Bell Canada sign outside company’s offices in downtown Montreal. (CP)
Related Articles
Interactives
Internet Links
The world's most powerful private equity firm, New York's Kohlberg Kravis Roberts, is stalking BCE Inc. in the hope of launching a friendly takeover bid for the owner of Bell Canada.
If successful, the purchase of BCE would rank as the biggest acquisition in Canadian corporate history and one of the world's biggest leveraged buyouts — a deal in which debt is used heavily to buy all the shares of a publicly traded company and make it private.
At Wednesday's price on the Toronto Stock Exchange, BCE was worth $30.13 a share, for a total value of $24.3-billion. A takeover premium, usually in the 15- to 20-per-cent range, could raise the price to just under $30-billion.
In early trading on the TSX Thursday, BCE stock was 7 per cent higher, gaining $2.07 to trade at $32.20, after jumping as high as $33.60.
Sources say KKR has had at least two meetings with top BCE officials, led by chief executive officer Michael Sabia. The first was late last year. The second, in which a buyout idea was discussed, was held in Montreal in the past two weeks.
KKR would not buy BCE on its own because of federal laws that prevent foreigners from owning more than 46 per cent of the voting shares of a telecom company. According to sources close to the discussions, the private equity firm has tried to recruit Canadian partners and has been in talks with leading pension funds, including the Ontario Teachers' Pension Plan. Teachers has assets of about $100-billion and owns 5.3 per cent of BCE, making it the company's biggest shareholder.
BCE, which has a policy of not commenting on market rumours, would neither confirm nor deny that it has been approached by potential bidders.
KKR partner Alex Navab, who is the point man on the firm's Canadian investments, also refused to comment on any discussions related to BCE.
Teachers officials would not comment. But an executive close to the pension plan and familiar with the talks said the fund would welcome a BCE takeover bid and would be willing to boost its ownership position substantially if given the opportunity. Several other Canadian pension plans and private equity funds also might be invited to help “Canadianize” the potential takeover and win political points in Ottawa, the executive said.
“Certainly, no one thinks anyone could buy BCE without Teachers getting involved,” the executive said.
BCE's other big institutional shareholders are Scotia Cassels (4.9 per cent); TD Asset Management (4.9 per cent); Mackenzie Financial (4.6 per cent) and Barclays (3 per cent). The rest of the company is widely held, and has long been a mainstay of conservative portfolios.
The sources said there was no certainty that KKR and its partners will mount a purchase offer for all outstanding BCE shares. Mr. Sabia has resisted any idea of a takeover in the belief that, despite a long period of weak stock-market performance, he and his management team can still boost its value. BCE shares finally came alive last year, but have lost 4 per cent since the start of 2007.
“Private equity firms are told categorically no to offers,” said an official close to Mr. Sabia.
Nonetheless, BCE appears to have taken precautions. It has hired Goldman Sachs, the top-ranked Wall Street investment firm, to advise it on strategic options. Other Wall Street firms and banks are said to be willing to lend KKR and any Canadian partners billions of dollars to finance a takeover offer.
KKR became famous in 1988, when it launched what was later called the mother of all leveraged buyouts: the $25-billion (U.S.) takeover of food giant RJR Nabisco. The takeover battle was chronicled in the bestseller Barbarians at the Gate.
In recent years, it has shown an interest in Canada and has done lucrative deals with Teachers, including the 2002 sale of BCE's Yellow Pages business for $3-billion (Canadian). At the time, it was Canada's largest private equity transaction. Two years earlier, KKR and Teachers paid $2.6-billion for Shoppers Drug Mart, which has since been taken public.
KKR is also familiar with phone company deals. In December, 2005, it was part of a private equity consortium that paid $12-billion (U.S.) for Denmark's largest phone business, TDC.
Private equity firms are attracted to BCE's strong cash flows, which would be used to pay down the debt taken on to finance the buyout. Typically, such buyers put up only 25 per cent of the purchase price in equity. The rest of the money is borrowed.
BCE churns out earnings before interest, taxes, depreciation and amortization, or EBITDA, of $7.5-billion (Canadian) a year. Telecom takeovers have been done at prices equal to five times EBITDA in recent years. BCE is also capable of generating more cash, as executives forecast EBITDA will grow at 4 to 6 per cent a year. Mr. Sabia has also said the company can cut at least $450-million in costs this year.
Analysts have long believed that as a holding company, BCE stock trades at a discount to the price of its underlying assets. While Mr. Sabia is given credit for narrowing this discount by focusing the company on its telephone roots, Desjardins Securities analyst Joseph MacKay estimates BCE's net asset value is $34.76 a share, well above the latest share price.
The biggest challenge to the former phone monopoly, one shared with incumbent telecom players around the world, is keeping its core residential and business clients. Bell lost 152,000 residential lines in the last quarter, mostly to cable company competitors. Bell runs a total of 28 million customer lines.
BCE holds a minority stake in CTVglobemedia Inc., parent company of The Globe and Mail.
The $10-billion club
There have been four domestic takeovers worth more than $10-billion:
$20.1-billion: CVRD's acquisition of Inco
$20.1-billion: Xstrata's acquisition of Falconbridge
$18.8-billion: British American Tobacco's acquisition of Imasco
$12-billion: Barrick Gold's acquisition of Placer Dome
Source: Bloomberg
14
