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    Globe and Mail  


    July 3, 2007  

Teachers faces big task now the deal is done
Major investment needed to compete with rival carriers

The bidding war for BCE Inc. may be over, but the Ontario Teachers Pension Plan should brace for more tough decisions ahead.

With the takeover, Teachers will acquire the country's largest telephone company and the stellar Bell Canada brand. That's the good part.

Then there's the not-so-appealing side of the deal. Bell has struggled in recent years to adapt to a very competitive telecommunications market.

Considering that BCE has some catch-up to do in certain areas, not to mention the significant capital expenditures required by carriers to stay competitive, Teachers could very well end up spending more than the $34.8-billion it paid for BCE. (The value of the deal is $51.7-billion, including debt.) "They're investing $50-billion in something which still needs work," said Iain Grant, an analyst at telecom consultancy SeaBoard Group. "That's not the end of the investment. That's merely the beginning."

It should be easier, however, for Teachers to make those changes. As a private company, Bell won't have to worry about whether long-term projects affect short-term forecasts or the stock price.

The past two decades have ushered in radical change for Bell. It has cut thousands of jobs, and expanded in wireless to offset the introduction of competition in the long-distance and local phone markets in the 1990s. That strategy worked for a time.

However, things have become a lot harder since some very strong rivals, the cable operators, entered the home phone market in 2005. They have taken nearly one million subscribers away from Bell.

Moreover, the war could become fiercer. The telcos will need to spend a lot more on their land-line networks in the future in order to offer a competitive television service and match cable firms' Internet speeds, observers say.

So far, Bell's budget is much smaller than that of Verizon Communications Inc. in the United States, which is installing fibre-optic cables right to customers' homes. Bell, in contrast, is bringing fibre lines only as far as neighbourhood hubs - which offers far less bandwidith - and is a few years behind schedule.

If Teachers decides Bell needs a really robust residential network to compete, it will have to spend billions more than what Bell previously budgeted, predicts Brahm Eiley, president of Convergence Consulting.

"A number of years ago, Bell was at a crossroads," Mr. Eiley said. "It needed to either cut spending and be the low-priced player, or spend a lot more to compete with the cable companies, or it could muddle through.

"Whoever ends up with this company at the end of the day is going to have to deal with this."

Bell's wireless business also needs help. Although it's supposed to be the big growth area, it has disappointed. Two years ago, it had serious glitches with a new billing system that angered clients who ended up moving to competitors. More recently, it has been disrupted by changes to the way cellphone dealers are paid.

In the first quarter, Bell added a meagre 13,000 cellphone subscribers, way behind rivals Telus Corp. and Rogers Communications Inc.

"Wireless is a mess," Mr. Grant said. "The fact Bell is coming third in most of the wireless showoffs, that's going to have to be addressed."

Still, there is the possibility that someone else will have to make these hard decisions. If Ottawa ever scrapped foreign ownership limits on the sector, Teachers would be able to carve up Bell and sell off its assets to U.S. carriers.

"The wild card is changes in foreign ownership legislation," Mr. Eiley said. If they are able to sell "they don't have to deal with this."


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