highly volatile for a month or more. After that, we could see a six-month rebound in prices. The U.S. bailout of major financial institutions raises inflation risk over the next few years, but it heads off panic. Nobody can predict market bottoms, but I suspect we are much closer to the bottom than the top. NORTEL NETWORKS CORP. $3.25, Toronto symbol NT, fell 50% this week after the company cut its revenue and earnings outlook for 2008. Due to slowing demand for telecommunications equipment, unfavourable foreign exchange rates and delays delivering certain products, Nortel now expects revenue for 2008 will be 2% to 4% lower than in 2007. It had earlier predicted that revenue would rise this year. Due to the lower revenues, Nortel will probably lose $0.39 U.S. a share in 2008. That estimate excludes the costs of a new restructuring plan. Nortel earned $0.37 U.S. a share before unusual items in 2007....

TRANSCONTINENTAL INC. $13.85, Toronto symbol TCL.A, earned $30.3 million in its third fiscal quarter ended July 31, 2008, up 6.7% from $28.4 million a year earlier. Per-share earnings rose 11.8%, to $0.38 from $0.34 on fewer shares outstanding. These figures exclude unusual items. Revenue rose 6.1%, to $584.9 million from $551.1 million. If you exclude the negative impact of the higher Canadian dollar on Transcontinental’s U.S. and Mexican operations, revenue in the quarter would have grown 8%. Transcontinental’s recent investments in new printing presses should continue to keep its costs low. The company’s expertise and flexibility is also helping it win new printing contracts. For example, it recently started to print flyers for Shoppers Drug Mart in a deal worth $25 million a year. Transcontinental is a buy....

BCE INC. $40 (Toronto symbol BCE, Conservative Growth Portfolio, Utilities sector; Shares outstanding: 805.8 million; Market cap: $32.2 billion; SI Rating: Above average) plans to cut its workforce by 6% and simplify its management structure. This will cost BCE $250 million, but should save it $300 million a year. In the three months ended June 30, 2008, BCE earned $425 million or $0.53 a share before one-time items. The consortium headed by the Ontario Teachers’ Pension Plan now aims to complete its $42.75-a-share takeover of BCE by December 11, 2008. Even if the deal falls through, the savings from this latest restructuring will help BCE compete with new entrants in the wireless market. BCE is still a buy.