BCE-Telus merger would be nightmare: Forrester

If Bell Canada Enterprises Inc. merged with Telus Corp., corporate Canada would be faced with a monopoly for enterprise services, a Montreal-based analyst has said.

No such merger has been announced but published reports Wednesday quoted a report from RBC Dominion Securities Inc. predicting a merger between the telecom carriers “is increasingly likely” in the next year or two.

Neither BCE nor Telus would confirm or deny they are in merger talks and both companies Wednesday dismissed the report as “speculation.”

Brownlee Thomas, Montreal-based principal analyst at Forrester Research Inc., said a merger would be bad for business users because Bell and Telus compete in providing network services for corporation.

“Bad idea,” she said. “Don’t let them do it.”

One of Telus’s customers is the Department of National Defence, which in 2007 chose the Vancouver carrier over Bell Canada in a competitive bid for a global network carrying voice, video and data.

Although the cable companies are competing with incumbent local exchange carriers in providing wireline services for consumers, this is not the case for business, Thomas said.

“A Telus-Bell tie-up? I would be pulling out my hair as an enterprise business buyer,” Thomas added.

But Lawrence Surtees, research vice-president for communications at IDC Canada, said a merger between Telus and Bell would not mean a monopoly.

“Bell and Telus are not the only national choices,” he said. “Allstream continues to be a significant player. Don’t forget AT&T Global Services.”

Allstream, originally AT&T Canada, was acquired by Manitoba Telecom Services five years ago but continues to operate a 27,900 km national fibre network.

Two years ago, Telus disclosed it had started talking to BCE about a possible merger in May, 2007. Other investors, including Canada Pension Plan Investment Board, Onex Corp. and Caisse de depot et placement du Quebec, were also interested.

Telus ended discussions over what it called “inadequacies of BCE’s bid process.”

Then BCE announced the Ontario Teachers Pension Plan agreed to take BCE private by buying the majority of outstanding shares of the company. Had that deal gone ahead, Teachers would have owned the carrier, along with Providence Equity Partners Inc., Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity. At the time, the merger was expected to cost $50 billion.

But the privatization carried a condition that BCE’s auditor, KPMG, report on the “solvency” of the firm Dec. 11. The night before the report was due, Teachers told BCE the deal was off because “KPMG has concluded that a required test for the solvency opinion was not met.”

So BCE remains a publicly-traded company, though its chief executive officer, George Cope, is the former CEO of Telus Mobility. Despite this, a merger would cause a culture clash, and “integration nightmare,” Thomas said.

“These companies operate in radically different ways,” Thomas said, adding it is unlikely Telus would want to be acquired by BCE.

RBC Dominion Securities would not release Allen’s report Wednesday to Network World Canada, but published reports quoted the report as speculating if the two carriers merge,, BCE would own two-thirds with the remainder owned by Telus shareholders.

“I cannot see Telus management being treated equally by managers of Bell,” she said of this scenario.

Earlier this month, BCE released its results for the quarter ending June 30. Net income was down 8.5 per cent from the same quarter in 2008. Operating income for its wireline division dropped by 21.6 per cent. Though wireless revenues dropped slightly, operating income from wireless rose five per cent.

For its part, Telus said wireless data revenues in its most recent quarter rose by 37 per cent.

“Wireless is propping up both companies but not because it’s more efficient,” Thomas said. “There are only three players in Canada.”

But this will change when new entrants Globalive (using the Wind Mobile brand), DAVE Wireless, Public Mobile and Videotron roll out wireless services using spectrum they bought in last year’s auction.

Telus has asked the Canadian Radio-television and Telecommunications Commission to look into Globalive’s ownership structure, because an Egyptian firm, Orascom, holds 65 per cent of the equity.

In addition to competition on the wireless side, Bell and Telus are also facing competition in business services from cable companies, Surtees said.

“That will ratchet up the heat on established incumbents even more,” he said. “I share that view you could very much be looking at a Bellus.”

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