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BCE — the never-ending investment story

This investor has some hard questions about the BCE deal and the company today, but still believes it has a place in Canadian portfolios.

Why didn’t anybody see it coming?

There were so many hurdles in the way that one of them was bound to cause a fall. But everybody stood at the finish line confidently expecting the race to be run as called.

We’re talking about the privatization of BCE Inc. (TSX-BCE), a deal that expired just before it broke the tape.

More to the point, we’re considering whether or not this stock still belongs on the must-own list of Canadian investors.

We will look at BCE through the eyes of Mr. T.E. Gardiner, a man who once worked for Bell Canada, and who shares his investment experiences with the readers of Investor's Digest of Canada.

Mr. Gardiner admits that the collapse of the deal took him by surprise, but that in retrospect it should not have. He begins with a look at all the obstacles that ought to have tipped folks off to the problems.

Then he asks some hard questions about who profited from the whole process and whether or not there should be an investigation. Finally, he looks at the future of BCE and the people who invest in the company.

Where was the warning?

When Ontario Teachers Pension Plan and its American partners set out to take BCE private, they needed several layers of approval.

The various security commissions, the anti-combines people and the CRTC each had to give its seal of approval. Then there was the bondholders revolt that led to a suit that eventually failed in the Supreme Court.

Right at the end, Mr. Gardiner observes, the economy went sour. And that was the blow that brought it down.

It died because an alert pair of eyes at the accounting firm, KPMG, discovered that the company could no longer live up to its debt covenants and would be insolvent if the deal went through.

“It’s not clear to me why this wasn’t obvious last summer rather than not until just before the deal was to close,” says this investor. “Shouldn’t there have been some warning in the financial press?”

A cynical question

There were plenty of losers in the wreckage. “Long-term BCE shareholders (me included) lost tens of thousands of dollars,” says Mr. Gardiner. “But at least it was only on paper. Speculators who bought over the past year in the $30 to $35 range lost real money. I suppose the bondholders were happy.”

He does have one “cynical” question.

“The only other people who made money were those who sold short. Being somewhat cynical, I’d like to know whether anyone at KPMG did so. The timing of the insolvency discovery seems highly fortuitous for short sellers. I have no evidence of any wrongdoing, I’d just like someone to look into it.”

Existing shareholders are certainly disappointed the deal didn’t go through, but don’t go dumping the stocks now, Mr. Gardiner advises.

The deal was too rich for today’s markets and Teachers was probably glad of an excuse to cancel the buyout.

But that leads to another hard question.

The missing dividends

“I am annoyed that BCE decided to cancel the dividend for most of last year,” complains Mr. Gardiner. Clearly this was done at Teachers’ request to keep more money on the table.

“Since the deal fell through,” he adds, “that money, in theory, belongs to BCE shareholders.” But unless BCE gets the break fee from Teachers, he doesn’t see much chance of collecting the missing dividend cheques.

Having considered the rather large volume of water that has passed under the bridge, this shareholder turns his gaze on the future. How does BCE look as a investment now?

Pretty good, he reckons. With the re-instated and increased dividend, the stock yields a little over 6 per cent. It has the earnings and cash flow to support it, and an attractive payout ratio of 11.1.

None of its major competitors can match those figures. Rogers Communications (TSX-RCI.B) is the major competitor in Ontario and Quebec, but its yield is much less attractive and it must adapt to new management after the death of its founder, Mr. Ted Rogers.

Telus Corp. (TSX-T) and Manitoba Telecom Services (TSX-MBT) also have lesser yields and the latter’s dividends exceed its earnings, not an encouraging sign.

Mr. Gardiner has one more bone to pick with BCE.

The best to hope for

BCE has introduced a buyback plan. “I don’t buy the argument that it increases shareholder value,” says this investor. “It simply rewards people who want to get out — speculators and executives selling off the shares they got from the stock options.”

Surely there’s a better use for the company’s money than that, he says. They will need cash to upgrade their network — and a new marketing angle now that the hockey-loving beavers have retired to the lodge.

Having gotten this last complaint off his chest, Mr. Gardiner is willing to stay with the stock. It has the resources to carry out the programs ahead and weather the economic storm.

He doesn’t expect any huge growth in the share price or dividends in the next couple of years, he tells his readers in Investor's Digest of Canada. But BCE looks like “a good, solid income stock. That’s what I prefer under most market conditions and the best most people can hope for in today’s unsettled markets.”

If you’ve got it, keep it, he says. If you don’t, you might want to pick some up.

So whatever shenanigans may or may not have gone on with BCE, this observer believes one of Canada’s favourite income stocks is right back where it used to be.