BCE's latest diversification move, an estimated $50-million acquisition of the 756-store Source chain, is getting a cautious thumbs up from analysts.
BCE acquired the bankrupt retail chain on Monday as part of a move to win more wireless clients. RBC Dominion Securities Jonathan Allen said in a report Tuesday: “Bell Mobility has steadily lost market share in the last 5 years and a key reason, in our view, has been Bell's distribution gap versus Telus and Rogers Communications."
BCE can now flog more of its own products through The Source outlets - satellite TV and Internet, along with cellphones - and at the same time, eliminate a sales channel that accounted for 5 per cent of Rogers wireless sales. When the dust settles, BCE will have a total of 1,479 outlets, compared to 1,100 at Rogers and 800 at Telus.
What are the risks on this deal, which Mr. Allen estimates played out for between $50-million and $100-million (U.S.)? (Given the grim outlook for retail, the lower end of that range is probably closer to the mark.)
Well, existing Bell World retail franchise owners may be miffed at competing with The Source. Relationships with this group have been testy in the past. And Mr. Allen said the other product lines at The Source may prove a distraction, as “while the Bell points of presence will increase substantially, we worry that selling iPods, TVs and GPS systems is getting a little away from the traditional business.
In other words, this isn't the high-stakes bet that came with past BCE forays into real estate, financial services and international telecom, acquisitions that ended poorly.
In an interesting footnote to this transaction, it's worth noting how much cheaper it is to buy a distressed retailer out of creditor protection, rather than opening new stores.
In the Bell World retail chain that has been BCE's primary retail distribution channel, it costs $250,000 to get an outlet up and running. There's a U.S. cellphone retailer trading with a valuation that puts a $390,000 price tag on each store. By Mr. Allen's estimate, BCE is getting The Source for between $85,000 and $172,000 per store.
