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    BCE's new owners could cut up, sell assets  

By Wojtek Dabrowski

    July 5, 2007  

TORONTO (Reuters) - The sale of BCE Inc. (BCE.TO: Quote, Profile, Research) to a private-equity group could herald the end of a 127-year-old telecom conglomerate as pieces of the company are cut off and sold.

Aside from generating returns from the C$34.8-billion ($32.8 billion) purchase -- Canada's largest buyout to date -- the investor consortium led by the Ontario Teachers' Pension Plan will need to service and retire the mountain of debt used to finance the buyout.

A source familiar with the deal has said only about C$8 billion of the price tag is equity, with the remainder raised in the debt market.

Private-equity investors like U.S.-based Provident Equity Partners and Madison Dearborn Partners, which are part of the Teachers' group, often seek double-digit returns as high as 20 or 30 percent in buyouts.

That may lead the new owners to begin selling assets and cutting costs aggressively to maximize cash flow.

However, cost-cutting may be difficult as analysts believe BCE will also have to spend if it is to remain competitive.

"Our expectation is the strategy has to bring fiber closer to households and businesses," said Iain Grant, managing director at the SeaBoard Group. This means hooking up more and more customers to high-speed Internet services.

"That's going to cost a lot of money and a lot of focus and a lot of attention to detail."

Grant and others think ExpressVu, BCE's satellite TV business, is likely to be divested as the company is recalibrated.

"You've got probably an 18-month transition here before you say goodbye to ExpressVu," he said, adding that the thinking is that ExpressVu will be sold as BCE ramps up its Internet-based TV offerings.

Troy Crandall, an analyst at MacDougall, MacDougall & MacTier, estimates ExpressVu is worth about C$1,400 per subscriber. With roughly 1.8 million subscribers, that would give it a value of roughly C$2.52 billion.

As well, BCE's 42.8 percent stake in regional phone company Bell Aliant (BA_u.TO: Quote, Profile, Research) could be sold, Crandall said.

While Teachers' could chose to try and bulk up Aliant, which operates primarily in Eastern Canada it could also elect to keep BCE's current holding or sell it off.

But a sale could prove dangerous if Aliant were to fall into the hands of a rival such as Rogers Communications Inc. (RCIb.TO: Quote, Profile, Research). Because of this, Teachers' may keep Aliant "just to ward off competitors," Crandall said.

Perhaps the largest question mark is the future of BCE's wireline and wireless businesses, and whether they will be kept together or split as Teachers' looks to extract the most value.

Wireless, for example, could be split off while the wireline business is paired up with high-speed Internet and Internet-based television service.

The Teachers' group will also scrutinize BCE's capital expenditure, or capex, program, which means spending to maintain or expand its network.

"I think they would be quite open to keeping the capex where it is," Crandall said. "I think anyone that really understands the business obviously would understand that capex is really the lifeblood and also ultimately the decision maker on which direction the company's going to go."

BCE confirmed in May it expects growth in earnings per share of 4 percent to 7 percent in 2007. To remain a growth business on its perch as Canada's biggest telecom company, it will have to invest, meaning Teachers will have to open its wallet.

"I think they have to invest more," Grant said, adding Teachers may have to go as high as doubling BCE's capital expenditure.

The Teachers' group is a financial buyer, and it most likely won't be able to extract the same level of synergies that would have been available to a strategic buyer like Telus Corp. (T.TO: Quote, Profile, Research), Canada's No. 2 telephone company.

Telus unexpectedly walked out on the BCE auction shortly before bids were due. It has not said definitively if it will come back to the table with an offer or whether it will sit back while BCE is sold to the Teachers' group.


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