Ontario Teachers Pension Plan, frustrated after years of watching its investment in BCE Inc. stagnate, has enlisted U.S. buyout firm Providence Equity Partners Inc. to explore a takeover of Canada's largest telecom company, according to people familiar with the matter.
Teachers, whose 5-per-cent stake makes it BCE's largest shareholder, is determined to lead any privatization effort and approached Providence about teaming up, the sources said. So far, conversations with BCE have been informal and the suitors have stopped short of making a formal bid because BCE has indicated it's not interested in a sale.
Providence and the pension fund were willing to pay an "eye-popping price" of close to $40 a share, or about $32-billion in total, one source said. A price in that range would be a big premium to any value the company has fetched on the stock market over the past year. BCE shares yesterday closed at $32.64, giving BCE a market capitalization of $26.4-billion.
In pre-market trading Tuesday, BCE shares jumped 8.4 per cent in New York.
Teachers said yesterday in a regulatory filing that it "is closely monitoring developments and is exploring its options," with respect to BCE, and spokeswoman Deborah Allan said any bid would have been disclosed in that filing. A spokesman for BCE said the company has "neither received nor rebuffed a specific offer."
Still, news that BCE turned away advances from another deep-pocketed private equity suitor promises to ratchet up the pressure on chief executive officer Michael Sabia, who is struggling to improve the company's languishing stock price and demonstrate that his corporate overhaul -- not an outright sale -- is the best way to create value for shareholders. But that argument is becoming more difficult to make in light of the amount of cash that buyout firms are dangling.
Two weeks ago, The Globe and Mail reported that private equity behemoth Kohlberg Kravis Roberts & Co. had broached the idea of a privatization but that that was rejected by BCE. Investment banking sources say Blackstone Group and Silver Lake Partners are also looking at the Montreal-based company, which operates Bell Canada.
Mr. Sabia is now playing for time in hopes that the stock market will begin to give the company credit for the restructuring he has engineered at the sluggish telecommunications giant. The BCE board believes that any upside from Mr. Sabia's plan to increase profitability should go to current shareholders, and that the company can keep the would-be buyers at bay for months if need be, perhaps by enlisting government support, said a source close to the company's board.
"The board is very much of the view that you can [bring to the] surface values that the market can recognize and will be to the benefit of shareholders, not private equity buyers," said the person, who asked to remain anonymous.
The board is presenting a united front against a sale, but sources say behind the scenes that a minority of directors has pushed for more talks with potential suitors.
Mr. Sabia has already done some of the things a private equity buyer would likely want to do. He has shed excess assets, such as the company's Telesat satellite arm and a stake in CGI Group Inc., as well as spun out much of the company's slower-growth land line business into an income trust. So far, the market hasn't bought into Mr. Sabia's plan, as evidenced by a share price that's not far from where it was three years ago.
With all the private equity firms circling, BCE has hired Goldman Sachs Group Inc. to advise on its options. But should the pressure from shareholders to sell become unbearable, BCE is banking that the federal government will help deflect any takeover attempt that includes a foreign buyout firm, sources close to the company said.
"Foreign takeovers have become a very political story," one source said. "If BCE has a viable plan, Ottawa is going to listen."
That strategy, however, is dangerous. It didn't work for Inco Ltd., which hoped for support from Ottawa during its fight to avoid being taken over by a foreign buyer. The federal government was loath to interfere in financial markets and stayed on the sidelines.
In Providence, Teachers has a partner with experience buying companies like BCE -- onetime monopolies now fighting competition as telecom markets deregulate. Rhode Island-based Providence, a $21-billion (U.S.) fund, has participated in buyouts of the incumbent phone companies in Denmark and Ireland. A spokeswoman for Providence did not return a call seeking comment.
Teachers and Providence worked together recently in a bid for Telesat, which was ultimately sold for $2.6-billion (Canadian) in December to Public Sector Pension Investment Board and Loral Space and Communications Inc. Teachers and Providence were also the largest investors in MetroNet Communications Corp. in the late 1990s.
KKR, for its approach to BCE, allied itself with the Canada Pension Plan Investment Board, a necessary step because of government ownership regulations that prohibit non-Canadians from owning more than 46 per cent of a telecommunications company in Canada.
It's unclear whether Blackstone Group or Silver Lake has lined up a Canadian partner. Possibilities include Onex Corp., the Caisse de dépôt et placement du Québec and OMERS, which invests the pension contributions of Ontario municipal workers.
A price of $40 a share for BCE would be much higher than analysts had predicted the company could fetch, with most saying that private equity buyers would have trouble making their expected returns at a price above about $36. But with Providence's expertise in the telecom sector and Teachers' knowledge of BCE's workings -- Teachers' director Thomas O'Neill is also on the BCE board -- the partners may feel they have an edge that enables them to pay top dollar.
A $32-billion buyout of BCE would require about $6-billion of cash up front, and the rest could be funded by bank loans and bond sales. Because BCE is so well-known to banks, financing would not be tough to arrange, said one high-ranking private equity executive.
With files from reporter Andrew WillisSnapshot
Source: company reports
Providence Equity Partners Ltd.
Headquarters: Providence, R.I., with offices in London and New York
Focus: Communications, media and entertainment investments
Assets: $21-billion (U.S.)
Notable investments: AT&T Canada, Eircom, Warner Music Group, Nextel, Hallmark International
How a BCE buyout could work
Step 1
Buy BCE at $38 a share, or $31-billion, a 20% premium to the current price.
Spend $9-billion and borrow the remaining $25-billion.
Price works out to 6.4 times EBITDA, in line with value of U.S. phone companies and Telus.
Step 2
Cut costs and pay down debt.
Sell satellite TV provider Bell ExpressVu: $2.1-billion.
Sell stake in Bell Aliant income fund: $3.1-billion.
Sell 15% stake in CTVGlobemedia: $300-million.
Invest $3-billion a year in network upgrades and pay $2.5-billion a year in interest.
Step 3
In 2011, do an initial public offering of either the whole company at 6.4 times EBITDA or Bell Mobility, which would command eight times EBITDA.
Pay down $14-billion of debt.
Make $6.8-billion on a $9-billion investment, or an 11-per-cent annual return
Source: The Globe and Mail, Genuity Capital Markets
© The Globe and Mail
