BCE Inc. is pressing ahead with a $1-billion initial public offering of its Telesat Canada unit this fall after talks broke down with potential buyers of the world's fifth-largest commercial satellite operator.
BCE put Telesat up for sale in February as part of a strategic review of its telecom business. Chief executive officer Michael Sabia said at the time that his preferred option was to sell a minority stake in the Ottawa-based company for $1-billion, but also indicated he was open to an outright sale.
The phone company has since looked at deals that would see Telesat sold to groups that include industry players such as SES Global SA and Eutelsat SA, and private equity funds such as the Ontario Teachers Pension Plan.
Those talks broke down over issues that included the value of the business and who would run it. Sources in the financial community also said it was difficult to structure a purchase by Canadian and U.S. players that ensured the buyers do not trip over foreign ownership restrictions on domestic telecom companies. But several sources said BCE could return to the negotiating table after it files the paperwork needed to support a stock offering.
“BCE always had a number of paths it could go down with Telesat, but it now seems clear that they will go the IPO route,” said one investment banker who works with the telecom company. A financier at another firm said the paperwork needed to support an offering is slated for mid-September. RBC Dominion Securities Inc. is expected to lead the underwriting, which would be one of the largest IPOs of the year.
“Telesat's management team was never in favour of a deal that would see them lose control of the company,” said another investment banker familiar with the process.
Telesat owns five satellites and has a growth story that would support an IPO marketing effort. Last year, revenue rose 31 per cent to $478-million, with the company generating $203-million in cash from carrying North and South American television and telephone traffic.
In a recent report on the satellite industry by Armand Musey of Near Earth LLC, a boutique investment bank specializing in the space industry, Telesat was described as controlling “highly prized orbital locations covering North America, which make it an extremely attractive asset.”
“The prospect of an IPO imposes a discipline over any other potential buyer,” said one investment banker with ties to BCE.
He said: “I wouldn't be at all surprised to see BCE file for the IPO, then go back to anyone who bid to see if they can restart the talks.”
If Telesat does go public, with BCE as its majority owner, the stock could eventually attract a takeover premium if the federal government relaxes foreign ownership restrictions in the telecom sector.
The satellite business is consolidating around its largest players, with Washington-based Intelsat Ltd. recently offering to buy American rival PanAmSat Holdings Corp. for $3.2-billion (U.S.), along with the assumption of $3.2-billion in debt. Sources say that in the past year, Luxembourg's SES Global and France's Eutelsat looked at finding a Canadian partner and taking a stake in Telesat as they moved to fill regional holes in their coverage.
A federal review panel earlier this year recommended that Ottawa ease restrictions on foreign investment in the country's phone companies, saying it would help lead to greater competition in the sector. But the panel expressed concerns that more foreign investment in Canadian cable and satellite companies could affect broadcasting policies, along with worries about national security and job losses.
Telesat was founded in 1969 and gained international recognition when it launched Anik A1 in 1972. BCE is being advised on the overall Telesat spinout by RBC Dominion, Goldman Sachs & Co. and Citigroup Inc.
Telesat has been seen as a takeover candidate since 2001, when BCE indicated that it planned to sell its non-core assets. This move picked up steam over the past 12 months, as Mr. Sabia moved to spin out BCE's stake in rural phone lines as an income trust, and sell down the phone company's stakes in media and information technology outsourcing companies.
