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Canwest News Service
B CE Inc. is always described as a stock for widows and orphans. So it is — if those widows and orphans happen to be masochists.
Over the past decade, shareholders in Canada's largest telecommunications firm have become close friends with disappointment. Perhaps the worst blow was the collapse a year ago of a private-equity deal that would have paid BCE shareholders a lush premium for their stock.
The $52-billion deal, led by the Ontario Teachers' Pension Plan, was to be the largest leveraged buyout in Canadian history. It blew apart when accountants would not confirm BCE would remain solvent after the takeover loaded it with debt.
The failure left BCE shareholders with a stock that is treading water around $27.75 a share, far below the $42.75 price the consortium had agreed to pay.
So why would anyone go near this chronic underperfomer? One excellent reason is BCE's lavish 5.9% dividend yield. Then, too, there's the slight — but growing — possibility that BCE could turn out to be a better competitor than its lack-lustre history would suggest.
For once, it appears to be focused on its core business of delivering phone service. For BCE, that's progress. The parent of Bell Canada has been dogged for decades by a penchant for money-losing diversifications into everything from real estate to Internet convergence plays.
New management, led by CEO George Cope, is winning good reviews for doing what needs to be done to compete with Rogers Communications Inc. and Telus Corp., the other two big players in Canadian telecom.
Cope, who took the top job 16 months ago, has just completed a multi-billion-dollar upgrade of BCE's wireless network, so it's now on a par with Rogers. This spring, he bought The Source, a 750-store electronic retailing chain, to give Bell products an expanded presence on Main Street.
He's also engaged in corporate liposuction. "The cost cutting in the past 12 months has been unprecedented in the company's history," says Jeff Fan, an analyst with Scotia Capital in Toronto.
The question is whether Cope will be content to be a strong administrator of a cash cow in decline or whether he will aim higher. His easiest road would be to take no major chances, keep expenses drum-tight and run BCE to deliver the fat dividends that current shareholders want.
A more ambitious plan would be to invest in more upgrades to the company's transmission networks. That would position BCE better to compete with cable companies and new wireless competitors down the road.
Problem is, upgrading the company's networks would require an investment of billions of dollars, which would cut into potential dividend growth over the next few years. The benefits would largely accrue not to Cope or to current shareholders, but to shareholders in the distant future — and to the next CEO, for that matter.
Even if Cope does decide to invest in the future, BCE will be hard-pressed to maintain its market share. "Simply standing still in this environment is going to take hard work," says Lawrence Surtees, vice-president of communications research at IDC Canada Ltd. of Toronto, a technology market research firm. "BCE's problem is that it's the biggest player in the market so everyone wants a piece of its business."
The company's mix of businesses doesn't help. BCE derives more than two-thirds of its revenue from phone and data calls delivered the old-fashioned way — over land-lines that run to customers' homes and offices. Wireless is a much smaller percentage of its overall business than it is at Rogers or Telus.
Unfortunately for BCE, it's wireless that is providing the growth in telecom. The landline market that forms the bulk of BCE's business is eroding. Many people are giving up their traditional phones and using only cellphones. Meanwhile, cable companies such as Rogers are offering their own versions of home phone, delivered over cable rather than phone lines.
So what's a phone giant to do? "Wireless is the future of the franchise," says Surtees. "Wireless is the growth engine." He argues that BCE should focus on developing its wireless business and approach corporate users, in particular, with high-value bundles of wireless services.
Not so fast, says Fan of Scotia Capital. While he doesn't dispute the need for BCE to invest in wireless, he believes that anything it does in that area can be matched by Telus and Rogers.
Fan believes it's far more important for BCE to stop the erosion of its landline business while there's still something to be saved. He thinks the company should upgrade its landline network. Ideally, it would install a fibre-optic network that would go directly to customers' homes and deliver lightning-fast transmission speeds for everything from data to television.
Building such a network would cost billions, but it's a necessary expense that BCE must pay to protect a vital business, says Fan. "The company should bite the bullet," he says. "The longer it delays, the fewer customers it has to save."
The risks are sizable and investors should be realistic about BCE's potential. It's never again going to be a growth stock. But it delivers a big dividend and, if Cope makes the right choices over the next few years, it may be just a bit better than the market believes it is. Widows and orphans, take note.
