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    That was intense  
    Globe and Mail  
   

SINCLAIR STEWART

 
    October 26, 2007  
   

For Michael Sabia, it doesn't matter that the cast-of-thousands,
twists-aplenty buyout of BCE was the biggest deal in Canadian history.
What matters is that it was fun

Amid the tumult of bellyaching that enveloped BCE Inc.'s sale process last spring, amid the accusations of nepotism and folly, of Machiavellian pacts and fumbling ineptitude, there was also amusing irony.

On a Sunday morning in mid-April, Michael Sabia, a practising Catholic whose work ethic would cow the most resolute Protestant, was at home in Westmount, hunkered down in his wife's tiny office. No doubt he was wearing his red sweater (red is his colour, after all), a staple of his informal attire that has become as much a trademark as his owlish glasses and, of course, The Hair: a thicket of crimped topiary that, in unruly moments, appears to function as a repository of unused energy.

If the 54-year-old CEO of BCE occasionally looks harried, it's not because the rigours of the job are gnawing at him. Au contraire. Sabia is a self-described pressure junkie, someone who thrives on intensity (and who occasionally suspects himself of manufacturing it, just to get the fix). As an added blessing, his migraines, a decades-old affliction, never seem to surface when his feet are to the fire, like they were on this day.

All of which is to say that this was very much Michael Sabia's kind of morning. The night before, there had been an emergency board meeting to discuss the threat of a hostile takeover by the Ontario Teachers' Pension Plan, BCE's largest shareholder. The directors issued Sabia an order: Make some calls, line up some bidders and try to jump-start a bidding war—in the next 24 hours.

There was a subtext here, and it was an uncomfortable one. An auction would mean that BCE, a venerable company whose history stretches back 127 years to the birth of the telephone, would likely disappear from the public markets. It also meant that Sabia would probably be forced to leave the CEO's post without seeing the fruits of the turnaround effort he'd waged for the past five years.

Yet Sabia, possessed of a monomaniacal focus, didn't dwell on the distractions. He instead turned his attention to a short list of potential suitors. There was Henri-Paul Rousseau, the head of the powerful Caisse de dépôt et placement du Québec; Gordon Fyfe, who ran the Public Sector Pension Investment Board, a smaller pension fund; and, most importantly, David Denison, CEO of the Canada Pension Plan Investment Board, which had twice talked to Sabia about a takeover in the past year, only to be rebuffed.

As Sabia set to work, however, it soon became apparent there was a glitch. Try as he might, the most powerful telecom executive in the country couldn't find Denison's number.

Conversations with any one of Michael Jonathan Sabia's well-connected friends typically begin with a preface about the force of his intellect. "He's off-the-scale bright," says Dick Currie, BCE's garrulous chairman. "Michael is one of the most intelligent persons I've come across," says Paul Tellier, a BCE director and former Clerk of the Privy Council who gave Sabia critical breaks in both his public- and private-sector careers. "He was a bright guy with lots of energy," adds David Dodge, the head of the Bank of Canada, who asked Sabia to spearhead the creation of a little thing called the Goods and Services Tax.

Certainly, Sabia's ability to extract $42.75 a share from the Teachers' consortium, which was ultimately victorious in a fractious, twisting auction, did little to dent his cerebral credentials. It was, after all, a 40% premium over where BCE's stock had been treading water since the Flood.

In September, when shareholders gathered in Montreal to approve the sale, Sabia announced he would step aside once the deal closes early next year. But first he held up the price tag as vindication of his record since being thrust into the job in 2002. Sabia explained how he had inherited a sprawling conglomerate on the brink of financial crisis; how he and his team had hacked their way through a tangle of bureaucracy, jettisoned questionable assets, prompted a remake of the regulatory environment, performed triage on a sickly balance sheet—all while carefully steering the company back to its roots in telephony. Teachers, along with the other private-equity suitors, had recognized the wisdom of these moves before the market did, he suggested, and seized BCE at the hallowed "inflection point," just before the company, and its share price, took off.

It's a nice story, and the ultimate sale price—at $51.7 billion, it will be the biggest buyout in Canadian history—is difficult to quibble with. Yet critics of Sabia's tenure, in their legions, view this speech as a bit of revisionist history.

Start with one of the reasons that Teachers had put the company into play: It was irritated by the glacial pace of the stock's movement under Sabia. For all his vaunted brains, Sabia had earned a reputation in some quarters as congenitally incapable of making fast decisions, a corporate Hamlet wracked by what one associate described as "analysis paralysis." Then there are the questions about the business: How on earth did BCE let its wireless operations—the future of the phone business—become enfeebled? Why does dismal Bell customer service remain as universal a Canadian experience as Tim Hortons? And what about the cable companies that have poached nearly one million land-line customers?

Finally, the auction process prompted participants to moan about Sabia's hands-on role in the process—a symptom, they said, of his tendency to micromanage. Even supporters concede that it's not clear Sabia ever had a vision for BCE. "He brought the business back to the core," says one BCE executive. "The question is, whither the core?"

Iain Grant, a telecommunications consultant who has followed BCE's tortured evolution for many years, elaborates: "[Sabia] brought it back to what its core was in 1995, but it's 2008 now. He managed to get the company back on track and focused on its major mission. There was a lot of tinkering with the engine. Where he may have failed was in the driving. We didn't really have a sense of 'When that's fixed, Mike, where is this going?'"

Michael Sabia, it's probably obvious by now, is not your typical telecommunications executive. He has an analog phone mounted on the dash of his Audi, which, he admits, makes him circumspect, since anyone with a scanner can eavesdrop on his conversations. But Sabia likes the tactility of the big push buttons. He hates Bluetooth—likewise the Star Trekky earpieces that let people talk without picking up a handset. And he was only a reluctant convert to the BlackBerry, that ubiquitous little hand extension that powers much of his wireless business.

All of which leads to a question: What business has Sabia had running the country's biggest phone company, let alone attempting to steer it back to the industry's cutting edge? He did not install phones as a teenager, like his rival Darren Entwistle at Telus Corp. Nor did he dive into wireless straight out of business school, as did his heir apparent, George Cope, president and chief operating officer of BCE's Bell Canada unit. Sabia's path was accidental.

He grew up in St. Catharines, Ontario, the only boy among four children in an upwardly mobile Italian family. His father, Michael, was a surgeon, and his mother, Laura, was arguably the country's most prominent feminist during the 1960s and '70s. She was the first president of the National Action Committee on the Status of Women, from which station she lambasted the patriarchy of corporate Canada, often with the sort of caustic wit that would become a defining trait of her son. Bell, incidentally, was a favourite target—"There are 25,000 women in Bell Canada and you can't tell me they're all stupid," she once remarked regarding the gender skew in management—and a long fight for employment equity at Bell was ultimately resolved in a settlement overseen by none other than her son, in one of his first major actions as CEO.

Sabia began attending Ridley College, a private school, in Grade 7. Although it was located close to home, he opted to board. He is uncharacteristically mute on whether his family was close. (A few years after his father's death in 1978, his mother told a reporter, with what appears to be genetic bluntness, that getting married was the "worst mistake I ever made.") But there is little question as to Laura Sabia's impact on her son.

His first recollections of her date back to early-daycare age—except there was no daycare back then, and city councillor Sabia led her little son by the hand as she toured the flooded basements of her constituents. One night in September, over an Italian dinner at a Montreal restaurant, Sabia wistfully recalled her homemade ravioli. One of his abiding missions is to find its equal.

Laura, who died in 1996, passed on to her son a refusal to suffer fools. Sabia imbibed the trait in dining-room banter that honed his skills as a champion debater in high school. "The dinner table conversations in my house, they were more a sort of combat," he says. "If you had a view, you put it on the table, and God, you'd better be ready to defend it. Because no quarter was going to be given."

Friends of Sabia say he is one of the few Canadian CEOs who pay more than lip service to gender equality. "His mother had an influence on him, there's no question," says Peter Daniel, who worked with Sabia in Ottawa and at BCE. "He wears it on his sleeve."

Sabia was a talented student, moving first to the University of Toronto's Trinity College in 1970 for an undergraduate degree in political economy. Here he met his future wife, Hilary Pearson, the granddaughter of Prime Minister Lester Pearson, who had enabled Laura Sabia's agenda in 1967 by creating the Royal Commission on the Status of Women. Sabia won a scholarship for a master's program at Yale University, where he crafted a dissertation on industrial development in Canada.

CEOs with academic backgrounds tend to get knocked for being, well, academic. In person, Sabia does have a bit of the professor about him—he is lettered, to the point of being intimidating. He doesn't read management books ("like drinking your own bath water") and seems more comfortable talking about architecture or geopolitics than he does about himself and BCE, which he does in a way that feels rehearsed.

He is taller than you would expect, a consequence, perhaps, of how he slouches in his chair, and there is a distinct physicality to his speech: Eyes widen and brows arch quizzically when he's stimulated, and he punctuates points mid-sentence with a whistle or a brief, plosive expiration—pwuuuh! Occasionally, he will explain how he is forming his thoughts before providing an answer—the tic of an overly deliberative mind.

Yet Sabia insists that he did not miss his calling, having had little desire to submit himself to the publish-or-perish fate. "It was a lot about sitting in a room, writing an article or writing a book, and that was not the way I wanted to spend my life," he says. "Those guys are great, they're brilliant, they're geniuses, and they make huge contributions to the world, but it's not me."

In fact, Sabia didn't have much of a vocational plan when he left Yale. He chose Ottawa largely because Hilary was working there in the Finance Department.

The city did hold some appeal, as it catered to both his interest in public policy and, more broadly, a restless curiosity that was drawn to conceptual problems: studying them, diagnosing them, and then grappling with a way to fix them.

As a junior bureaucrat, Sabia quickly distinguished himself as a creative thinker, one who could master the finer details of policy and spin an effective sales pitch to skeptical politicians. This placed him on the radar of David Dodge, then the assistant deputy minister of finance, and in turn earned him some notoriety: Sabia was placed in charge of a tax overhaul, the centrepiece of which was the creation of the GST.

Dodge recalls how Sabia would wander the food courts in their building, stocking up on items that could help them navigate their way through the practicalities of a new tax. Eventually, Sabia's office became a "laboratory," and it was here that he devised the "pig rule."

"If you were a pig and bought 12 doughnuts, obviously that would be a grocery," Dodge explains. "But if you bought one, therefore it was a confection, and should be taxed differently."

Internal debates on the GST meandered along this Kafkaesque path—picture several bureaucrats sitting around a table, arguing about how the new code should treat gumballs. But, here and elsewhere, Sabia figured out the system and learned to do what any effective civil servant must do: Use suasion to knit together warring factions and push through a result.

Along the way, he also earned a reputation as a tireless, if frenetic, worker who frequently pushed himself past the point of exhaustion. Heather Conway, a former executive vice-president at Alliance Atlantis Communications Inc. who worked with Sabia in Ottawa, remembers visiting him at the office one Sunday after his back had given out. She needed a document across the room; Sabia obliged, she says. "He was on the floor, and he literally pulled himself across the floor on his elbows."

Sabia shrugs off these stories as apocryphal, though he does admit that he once slumped to the floor and nodded off after delivering a sheaf of documents to support staff for copying. "As Shakespeare said, 'to thine own self be true, and thus false to no man.' It's pretty hard for me to sit here and go 'Workaholic! Whaddya mean, me?' I think I am," he says. Even today, he lives in his corner office at BCE (one of whose walls he had painted red, naturally), arriving early in the morning and staying well into the evening. Friends say he seems most comfortable here, sipping tea out of his collection of Far Side mugs, and, when 4 o'clock hits, raiding his cache of microwave popcorn. "I mean, talk about how a leopard can't change its spots," he says. "I've been doing that for so long, it's just me. It's just who I am. It's how I lead my life."

Despite—or perhaps because of—the gruelling hours and intense environment, Sabia enjoyed his time as a bureaucrat, first at the Department of Finance, and later as deputy secretary of plans under Paul Tellier at the Privy Council Office. It wasn't so much his own involvement he relished as the bird's-eye view of some of the most important decisions a government can make.

Yet in early 1993, Sabia decided to follow Tellier to the private sector, to assist in an attempt to resuscitate CN Rail. It was not an easy decision—he turned Tellier down initially, citing inexperience—but he was won over by the promise of the problem itself: a moribund railway, grown fat from decades of neglect, that many had given up for dead.

"Don't ask me why, but I'm just not a lifer," he begins, searching to explain the move. "I just like going from thing to thing, and continuing to test. I think people sometimes misperceive me a bit in that I really like working in a group of people, creating a group of people. I like it intellectually, but I also like it as a person. One of the reasons why I like companies or organizations with strategic problems—or, in the case of CN, turnaround-type issues—is that they create a lot of intensity. I like an environment where you're working with a group of people, and it's intense, and you're going at it, and it's kind of wild."

Sabia was well-regarded professionally, and associates from the era frequently mention his sense of humour—he is funny, but in a deadpan way, favouring wry retorts tinged with sarcasm. Yet he was also viewed as someone with a short fuse who didn't merely refuse to suffer fools, but who had the verbal cudgels to knock them out of his way. He was headstrong, and held his tongue in check with difficulty. He once described himself to a reporter as a "shit disturber," and remarked that when he joined CN, he could "smell the formaldehyde—the boys were stiff!" These remarks were later exhumed for a profile that dwelled on his temperamental side. The story bothered him, friends say, and it prompted him to dial down the intensity.

"He had quite a temper in his Ottawa days and the CN days, but he has worked on this," concedes Tellier. "After the first meeting of the management group [at CN], I called him and said, 'Michael, for the first month, keep your mouth shut. Come and see me, we'll chat and so on, but assess the situation. Take your time. Don't pass judgment. Don't take a shot at them.' And he did behave."

For a little while. As the two men put in place an aggressive turnaround plan and began remaking the executive team, Sabia settled comfortably into his role as vice-president of corporate development. Soon, he was openly questioning his boss in front of other executives, ushering in a kind of glasnost that Tellier credits with helping to change the culture of the company. "He would start by saying, 'Paul, I do realize that you're paying my salary, and God knows I need my salary to pay my mortgage. But you know what you just said? Full of shit.'"

The rest of that story is well known. The two bureaucrats whipped the company into shape, took it public, and then moved on so that Hunter Harrison, a lifelong railroad operator, could lead CN forward.

Sabia looks back on his record with more than a little satisfaction. "There were so many people who said, 'These two bureaucrats? C'mon, give me a break. These people don't know about railroads. You've got to live your life on the railroads to understand them, for God's sake! It's an art! It's a science! It's beautiful!' So, to this day, I'm convinced the reason Paul was so successful there was the power of fresh eyes. Because fresh eyes don't have to be expert eyes."

Sabia certainly had fresh eyes when he arrived at BCE from CN in 1999. What greeted him was a corporate octopus, its tentacles scarred from ill-fated forays into finance, real estate, pipelines and an assortment of other businesses whose common link was that they had absolutely nothing to do with telecommunications. Sabia was put in charge of Bell Canada International, a mishmash of assets that were being auctioned off. But his apprenticeship to CEO Jean Monty didn't last long.

Monty had made a series of disastrous bets, including a $7.5-billion investment in overseas long-distance carrier Teleglobe Inc. that turned BCE into a financial basket case and resulted in a massive write-off. He also lurched into the media sector, proselytizing about the power of convergence as he struck a deal to combine Bell's Internet capabilities with the CTV Television Network and The Globe and Mail.

Monty, it must be said, did have the foresight to spin off Nortel. But by the spring of 2002, his grand vision was in shards. Monty resigned and Sabia, who had never run a company other than Bell Canada International, found himself being asked by the board to pick up the pieces. (Currie, meanwhile, became chairman.) For someone who thrives on the problematic, this was the motherlode.

"We didn't say too much, for understandable reasons, publicly at the time, but very little had to go wrong before we were in a really serious financial crisis," says Sabia. "Maybe I'm not introspective enough, but I didn't sit there and go, in some Hamlet-like moment of reflection: 'Am I ready to take on the challenge?' I don't think like that. I just figured, this is a big problem and it's got to be fixed, so get on with it."

Sabia's previous job helped him in some respects; like CN, BCE was legendary for its bureaucracy, for a stubborn culture that stymied quick decision-making or changes in strategic tack. Yet if CN was scary, BCE was a house of terrors. In addition to the Teleglobe writedown, BCE had a contract with SBC Communications, which owned 20% of the company, requiring it to buy back that $6.3-billion stake when SBC chose to sell it. If the U.S. telecom pulled the trigger at an inopportune moment, BCE would be up the creek.

The first order of business was to repatriate that chunk of the company, absorb the Teleglobe charge and renegotiate debt arrangements with BCE's bankers. Then, Sabia knew, he could turn to the more endemic problems—profligate spending, a bloated employee base, corporate balkanization and a string of non-core assets.

When he arrived at BCE, the company was in such disarray that it couldn't determine whether a phone customer was also a satellite customer or a wireless customer. It took the accountants a full month just to close the books on a quarter. Inevitably, as Sabia reeled off $14 billion worth of reparatory transactions and began cutting jobs (ultimately 8,000, producing the current headcount of 55,000), other things, like customer service, suffered. It soon became apparent that many systems problems had been partly masked by voluminous staffing. When the cuts were made, fingers came out of dikes, exacerbating Bell's reputation for horrible customer service—which it has yet to fix. (Sabia insists this is now the company's number-one priority.)

Yet some observers believe Project Galileo, as the cost-cutting program was christened in 2004, didn't go nearly far enough. BCE had to incur sizable charges for severances and restructuring, but investors failed to see an appreciable rise in profit margins. Meanwhile, the private equity firms that were starting to scope out BCE seemed convinced there was plenty of additional fat to be trimmed, particularly in middle management, where BCE is viewed as much more bulky than its peers.

The first asset sale was Yellow Pages Group, to Teachers and U.S. private equity titan Kohlberg Kravis Roberts & Co. (KKR) for $3 billion—a sum that analysts praised at the time, but which in hindsight looks like a steal, given that Yellow Pages is now worth billions more as an income trust. Stakes in other tangential businesses, like IT outsourcer CGI, were also cut adrift. But the general pace of divestitures was maddeningly sluggish.

In 2003, Sabia famously implied that Bell Globemedia, the convergence play, was a non-core asset, but he didn't strike a deal to reduce BCE's stake from 68.5% to 20% until the end of 2005, essentially leaving the properties in limbo for the interim. Telesat, BCE's satellite arm, was auctioned off for $3.25 billion, but not until the end of 2006. And a complex move last year involving the spinoff of some of Bell's rural phone lines into an income trust seemed to confuse investors, who wanted to see straight sell-offs. Although Sabia promised these changes would free up billions of dollars to invest back into the main business, the stock remained stubbornly in idle, around $28, finally rising only thanks to the income-trust wave.

Yet the real challenge was coming from outside the company. When Sabia took over, the Internet was starting to mature, prompting predictions of the death of the land-line phone business, Bell's bread and butter. Wireless communication was exploding, and well-equipped cable companies were preparing to join the assault, aiming to cream off Bell's customer base with a full suite of wireless, Internet and telephone products.

It was a classic technological disruption. Sabia brought in a former Kodak executive to talk to his team about how that company had failed to adapt to its own digital disruption. Everyone could identify the phone company's issues. But there were no clear answers on how to fix them. "On the one hand, you're trying to rebuild the organization, and at the same time you're losing almost pure profitability as local access customers go away, and all of that accelerated through '04 and '05," Sabia says. "It's very challenging to demonstrate progress, because you're working very hard to make up for what's leaking out of the bottom of the boat."

Sabia's supporters insist much of the criticism that has been levelled against him is unfair—it overlooks the difficulty of both the hand he was dealt and the challenge of making changes amid such a mercurial competitive environment. "Over the years, there were constant criticisms of Michael," grouses Currie, the company's chairman. "There was always the rush to judgment."

Currie claims he never saw an instance of bad judgment by his CEO, though he does speculate that Sabia's largest regret would be not thinking harder about buying wireless provider Microcell, marketer of the popular Fido service. Microcell was eventually acquired by cable czar Ted Rogers in 2004, further undermining Bell's once industry-leading mobility operation.

The justifications were manifold: Bell was in bad financial shape; the head of Bell Mobility didn't want to do the deal; Bell Mobility's dominance in Ontario and Quebec had produced a culture of inertia; and embarrassing errors in its billing system had scared off customers and paralyzed the division strategically. Still, the loss of Microcell hurt, especially once Rogers started using it as a club. "I'd say wireless was the situation that we let get to a weakened point," acknowledges one BCE executive. "And we shouldn't have allowed that to happen."

The core conundrum still facing BCE is that it must manage the careful extinction of the land-line business, which is still a pillar of revenue, against the measured growth of its Internet-based communications. If the latter competes too effectively as a separate business, it will cannibalize the lucrative revenue stream from the conventional land lines before they've run their course. "I don't think it is so obvious what the right answer is," says the BCE executive. "You can say, 'You were taking too much time, Michael'—but to do what?"

By the late spring of 2006, just months before the global private equity boom took off and ushered in the era of the megadeal, the BCE board was contemplating a handful of radical options, ranging from a recapitalization of the business to an income trust conversion, to a leveraged buyout.

At one point, Sabia approached a banker at Goldman Sachs to inquire about the prospects of a privatization, but was greeted with incredulity: A BCE buyout would be worth more than $30 billion—plus debt—and no one was doing deals of that size.

Not for a couple of months, anyway. By late summer, a raft of ever larger private equity buyouts hit the market in the U.S., culminating in a $45-billion (U.S.) takeover of Texas-based utility TXU in February of this year. As the credit markets relaxed to near stupor, rumours began to percolate that some of the world's most powerful private equity firms had begun to target BCE. But Sabia and his team ignored the gossip, tied up as they were with more pressing matters.

Telus, Bell's arch-nemesis, had announced on Sept. 11—Sabia's birthday—that it planned to turn itself into an income trust, in what would have been the largest such conversion to date. BCE had been studying this option for some time, and once Entwistle moved, Sabia was not about to let him have the advantage of the tax-efficient structure all to himself. Within a month, BCE said that it, too, would take the trust path, much to the joy of investors, who gave the stock an immediate boost.

Sabia phoned Finance Minister Jim Flaherty the night before the announcement, as a courtesy. Although the two never discussed federal policy on the matter, Sabia knew enough about Ottawa to suspect that the conversion of an iconic company like BCE might spur an already nervous government to clamp down on the income-trust sector before the entire TSX followed suit. "It was certainly a question in my mind: that as the income trust sector moved into blue-chip Canada, would that trigger policy debate or action on the part of government? I did think that the combination of Telus and BCE [converting] would test that. But I was surprised that the government took action as quickly as it did."

Flaherty, of course, uncapped a rude surprise on Halloween, stopping the trust boom in its tracks, cancelling any pending conversions and single-handedly deflating the value of several companies, including BCE.

Sabia pressed on. But with the trust option gone, BCE's fate was sealed. Flaherty might as well have sent personal invitations to the private equity barbarians who had been biding their time outside the gates.

Just two weeks after Flaherty's announcement, KKR officials met with Sabia to express their interest in a buyout, but Sabia, after consulting with Currie, was implacably opposed. The two men were convinced that BCE had rounded a crucial corner that fall, and felt the company could eventually win back investors' faith on its own terms. But Sabia's message to investors—that BCE was steadily returning to a predictable cash-flow machine, that dividends were being tethered to profit growth, and so on—was largely ignored.

"He's long on strategy and short on operations. I think there's a naiveté there," one business associate says of Sabia, referring especially to the KKR rebuff. "He said, 'We're not interested,' and, based on that conversation, believed everyone would put their pencils away."

Of course, no one put their pencils away; instead, they sharpened them.

BCE, depending on one's point of view, was either the victim of a perfect storm or the beneficiary of a celestial alignment. By the spring of this year, when the buyers began to knock more aggressively, several things had begun to coalesce. Private equity firms were awash in boatloads of cash. Debt, meanwhile, was rock-bottom cheap, and acquisitors could borrow with wilful and, in some cases reckless abandon, almost unburdened by restrictions. BCE, if Sabia's word could be taken as gospel, was just turning the corner—but the markets hadn't responded, affording private equity suitors an enticing entry point; and the company was saddled with an impatient investor, Teachers, that just happened to be the most powerful private equity force in the country.

"With that combination of events," Sabia acknowledges now, "this was in effect a company with a bull's eye on it." Still, BCE attempted to stave off the inevitable.

A few days before Easter, Jim Leech, who heads Teachers' private equity division, phoned Sabia to tell him he was thinking of making a 13D filing with regulators. The disclosure is required when an investor moves from a passive stance to an active one, typically signalling a takeover attempt. Sabia told Leech that such a move would be irrevocable—that it would thrust BCE into play—and pleaded for a face-to-face meeting at Teachers' Toronto headquarters.

On Easter Monday, their backs to the wall, Sabia and Currie, who had been vacationing in Florida, flew to Toronto. They discovered, much to their irritation, that officials from Providence Equity Partners, the pension fund's U.S. backer, had flown in, too. Sabia and Currie curtly refused to sit down with the Providence executives, saying they had only come to talk with Teachers.

The two men warned Teachers that the filing was unnecessary, that the company was making real progress. But Leech, who was joined by the pension fund's CEO, Claude Lamoureux, insisted he had no choice. Given the number of potential partners Teachers had approached about joining in a deal, and because word of a bid had leaked to the media the week before, the fund's lawyers had told him he was required to make the filing. Sabia asked Leech to go back to the lawyers one more time, but Leech said his hands were tied.

It was a tense discussion, and Teachers made clear its determination: If there was going to be a buyout of this company—of their company—they would be the ones to do it. Furthermore, the fund intimated, it had the financing in place to do a deal.

As the meeting drew to a close, Currie took Lamoureux aside in a last-ditch effort to dissuade him. No luck. Later that afternoon, Leech contacted Sabia to say that Teachers would press ahead with its filing that day, after markets closed. BCE was in play.

And so Sabia found himself at home on a Sunday scrambling to find a phone number and seed an auction. By the end of that day, he had succeeded. Having got the number for CPP's David Denison from one of the dozens of bankers who were advising BCE, he had nurtured an alliance spanning CPP, KKR, the Caisse and the Public Sector Pension Investment Board.

Yet this feat was greeted with a torrent of criticism. Teachers, which had been counting on the Caisse's support, was suddenly on the outside looking in. Other U.S. suitors, like private equity player Cerberus Capital Management, were also upset: Whispers began circulating that the so-called auction was rigged in favour of the CPP group. Furthermore, detractors complained, BCE had abandoned standard practice by giving its CEO the starring role in the process. Where was the board? Why hadn't a committee of independent directors been assembled to assess the playing field and make the approaches?

"We didn't ask to be put into play" is how Currie summarizes his comeback. The Teachers' move, coupled with the fund's insistence that financing was already locked up, forced the board to move quickly that weekend, he says. "We said we can't have one horse in this race."

Federal regulations that limit foreign ownership of a telecom to a minority stake had long inoculated BCE against a takeover by bigger U.S. counterparts. But now that the company was in play, the requirement that any bid contain a clear majority of Canadian equity drastically limited the pool of possible buyers. If Teachers was given too much time, it might recruit other Canadian backers to its team, preventing a real auction. It was, in Sabia's words, a "fight over scarcity."

The CPP group, the early favourite to win, quickly tried to pad its lead by recruiting three provincial pension funds in Alberta, Ontario and British Columbia. Once again, BCE stepped into the process to say no—again, it didn't want any one consortium to hog a disproportionate share of the Canadian equity. But the intercession produced the opposite result; rather than join another suitor, the three funds sat on the sidelines, presumably convinced that CPP would win, and that they'd eventually be cut in for a chunk of the deal. CPP and KKR also grew frustrated that they were restricted from adding Canadian partners. Soon the newspapers were awash with criticisms of Sabia's role in shaping the auction.

Teachers refused to enter the process until early June, just three weeks before bids were due—the better to put pressure on BCE to revise the process. The fund thought that BCE harboured an anyone-but-Teachers bias. "We were concerned about the way the process was started, with management's role in helping to form the lead consortium," says Leech (who, since the deal, has been named Claude Lamoureux's successor). "I think we were satisfied that there was at least enough visibility by the board that it alleviated some of those concerns—I wouldn't say all of them; I'd say some of them."

Sabia does admit he's a control freak (actually, he thinks "involvement freak" is more accurate). When BCE sold Yellow Pages, insiders said he was trying to leave his fingerprints on everything, right down to the accounts receivable.

Some believe that Sabia's controlling nature belies his problems with trust. He is a private person. One colleague says he only confides in a small number of executives, which obviously creates team-building problems. Another theory says that BCE habitually moved so many executives that an institutional vacuum was created—the lack of experience in key roles required Sabia to assume an extraordinarily high level of involvement.

While Sabia is willing to concede some of these tendencies, he rejects any notion that his actions were offside—especially since he had decided, in early May, that he would leave the company if the process concluded successfully. The way he sees it, he was just doing his duty to maximize value for shareholders.

"Chess is a good metaphor for a lot of what happens in business," says Sabia, turning animated. "And so [Teachers' bid] was one change in the board, but then our job is to change the board again. Because you don't let them define the terrain—we're going to define the terrain. …And then that became just"—he begins wringing his hands together as though twisting a towel—"mmmmrhhh, just maximizing the tension. Squuueeze it, and squeeze it on all sides to all the players. ...We're going to run this, and we're going to extract the last nickel. And if anyone thinks they've got a layup here, we've got a surprise for them. That part? Fun."

That part, maybe. But not the microscopic nature of the media coverage. Heeding its advisers, BCE had decided to refrain from engaging in

a public relations battle. Instead, the company seemed to be impersonating an ostrich, even while all and sundry took shots at it. "For Michael, it bore on him pretty heavily," says Currie, who felt it necessary to "pump up [Sabia's] tires" during the process. "Every now and then, it was important for him to understand that I was 100% supportive and the board was 100% supportive." Tellier is more blunt. "It was pretty messy," he says. "It was very unpleasant for Michael, and it was very unpleasant for the board. Maybe there was a lack of discipline. There was too much information leaking out. Maybe the issues surrounding the file were not as well explained [to the media] as they should have been."

Then came the Telus sideshow. About a month after the auction formally began in April, BCE's chief rival entered the game. The theory was that Telus could pay more than the private equity funds; as a company already in the phone business, it alone could take advantage of cost savings from lopping off overlapping systems, marketing and the like.

The big "if" here, though, was whether the federal government would allow such a combination, which to all appearances would violate competition laws. It is on this point that things quickly unravelled. Entwistle, who was approached by Sabia in early May to enter the auction, thought the two men had a deal to go to Ottawa together and seek the government's blessing; a joint effort, Telus believed, would win them a regulatory reprieve and rally the economic nationalists who yearned for a world-beating, made-in-Canada solution.

According to Sabia and the BCE camp, no such agreement was ever struck. "Telus's position, for instance, on antitrust remedies?" asked Sabia. "Snowball's chance in hell." Currie, who added to the bad blood following the auction when he described Entwistle and his team as "amateurs," has since toned it down, but only by a notch. "The requests that Telus made of us were absurd," he says.

Telus withdrew from the auction just before bids were due, citing "inadequacies" in the process: Presumably, these included a lack of co-operation on the Ottawa front, a tight deadline for bids and a lack of access to information.

The auction was on shaky ground, and not just because of Telus's withdrawal. The CPP-led group, once the apparent front-runner, suffered the loss of a pair of key backers—Gerry Schwartz's Onex Corp. and the Caisse—just days before the bids were entered. The Caisse was said to be miffed at Telus's inclusion in the race, and, like Onex, it grew nervous about the ultimate cost of the deal. Bankers and risk committees, meanwhile, were beginning to sweat over a discernible downturn in the credit markets.

The problem for BCE was that as competition weakened, the urgency to conclude the auction increased; if parties began dropping out, or debt markets crumbled (as they in fact did not long after the sale was announced), the price tag could plummet.

On the Tuesday that bids were due, KKR and CPP scrambled to put in place an offer of $40.25 a share. Cerberus, for its part, had a more complex offer that would have offered shareholders a mix of cash and equity in a new publicly traded company.

Teachers and its U.S. partners, however, entered at $42.25 a share—a huge premium—and BCE managed to get the company to up its bid (the suitors had no idea how much rivals had offered) to the tune of another 50 cents on the last Friday of June. That night, over Coke and pizza, the BCE board finally signed off on the deal. BCE was gone, and Sabia, all but done.

Shortly before the shareholder meeting in September to approve the deal (97% said yes), Currie acknowledged some mixed feelings. "To be brutally honest, I would rather the whole thing not happen," he said. "But [Teachers'] timing was exquisite, I'll give them that."

Sabia showed no such ambivalence. On a recent Sunday in Toronto, as he sipped coffee on the patio of the Drake Hotel, he seemed, at least by his standards, almost relaxed. The tie was off, and he talked for a while about Mattel's problems in China, about the burgeoning middle class in India and the changing power dynamics of the global economy. (Of course, he can afford to relax: Between stock that he has bought personally, and stock and options that he has been granted, he stands to cash out $24.6 million when the BCE deal closes.)

Sabia didn't appear irritated by the forced sale of BCE or his own early departure. Relieved? Maybe. Vindicated? Perhaps. Being forced into an auction might ultimately be the best thing for his legacy, though critics would point out that the $42.75 sale doesn't look that impressive considering the stock didn't budge much above $30 for the majority of Sabia's tenure.

"I don't have a lot of that angst about, 'Well, we did the right thing for our shareholders, but gee, in terms of the other way we think about our responsibilities [the company itself], we really had to compromise that.' I don't feel that."

Sabia's CN experience was much on his mind in the spring when he decided he would leave BCE. Once again, the cleanup job was done and the company could be turned over to an operations expert. In truth, Sabia probably jumped before he was pushed—there is little indication that Teachers and Providence believe he has the chops to oversee BCE's next incarnation.

Cope, the former Telus executive who heads Bell's phone operations, has been tapped to replace Sabia, though the jury is still out here, as well. Cope has proven himself in the wireless business, but not in a bureaucratic minefield.

Analyst Iain Grant suggests BCE would be best served by bringing Entwistle aboard. "He is much more of a leader than Michael Sabia is. I think you're looking at the difference between Eisenhower and Churchill. One was a master general, the other was a leader…[BCE] needed someone who understood that when the soldiers march, they need latrines, food, supplies. But it's the leader who tells them where to march."

Sabia would likely quibble with that summary, but not with its essence: Different times call for different strengths.

He insists he's not sure what he'll do next—he's more interested in problems than in sectors—but says he's not tethered to Montreal, or to Canada, for that matter.

"I was pretty much of the view that if we could really create the kind of intensity that we did, and get the price that we did, then for me that would probably be a bookend," he says. "I feel pretty good about that. I have a sense of accomplishment. This could have been a different story. This could have been Kodak."

GST GANG MAKES GOOD
The GST may have been reviled by many Canadians, but the controversial tax did little to dampen the job prospects of its chief architect, Michael Sabia—or those of his various superiors in Ottawa. Like Sabia, they've since enjoyed stellar careers that belie the idea that public-sector types can't pass Business 101.

DAVID DODGE
In 1986, Dodge, then an assistant deputy minister in the Department of Finance, hired Sabia to help design the GST. Dodge knew of Sabia's brainy reputation; they were also alumni of the same private school, Ridley College. "He was a prodigious worker, thank goodness," recalls Dodge, who still keeps in touch with Sabia. For his part, Dodge climbed up to the deputy minister's job at Finance in 1992. He moved to the Department of Health in 1998 and became Governor of the Bank of Canada in 2001. His engaged regime stands in contrast to the aloofness of previous governors. He'll step down in January.

STANLEY HARTT
Montreal lawyer Hartt was the deputy minister of finance when Sabia began working on the GST in 1986. Hartt signed on as chief of staff to Brian Mulroney and then left for the private sector, where he ran O&Y Properties. In his latest incarnation, as chairman of Citigroup Global Markets Canada, Hartt has once again crossed paths with Sabia. Citigroup approached Ontario Teachers' Pension Plan last year about mounting a takeover of BCE. Teachers, which had been studying such a move, brought Citigroup on board as the cornerstone of its banking syndicate, which will lend tens of billions of dollars to finance the purchase.

MICHAEL WILSON
Wilson, Minister of Finance in the Mulroney government, is still grateful for Sabia's GST service. "He was able to take the theoretical aspects of a commodity tax—a value-added type of tax—and translate that into very understandable real-life situations." Later, when he became Minister of International Trade, Wilson had a hand in another controversial piece of policy—the North American Free Trade Agreement. He left Ottawa in 1993 to return to Bay Street, and eventually became chairman of the Canadian arm of global investment bank UBS. Last year, he was appointed to a critical public-sector job: ambassador to the United States.

PAUL TELLIER
Tellier didn't work on the GST, but the tax ultimately intertwined his career with Sabia's. The country's top civil servant for seven years, Tellier was so impressed by Sabia's GST record that he had him hired at the Privy Council in 1991. Tellier left late the next year to head CN Rail, but he brought his protégé over in early 1993; together they reinvigorated the railroad. As a director, Tellier helped Sabia get his start at BCE and supported his promotion to CEO. Tellier left CN in 2003 to attempt a similar fix at Bombardier, but left after clashing with the controlling Beaudoin family. Tellier has lately been on the board of Alcan, and is an adviser to GM Canada, McCain Foods and the French bank Société Générale.

 


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Sunday, 09 December 2018

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