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Bell Aliant investors being paid to wait for BCE bid

A Bell Aliant-BCE deal would increase competitive pressure on Aliant rivals Rogers and Cogeco. A pedestrian talks on the phone while passing in front of a Bell Canada store in this photograph taken with a tilt-shift lens in Toronto, Ontario, Canada, on Thursday, July 28, 2011. Bell is Canada's largest communications company, providing telephone services, mobile communications, high-speed Internet and digital television. Photographer: Brent Lewin/Bloomberg

Brent Lewin/Bloomberg

A buyout bid for Bell Aliant Inc. would make plenty of sense for BCE Inc. And the prospect makes Bell Aliant's stock plenty attractive for investors.

There has long been speculation that telecom behemoth BCE would eventually make a bid for Bell Aliant. BCE already owns 44 per cent of Aliant, the dominant telephone company in the Maritimes, and picking up the rest through a takeover would make financial sense, says Maher Yaghi, an analyst at Desjardins Securities Inc.

Mr. Yaghi published some back-of-the-envelope calculations indicating that BCE would benefit from a takeout, even if it paid as much as $31.50, about a 15-per-cent premium to the current market price around $27.

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At such a premium, the acquisition "could provide a positive impact to overall free cash flow for BCE," Mr. Yaghi contended in a recent note to clients.

The possibility of a deal makes Aliant an intriguing, low-risk speculation because the company has a great dividend yield of 7 per cent, one of the best on the Toronto market. In effect, investors are being paid handsomely to wait to see what happens.

While they wait, shareholders own stock in a conservative, well-run company. Given that interest rates on bonds are currently low, the lofty dividend payout would offer some support to the stock should the market tank.

As a company, Aliant has a mixed bag of pluses and minuses. On the downside, traditional residential land line phone business is in long-term decline because of the shift of consumers to wireless. But on the upside, Aliant has a well-regarded fibre optic network that will allow it to take on cable companies in delivering television and Internet.

To be sure, a takeover isn't a done deal, and Mr. Yaghi cautions that in the short term, BCE has some big distractions, such as the integration of its pending acquisition of broadcaster Astral Media Inc., that would keep it from making a bid. He says 2014 and beyond is the more likely timeline for any deal.

A takeover, should one occur, would likely be done in exchange for BCE shares, rather than cash. "Given the high liquidity of BCE's stock in both Canada and the U.S., we believe that an equity offer would be as attractive to Bell Aliant's shareholders as a cash offer," he says.

BCE would want to pay with stock because it wouldn't have to leverage up its balance sheet through debt, leaving it in a better position to continue increasing its own dividend or make other investments.

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Mr. Yaghi doesn't factor a possible takeover into his 12-month price target on the stock of $26.50, which is just below the current market price. The target is based on cash flow multiples, and has led him to peg a "hold" recommendation on the stock. He thinks BCE has more upside, and ranks it a "buy." Any acquisition has to have business logic behind it, and there is plenty to support a BCE takeover of Aliant.

With Astral, BCE has probably reached the limits of what it can acquire in the media space, given the hissy fit over corporate concentration by competitors objecting to the deal at recent Canadian Radio-television and Telecommunications Commission hearings.

That means BCE, if it wants to expand, will have to do so in other business lines. What would be better than telecommunications, where it has great expertise?

Mr. Yaghi says an Aliant deal would have the benefit of allowing BCE to bulk up in its battle with arch rivals, the cable companies. A deal would also position the merged company to increase competitive pressure on current Aliant rivals Rogers and Cogeco.

Then there is the competitive threat that Aliant poses to BCE itself. For Aliant to grow, its best option is to expand its fibre optic network, which could poach customers from BCE's satellite TV operation. The industry has a word for this – cannibalization – that suggests it's not a pretty thought and is to be avoided.

A plus for BCE, according to Mr Yaghi, is that an Aliant deal probably wouldn't face high regulatory hurdles. BCE already controls the company. Moreover, Aliant doesn't own broadcasting assets, so there isn't overlap there.

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