Money Matters: The Battle For Bell Canada Leaves Regular Investors Locked Out

Elaine Meinel Supkis

The International Herald Tribune reported the results of a group of the biggest M&A deals over the last few years. Only three out of seven of them had a positive effect on the companies involved. Unicredit bought Capitalia for $30 billion this year. So far the shares are down 10%. AstraZeneca bought Medimmune for $15 billion, another deal done this year. So far, the result is a 9% loss.
*snip*
n the first five months of 2007, the hustlers earned $25 billion doing deals of this sort. But when Boston Consulting Group looked at the results of similar transactions - 3,200 of them - it found that nearly 60% of them actually reduced shareholder returns.

Takeover activity rose 38% in the first half of this year, compared to the same period a year ago. A breathtaking $2.5 trillion is changing hands as a result. How much of it will really "add value"? Not much.

The world is flooded with 'liquidity' which I would like to say, is pure red ink from the massive trade deficit the US runs with the world coupled witih global government overspending, again, the US leading the way. This money has to make money and all the financiers know, if you pass it through many hands, the more it circulates, the more 'value' one can squeeze out of it. They conviniently leave out the bad news that all this vapid psuedo-wealth vanishes in a flash if the money either stops moving or if one of the players screws up and can't pass it onwards.

Shareholders, and I am part of that universe, like to see something come back for the money they spend buying stocks and bonds. This means, they either pay dividends or they rise rapidly and then you get rid of it to someone else and hope you can do it for more profit than the capital gains taxes and other hazards.

Nearly all long-term, conservatives love to buy and hold stocks that pay good dividends. Absolutely so. This can be lucrative in many ways. When one is younger, one can simply buy new stocks of the same company automatically with the dividends each quarter. Or one can cash in, especially if you are into retirement.

This isn't like participating in a fund where a bunch of people, often dreadfully young (they should all be over 60 years old!) buy and sell stocks and bonds seeking big returns. These are often prone to vaporizing. This means picking a good corporation and then using it for many years. Until they cease paying good dividends. Then it is time to sell.

Recently, I was discussing exactly this with a person I care a lot about (not myself, heh) because a blue chip stock he has accumulated this way since 1955 was going down in the stock market. I explained to him, the big equity pirateers and the hedge fund hell hounds were angry at that stock because they couldn't take over or devour it so they weren't buying. And further, the company defended itself by raising the dividends! This meant he would get even more stocks each quarter and they were already heading quite high.

So here is the story of Canada Bell which was a very big favorite for conservative hold and reinvest the dividend people seeking security, not great riches:

From the New York Times:

Bell Canada’s directors endorsed an offer worth about 51.7 billion Canadian dollars ($48.8 billion) from the Ontario Teachers’ Pension Plan and the private equity firm Providence Equity Partners on Saturday to take the company private. The deal for Bell Canada would be among the largest leveraged buyouts ever.

If approved by shareholders and regulators, the deal would be Canada’s largest takeover to date.

This is big, big news in Canada. This is a 'leveraged' buyout which means zillions of Canadian workers will soon lose their jobs, their homes and their futures. There will be suicides and bankruptcies as well as child abuse, etc. But the pirateers will be happy! Who cares if the company does badly? It will limp along and soon be resold to yet another, even uglier privateer.

The offer led by the teachers’ pension plan will pay 42.75 Canadian dollars a share. In the last year, the company’s shares have traded as low as 25.32 Canadian dollars a share.

The stocks have stagnated pretty much since the great collapse of March, 2000 when it shot up, over the course of just 2 years from $30 a share to $200 a share and then there was this $133.52 dividend payout and the stock collapsed in one day to $41.00 a share. Normally, the dividend payouts were 34-37¢ a share.

Canada Bell was like the US Ma Bell: a monopoly. Shareholders loved this, they bought and held the stocks. Once it was broken up, chaos caused a lot of ups and downs and the 2 year rise and collapse was due to attempts at buying up media organs such as TV and internet services. Since 2000, the company limped along but still paid dividends. Then it rose from $30 to $40 a share the last three months due to talk of privatizing the organization.

The unusually secretive process was also unpopular with many investors who saw the value of their shares swing based on rumors and incomplete news reports.

Bell is also one of Canada’s most widely held companies, with retail investors making up 60 percent of its shareholders.

Those shareholders will receive a healthy premium for their stock, but will lose Bell’s dividend payments, the main draw for many individual investors. Long-term shareholders may also face substantial capital gains taxes.

The majority holders were given no notice nor choice in this matter. The bidding war of the several private equity or hedge funds were barely beginning when the Teacher's Union and several other holders suddenly dumped the whole process without consultation, voting or warning and simply inked the deal on a Saturday when the markets were closed and people were assuming this would continue for at least another few weeks while the stocks would continue to rise.

So 60% of the investors are going to be cheated out of potential rise in value and in addition, the price of the stocks being frozen, they can't sell to anyone else but have to accept this deal or kiss it all goodby anyway!

In other words, this reeks of theft. Since the holders of these stocks were content to hold them even as the stocks stagnated due to the nice dividends, forcing them to disgourge this is still wrong. The private equity should have had a bidding war with the other equity firms to see who could get the most 'votes' which is counted very simply: how many stocks they manage to buy by offering a good price, one that tempts the holders to let go! Any other method is wrong and anticapitalist.

Canadian law prohibits foreign control of telecommunications companies.

I laughed at that one. All the privateers and hedge funds were foreign. Including the winner.

Look at this news story from earlier today:

Note that it talks about how everyone is discussing everything but do we imagine it is accidental that these talks suddenly ended on a non-trading day? I write so much stuff on weekends because this is when businesses and governments do all their 'data dumps' that they want no one to notice or see. Or to dump stuff when the markets are closed. This story is exactly the sort they do on weekends or holidays. I wonder what the winners paid the administrators of the Teachers Union?

From Bloomberg, 2005:

BCE Inc., Canada's biggest telephone company, will cut as many as 4,000 jobs, buy back stock and spin off its rural phone-line unit to boost a share price that has lagged rivals' such as Telus Corp. and Rogers Communications Inc.

BCE plans to repurchase about 5 percent of its shares for C$1.3 billion ($1.1 billion) and pay down debt by about C$1 billion by June 30, according to a statement from the Montreal- based company today.

Chief Executive Officer Michael Sabia, 52, is raising about C$6 billion from selling assets to increase profit and focus on the faster-growing wireless and Internet operations. BCE stock has dropped about 20 percent in the past five years, trailing Telus and Rogers. BCE said 2006 profit will fall as much as 12 percent, the fifth annual decline in seven years.

This is an old news story showing the difficulties of Bell Canada. They tried to get thousands to walk the plank in the hopes this would attract sharks and thus, drive up the price of the stocks. American companies do this all the time. When an executive needs a boost in his stocks he holds, a bunch of lower level workers get thrown to the sharks and the executive gets to buy and new house in Aspen or the Bermudas.

Some history of Bell Canadal from Funding Universe:

Bell Canada first made--and won--an application for continuance under the Canadian Business Corporations Act. The shift allowed Bell to begin implementing its plan without regulatory approval. Opposition came from consumer groups, who feared the reorganization would greatly increase telephone rates, and the government, who claimed the change would make Bell Canada too difficult to regulate. Government officials worried that telephone subscribers could end up subsidizing Bell's sister corporations. For example, Bell could buy overpriced equipment from Northern Telecom and pass the expense on to its subscribers. Bell Canada, however, claimed the reorganization would merely free its non-telephone subsidiaries to compete on equal footing with unregulated businesses, particularly internationally. The Quebec Superior Court eventually ruled that Bell did not need CRTC approval of the restructuring. So, barring an act of Parliament, the company was free to implement its plan.

The price of Bell's shares steadily increased--from $13.25 to $27.13 on the New York Stock Exchange--as the company reorganized. Shareholders approved the restructuring and exchanged their Bell Canada shares for those of the new holding company, BCE, Inc. The gradual deregulation of the telecommunications industry in the United States during the 1970s and early 1980s encouraged Canadians to lobby for lower long-distance rates through deregulation. CNCP Telecommunications applied to the CRTC for an opportunity to break into Canada's long-distance market, promising consumers 30 percent lower rates. In 1985 the CRTC rejected CNCP's request on the grounds that Bell Canada needed the long-distance revenues to subsidize local phone rates.

In 1990, however, the CRTC ruled that companies could buy time on private telephone lines in bulk from the phone companies and resell it at a discount. Within two years, the resellers had captured two to four percent of the phone companies' long-distance business. In 1992 the CRTC was expected to institute even greater changes in the long-distance market, such as allowing companies to resell discount packages like WATS. Resellers, however, wanted the CRTC to go further and allow them to own their own lines, an idea Bell Canada was fighting. Canadian Business quoted Bell Chairman Jean Monty as saying that '[the presence of resale means Canada already enjoys] a workable balance between competition and monopoly.'

Monopolies are such fun. We are seeing them reborn but they aren't pure monopolies like the Bell systems. They are more like chimera. Several animals stitched together. But as I showed with the Apollo Advisors group the other day, they like to have vertical systems rather than horizontal. And even then, the horizontal aspects tend to grow which is why Apollo holds most of the national real estate chains, a hilarous example since this is now a chain around Apollos' neck and might strangle them and kill the world's 6th biggest private fund!

MONTREAL, Québec, Dec. 18 2006 -- BCE Inc. (TSX/NYSE:BCE) today
announced the sale of its satellite services subsidiary Telesat Canada for
$3.42 billion to a new acquisition company formed by Canada's Public Sector
Pension Investment Board (PSP Investments) and Loral Space & Communications
Inc.
Consistent with BCE's stated strategy of concentrating on Bell, its core
communications business, the company had previously announced its intention to
surface the value Telesat represents for its shareholders through an IPO or
strategic sale.

Nov 22, 1989 BCE Increases Quarterly Dividend
BCE Inc., the most widely held corporation in Canada, today announced an increase in the quarter...

Oct 25, 1989 BCE 3rd Quarter Results
BCE Inc. today reported 1989 third quarter consolidated net income of $311 million, as compared ...

Bell Aliant announces cash distribution for June 2007

HALIFAX, NS, June 20 2007 -- Bell Aliant Regional Communications Income
Fund (the "Fund" or "Bell Aliant") (TSX: BA.UN) today declared its cash
distribution of $0.2350 per unit for the month of June 2007.
The distribution will be paid on July 13, 2007 to unitholders of record
at the close of business on June 29, 2007. The declaration of future
distributions is subject to approval by the Bell Aliant trustees.
To the extent that any portion of these distributions is designated as
dividends paid by Bell Aliant, that portion is designated to be an "eligible
dividend" pursuant to the Income Tax Act (Canada) and corresponding provincial
legislation.

Telus Corp.' s bid for Bell Canada Inc. has at least one element the other bids lack: Bell shareholders will get to keep the hefty dividend they have relied upon for years, rather than have it snatched away by private-equity funds.
Even better, a Telus takeover could lead to a larger dividend down the road as Canada's telecommunications sector moves toward a dividend-hiking machine sometimes known as a duopoly.
In fiscal 2006, Bell Canada (formerly known as BCE Inc.) distributed about $1.1-billion to shareholders in the form of quarterly dividends, making it one of the biggest sources of dividend income in Canada. Telus distributed another $411-million over the same period.

Here are photos of the web pages of the three privateers who were trying to board the Bell Canada sloop:

Here is the winner's home page, Providence Equity:

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Thanks to the courtship of Bell Canada, their stocks outperformed nearly 80% of the markets. If the Teachers Union wasn't bribed into calling off this business, it would have outperformed 100% of the stock market. But the privateers were not happy with the competition, they wanted a fiat charge which would cut their expenses. So they cheated.

The biggest and most powerful of the losing funds is KKR:

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This is a fund with very deep and very political pockets. The fact that they lost this deal must rankle them and I wonder if they are going to sue. Certainly, lawyers were called out of bed at 9am to deal with this! There is no such thing as a vacation or days off if you are at the top and want to be very rich.

The other winner has an interesting list of companies it holds.
XM Radio, Nextel, Ryder Trucks, El Dorado Banks, Pay Pal are some of the companies this private equity fund holds or owns outright. It shocks me, how many corporations are no longer owned by someone within but are held by these private funds. These are no longer public companies! And they are locking in more and more of corporate America, nay, the world...except for Japan and China. The huge FOREX reserves probably are part of the reason why this is so. Only China is now becoming a player, the government is setting up private equity funds and firms and watch out. They will be the biggest pirates of all which is funny when we remember the latest Pirates of the Caribbean movie features a Chinese pirate the government censored! Heh.

Some analysts think these funds now represent around $47 TRILLION! This is a huge sum! And has the weight and heft of a FEATHER. It is like a huge thunderhead, a cloud rising to the very heavens, lightning bolts lighting up the whole mass, a giant monster spawning tornadoes and rain and hail!

And then it melts away and the sun comes out or the moon rises on the devasted landscape of shattered homes, uprooted trees, washed out roads and dead bodies.

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Comments

May 17, 2008: It ain't over until the fat lady sings. So far the U.S. banks are sitting outside their establishments with tin cups and how they are going to supply the capital they promised is anybody's guess. The BCE bondholders are going to get shafted. Lost their first trial but will appeal and then appeal again to the Supreme Court if necessary. This deal is dead in the water. The Ontario Teachers are not patriotic Canadians but a bunch of whores who don't care about the fact if the deal went through, their enormous debt would preclude them paying Canadian income taxes.

Posted by: Roslyn Ritz | May 17, 2008 at 12:30 PM