Ma Bell gets back to basics

Income-trust deal means Bell is back to being a phone company

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The Gazette, Friday, October 13, 2006

Ten years ago, when I was writing speeches for executives for a living, my favourite client was Red Wilson, then CEO of Bell Canada Enterprises, the massive holding company that had diversified out of its roots as the phone company.

"You know what's wrong with this company?" he asked one day, twirling a trademark unlit cigar. "There's too many goddam phone company people in it."

What he meant was that the culture of Ma Bell, built up over a century as a regulated monopoly, was resistant to change, and abhorred the very notion of diversification.

Wilson was the perfect choice to run a holding company because he didn't try to run his operating companies, he simply kept an eye on them from the centre. Since its founding in 1982, BCE was in a lot of businesses, some of which it had no business being in. At one time or another, BCE was in real estate, financial services and pipelines, not to mention its 40- per-cent interest in its telecom provider, Nortel Networks, later spun off to shareholders.

Wilson's successor, Jean Monty, was brought in from Nortel in 1997, and got caught up in convergence mania at the millennium, overpaying for things like CTV, the Globe and Mail, Telesat and a big share of CGI, the information technology outsourcer. Along the way, Monty sold off 20 per cent of Bell Canada. The growth segments of the business were in wireless telecom (Bell Mobility), satellite television (Bell ExpressVu) and Internet service provision (Bell Sympatico). But even as Monty was selling off a piece of Bell, he understood the power of the trademark, and rebranded the name onto the operating companies. Bell Mobility, for example, was formerly BCE Mobile, but as big it was in the stock market, BCE had no brand equity in the consumer marketplace.

The Bell branding exercise was about all that Michael Sabia retained of the Monty business model when he arrived on the scene in 2002. He gradually moved out of the other business segments and back into telecom.

On Wednesday, Sabia made a move markets had bee anticipating for months when he announced that Bell was converting to an income trust. The surprise element was the announcement that BCE itself will be broken up in the consolidation of telecom assets.

After a quarter-century of diversification, Bell is back to being a phone company. The announcement was accompanied by the usual banter about focus, core competency, sticking to knitting and getting back to basics - things that are always heard when a conglomerate is dismantled.

The market liked the news, sending a stock that has underperformed of late to a two-year high. Investors should be happy, and that means everyone with a retirement fund. With 300,000 individual and institutional shareholders, BCE is the most widely held company in the country. Not only is the share price out of the doldrums of the mid $20s, the payout to unit holders will initially increase from $1.32 to $2.55 annually, or 21 cents a month per unit.

But because Bell will be paying most of its profits to unit holders, it won't be paying corporate taxes, except as a percentage of retained earnings.

If Bell and Telus can convert to income trusts, the banks must be next. In theory, corporate taxes could shrink to zero as the entire Toronto Stock Exchange converts to income trusts. What's lost in all this is that taxes are paid as other income by the people who receive the monthly payout. That should be pretty much revenue neutral.

But this is how the income trust hoo-hah started on Sept. 19 of last year when Ottawa announced it would no longer automatically approve trust conversions, all because it was concerned about $300 million in potential corporate-tax loss. This from a minority government in imminent danger of falling, while hoarding a surplus that turned out to be $13.2 billion.

Senior Finance officials later made clear it wasn't their idea, or even that of then-Finance Minister Ralph Goodale, but that it had come from 24 Sussex Dr. The market response was toxic - BCE alone took a $1.6-billion hit in market value the next day, and it was then nothing more than a possible candidate for conversion at some future date.

There was a taxpayers' revolt, and before the Liberal government fell last November, it relented on the tax ruling. But some stocks had spiked before the market close and the fumbling of the announcement that day led to the mid-campaign headline that probably sealed the Liberals' fate: "RCMP criminal probe into income trusts."

Ten months later, we still haven't heard anything more. As for BCE, it belongs, Sabia said, to another era. Ma Bell is back.

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