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Thursday, June 21, 2007

Telus to Merge with Bell?

Telus says tie-up would be 'all-Canadian solution'
Jun 21, 2007 08:54 AM
Canadian Press
VANCOUVER – Telus Corp. (TSX: T) says a possible merger with Bell Canada parent BCE Inc. (TSX: BCE) would be "an all-Canadian solution" as pension funds and foreign investors circle its rival, which is Canada's largest telephone company."

Well, at least we would know who was screwing us when we pick up the phone... ;-)

Seriously, though, would it be better to have one super-sized Canadian provider, or an American-owned provider (ex-Bell) plus a large Canadian provder (Telus)? Neither seems to be a really nice choice.

Now, the rest of the FULL STORY because the Star locks down its articles after 7 days...
Vancouver-based Telus, the country's second-biggest phone company, confirmed Thursday it has entered into a mutual non-disclosure and standstill agreement and is pursuing non-exclusive discussions with BCE about a possible merger.

"Telus believes the combination of the two businesses would represent a compelling strategic and financial opportunity for all BCE and Telus stakeholders," CEO Darren Entwistle said in a release.

"It would be an all-Canadian solution for both immediate and long-term value creation, whilst ensuring a vibrant player continues in this increasingly competitive industry."

Telus joins a long list of companies eyeing BCE, which confirmed earlier this year it was reviewing options to increase shareholder value, including a sale or merger.

Other suitors include groups led by the Canada Pension Plan Investment Board, the Ontario Teachers Pension Plan Board and U.S. private equity firm Cerberus Capital Management. BCE has reportedly asked the three consortiums to submit their offers for the company before the Canada Day weekend.

Montreal-based BCE announced Wednesday night it's in discussions with Telus to "explore the possibility of a business combination." The two companies have a combined market capitalization of more than $50 billion.

A union of BCE and Telus would likely require the new entity to divest some of its wireline assets where they overlap but there would be few regulatory ramifications for wireline operations, UBS Securities analyst Jeffrey Fan wrote in a note to clients.

"The key questions are: How is Telus valued in a potential merger when BCE is currently valued as an LBO (leveraged buyout) candidate?," wrote Fan, and "is Telus really serious?"

Synergies in wireline communications of a merged company would likely come in around $700 million, Fan noted.

The brokerage raised its target price on BCE stock to $40, continuing its rating of "neutral."

Entwistle said Telus "has a unique opportunity to create a truly national Canadian enterprise with the requisite balance-sheet strength as well as scale and scope to continue Telus's development as a global leader in the deployment of state-of-the-art technology and innovative new services for customers."

Telus said a merger with BCE would "preserve and enhance a public Canadian investment vehicle for ordinary Canadians and institutional investors."

It would also "preserve an income tax base for Canadian governments that would otherwise be eliminated by highly levered private equity structures with non-taxable equity holders and U.S. sourced debt."

Telus is a western-based national telecommunications company, with $8.8 billion of annual revenue and 10.8 million customer connections including 5.1 million wireless subscribers, 4.5 million wireline network access lines and 1.1 million Internet subscribers.

Federal Industry Minister Maxime Bernier acknowledged last week the government is aware of the fierce debate around whether Canada's mobile market lacks competition as industry players exchanged barbs over whether the country's main mobile companies – BCE, Telus and Rogers Communications Inc. (TSX: RCI.B) – have already become too dominant.

Recent media reports, quoting sources close to the company, said Telus was unlikely to join the bidding unless there has a clear signal from Ottawa that it would not block a marriage of the country's two largest telecommunications companies.

While private-equity bids have dominated takeover speculation so far, BCE chief executive Michael Sabia said at the company's recent annual meeting that a private equity takeover is not the only option available to the company. That has led Bay Street to speculate on other possibilities such as a massive share buyback or a merger with Telus.

Teaming up with Telus is a scenario shareholders suggested at annual meetings of both companies recently, only to be brushed off by executives on both sides.

Earlier this year, National Bank Financial analyst Greg MacDonald wrote about the possible combination, citing a lot of savings since both are phone companies. However, the move would be costly considering the jump in BCE's stock recently.

Before the announcement Wednesday, BCE shares closed down 18 cents on the Toronto Stock Exchange, off from a recent high of $40.31.

Telus shares were up a cent at $$65.76.


Blogger Matthew The Astrologer said...

An "all Canadian solution" doesn't refer to the employees.

5:24 p.m., June 21, 2007

Blogger Doug Mehus said...

In terms of promoting competition and consumer choice, it's an easy answer. I would prefer an independent BCE Inc. owned by Canadian pension plans and U.S. based private equity firms.

From a tax standpoint, Telus owning BCE Inc. would be in the federal government's best interest as by having BCE majority owned by Canadian pension plans and Canadian or U.S. private equity in a highly leveraged situation, they'll likely be able to escape even more corporate income tax payments than they would've had they converted to an income trust. I wonder if "Canada's New Government" is regretting imposing a tax on trusts yet.

All things considered, foreign ownership doesn't matter. Allow companies in the telecom and banking sectors to be owned by foreign corporations in the same sectors while preventing the Canadian companies from merging. Sure, you lose the Canadian identities of the companies, but at least then you've got four or five healthy, large U.S.-owned Canadian competitors (or more) in each sector instead of two that can compete.


2:27 a.m., June 22, 2007

Blogger Damien said...

Hmm.. interesting take on things with the tax angle. Big telecom is also big biz, and, as such, a big part of the tax base. And losing Canadian telecom jobs isn't so cool, either. It amazes me how many ways there are of looking at these developments.

My thoughts are more about possible lack of competion after such a merger, and the closing off of possible future innovation in services and lower prices that we might lose out on.

4:05 p.m., June 23, 2007

Anonymous Anonymous said...

Much of the original work on Los Angeles private equity fund performance comes from seminal work of Steve Kaplan and Antoinette Schoar who reported that the performance of 746 private equity funds in their sample was close to that of the S&P 500, net of fees. Subsequent work by Phalippou and Gottschalg (PG)found the performance of private equity funds was below that of public stock markets.

7:28 a.m., April 15, 2008


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