Collapse of BCE deal good for business: Analysts

The announcement Thursday that Bell Canada Enterprises Inc.’s acquisition by a consortium led by a pension fund will not go ahead will benefit corporate customers in the end, a Gartner analyst suggested today.

“Most enterprise customers will begin to see some positive out of this,” said Elroy Jopling, Mississauga, Ont.-based research director at Gartner Inc., a Stamford, Conn. IT research firm. “You’re not going to be dealing with a Bell Canada that has significant debt. You will be dealing with a Bell Canada that has cash, so it’s a much different environment.”

In June, 2007, Ontario Teachers Pension Plan – along with Providence Equity Partners Inc., Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity – announced their intent to purchase all outstanding shares of BCE for about $50 billion.

Four banks agreed to lend the consortium $30 billion, which would have quadrupled BCE’s debt load if the deal had gone through.

One of the conditions of the privatization was for auditor KPMG to declare by Thursday that the company would “meet solvency tests.”

In late November, KPMG warned it would probably not be able to do this, so on Wednesday night, Teachers told BCE the deal was off.

Neither BCE nor Teachers responded immediately to requests to comment for this article.

Two major hurdles to the deal were overcome last summer. The Supreme Court of Canada ruled against a suit by bond holders and the four banks — Toronto-Dominion, Deutsche Bank, Citigroup and Royal Bank of Scotland — agreed to the loan.

Then BCE appointed former Telus Mobility head George Cope as its CEO, and one of Cope’s first decisions was to eliminate 2,500 management jobs.

“I think if BCE executes to strategy under George Cope, which they have every likelihood of doing, I think enterprise buyers will come out ahead,” said Brownlee Thomas, Montreal-based principal analyst for enterprise telecom services at Forrester Research Inc. of Cambridge, Mass.

“Over past nearly two years the executives have had their minds often on dealing with being acquired, or dealing with their potential new owner,” Jopling said. “To a degree they’ve taken their eye off the ball.”

But now, he added, Bell Canada can focus on customer service and product releases.

“It’s good to get this whole thing out of the way,” Jopling said. “It will be good to see, quite frankly, Bell, Telus and MTS Allstream’s minds around competing with each other to provide their enterprise customers with the best solutions rather than seeing the bankers and the lawyers and everybody else involved.”

One enterprise customer is not so sure BCE will change its strategy now that it will not be taken private.

“I don’t see any change in the behaviour of BCE at all,” said Andrew McAusland, associate vice-president for IT services at Montreal’s Concordia University. The acquisitions negotiations “may have put them behind in some business development issues but in my opinion they still provide a core service, they do it very well, and I don’t expect behavioural change from the company in being able to deliver the goods.”

“What that means long term in the products they develop, how they’ll change their strategy, I have no idea.”

One of Bell Canada’s recent moves was a deal with Telus Corp. to better compete with Rogers Wireless by starting to overlay its wireless network with High Speed Packet Access.

In the long-term, this could lead to a merger of the two biggest incumbent carriers, Jopling suggested.

“Let’s face it, Rogers is a formidable competitor to both Telus and BCE, and BCE and Telus have worked together on 3G and such,” Jopling said. “That may be down the road, one acquiring the other or maybe a merger. Until the economy turns around I don’t think anybody, customers or the financial community, want to hear of a BCE acquisition or acquisitions by BCE.”

Telus was actually interested in buying BCE in 2007, but pulled out shortly before the Ontario Teachers Pension Plan announced its bid.

Thomas hopes Telus never merges with BCE.

“I would be very worried if something like that happening because we would be looking at the re-monopolization of telecommunications,” she said. “It’s not very encouraging if you’re looking at one huge player and the next one in line is MTS Alllstream.”

The termination of Teachers’ acquisition comes the same week the Conference Board of Canada published a five-year forecast of the telecom industry in Canada.

In its Autumn 2008 Canadian Industrial Outlook for Canada’s Telecommunications Industry, the Conference Board predicted revenues for telecom providers will increase an average of 2.3 per cent per year for the next five years, when measured in constant 2002 dollars, though the providers will cut nearly 7,000 jobs this year and another 2,000 in 2009.

In its report, the Conference Board said wireless data services are accounting for an increasing share of wireless revenues, though the growth in price will be “limited” due to the new competitors who got licences in last summer’s Advanced Wireless Spectrum auction.

But Canada’s wireless data rates are so high a lot of customers don’t want to sign up, said Thomas,

“We’re still considerably more expensive than the United States,” Thomas said. “Currently businesses, enterprises and consumers are afraid to spend on telecom because they don’t have that visibility. We can’t tell how much it’s going to cost. It’s not predictable.”

She added even in a recession, companies will need to spend on telecom services so they can become more efficient.

“I think that we’ll see an interest in video conferencing, so you’re buying laptops now with video conferencing built in, you need broadband to make that a meaningful experience,” she said. “More and more companies are going to stop travelling and that means you need to have these collaborative tools to make it possible for people to do their work efficiently.”

But carriers are going to have to rely more on services and less on network access for revenues, McAusland said.

“I think the whole business model is going to have to change to one where you’re not paying so much for network access but you’re paying for a variety of services you may or may not elect to purchase or use on that network,” he said. For example, school boards that cannot afford to manage desktop software could purchase virtual desktops from service providers.

“If a provider could provide a back end virtual desktop and then sell single desktop subscriptions to it, that would be a great market,” he said. “Instead of school having to build a million dollar infrastructure, they could subscribe on a monthly basis to 100 desktops or something.”

BCE claims it is owed a $1.2 billion breakup fee but Teachers said Thursday it “terminated the agreement in accordance with its terms. Under these circumstances neither party owes a termination fee to the other.”

Jopling said if BCE sues Teachers, that should not distract managers from the business at hand.

“That should be the board of directors. That shouldn’t be George Cope’s primary interest,” he said. “The key is Bell Canada will prosper and survive based on how well they serve their customers, how innovative they are providing their customers with world class applications, that they provide value for their money. That’s what enterprise customers are looking for. They’re not looking for Bell Canada executives spending all their time trying to sue Teachers.”

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