Telus wont be merging with BCE anytime soon

The decision by Telus to call off its proposed merger with BCE earlier this week was met by surprise, but analysts are saying this decision may be a good thing for Canadian enterprise customers.

Despite waging a high-profile public relations campaign last week with its chief executive arguing about the need for a truly national player, Telus issued a terse statement that it would not submit an offer as part of BCE’s strategic review. The Western incumbent blamed “inadequacies of BCE’s bid process” as the reason for the about-face.

Telus’ proposal had rocked the Canadian telecommunications sector, which had already been buzzing about the possibility of the country’s largest provider being acquired by a U.S. private equity firm or various pension funds. It has been suggested by various reports that BCE could end up becoming a private company again depending on the acquiring party.

The other likely bidder was a consortium led by Canada Pension Plan Investment Board and U.S. buyout specialists Kohlberg Kravis Roberts & Co., whose members included Gerry Schwartz’s Onex Corp. and Caisse de depot et placement du Quebec. That consortium has also pulled out, but the BCE’s largest shareholder, the Ontario Teachers’ Pension Plan, is still reportedly making an offer with U.S. partner Providence Equity Partners.

Another contender is Cerberus Capital Management LP. BCE’s deadline for bids was Tuesday, and it will complete its strategic review by September.

“The fact is that whole BCE process seems to be geared not to get a bid they can accept,” says Ian Angus, principal analyst with Angus Telemanagement Group. “They’ve made it very, very short…Telus concluded it came in late, so preparing a bid would be difficult, and getting the (regulatory) approvals through would take much longer with their bid.”

Tony Olvet, who leads the communications practice at Toronto-based research firm IDC Canada, says Telus’ timing has been a stumbling block for several contenders.

“It’s interesting this terse announcement (from Telus) comes out the same day there’s discussion in Ottawa about having a policy from the government to have more authority of foreign ownership of firms,” he says, adding that Telus was a unique player in the BCE auction. “The card they were playing was not only national sovereignty, but almost a U.S.-like approach to national security – a national carrier that’s Canadian-owned.”

Angus says Telus does not have a great track record in terms of mergers and acquisitions, citing what he called two years of chaos following its takeover of BCTel in the 1990s.

“Telus is one of a very small number of actual competitors for Bell in the corporate market,” he says. “A takeover by Telus would have produced a much longer period of confusion and uncertainty. The whole point of a Telus takeover was, what can you cut out?”

Olvet noted that during its initial conference call with analysts about its proposal last week, Telus chief executive Darren Entwistle was vague on the enterprise impact, suggesting only that it would be beneficial to ensure long-term investment in the combined network.

“There’s a lot of talk about what this means for consumers, but sometimes the business customers are not really highlighted as a potential area for concern,” he says. “A lot of customers will be scrutinizing whatever deal takes place and the terms and could cause them to postpone the renewal of contracts or lead them to look at alternative suppliers.”

BCE assets include its Bell Aliant division, which signed up engineering and environmental firm Jacques Whitford as an IT outsourcing client. Russell Morrison, Jaques Whitford’s CTO, says Bell’s decision to spin off Aliant as an income trust last year makes him feel safe about the future.

“BCE overall does not drive what they’re doing,” he says, adding he’s not worried “unless something significant changes in the Bell Aliant structure.”

Olvet says you can’t rule out further spinoffs, no matter what happens to BCE.

“It’s not in the best interest of the organization,” he says. “If you look at using the buzzword convergence, having wireless/wirelines working together makes a lot more sense for the business and the customers. If they go down the privatization route, you’re looking at ROI decisions and that means splitting things up.”

A Reuters report Tuesday said almost 50 per cent of Canadians were opposed to Telus and BCE coming together.

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