Battle for Bell is as much about politics as it is about business

The Ontario Teachers' Pension Plan had better be prepared for a fierce fight

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The Gazette, Friday, April 13, 2007

So the Ontario Teachers' Pension Plan says it's no longer a passive investor in BCE Inc. Then it shouldn't be surprised if Ottawa and Quebec aren't disinterested bystanders in any fight for control of Canada's largest telecommunications company.

Bell is based in Montreal. It employs nearly 19,000 people in this province, about 16,000 at Bell Canada alone, making it the third-largest private-sector employer in Quebec. Its revenues of $17.7 billion last year, in a high-tech industry, place it up there with Bombardier and Alcan Inc. as Quebec icons.

And how long would Bell remain based in Quebec if control of the company passed to a pension fund in Ontario?

Stephen Harper, as the leader of a minority government in Ottawa, seeking a road to a majority through Quebec, would be troubled by this question. Especially with Gilles Duceppe in his face when Parliament resumes next week.

Jean Charest, as the leader of a new minority government in Quebec, cannot even consider the prospect of an Ontario pension fund gaining control of Bell.

This is getting ahead of the game, but that's exactly where it's heading.

With 42 million shares, or five per cent of the company, Teachers' is the largest single shareholder in the Montreal-based telecom giant.

Teachers' has let it be known that it's not happy with Bell's share price, which yesterday closed at a five-year high near $35, driven up seven per cent this week by speculation that Teachers' wants to lead a bid to take it private.

Since Bell is the country's most widely held company, with hundreds of thousands of individual and institutional shareholders, they aren't indifferent bystanders, either. With its quarterly dividend of 36.5 cents, Bell is Canada's widows' and orphans' fund, and has pledged to return at least 70 per cent of its future profits to shareholders as dividends. If the company were taken private, perhaps at a rumoured $40 a share, the dividend would disappear. Bad news for widows and orphans.

Teachers' is also unhappy with the return on its investment, which has fed a lot of street talk this week about Bell CEO Michael Sabia, and the apparently glacial pace of Bell's turnaround in the five years since he took over a sinking ship from Jean Monty.

Neither Teachers' unhappiness, nor the Bay St. trash talk about Sabia, stands up to factual scrutiny.

Consider: Bell's total return to shareholders, including the dividend, was 18.2 per cent in 2006. Bell's principal competitor in the big telecom space, Telus, had a return of 14 per cent.

As for Sabia, he has taken $2 billion of costs out of the system in five years. He has also got Bell out of all its non-essential business segments, and returned to its core competency. These weren't fire sales, either. Sabia got $1.3 billion for most of Bell's share of BellGlobe Media (including CTV and the Globe and Mail) and $3.25 billion net to exit Telesat.

Sabia has also done two share buybacks, paid down debt and increased the dividend twice in five years. He also is eliminating the holding-company discount by eliminating the holding company, BCE.

While the share price has under-performed until the recent spate of speculation on a private equity deal, it's pretty hard to make a convincing case that management has performed poorly. Bell might be boring, but hey, it's the phone company. It's supposed to be boring.

Why does Ontario Teachers' want to be owners rather than investors? What do their number-crunchers and analysts know about running companies in the residential and enterprise wireline, wireless, Internet and satellite-television segments of the telecom business?

The answers are, who knows, and absolutely nothing. Well, they'd bring in managers who knew about cost cutting and selling off parts of the business to pay down debt.

Teachers' is apparently looking for dance partners for a bid to take Bell private. But foreign ownership of Canadian telecoms is capped at 46 per cent, limiting the amount of money that can be cobbled together on Wall St.

So Teachers' needs friends in Canada. There's only one other Canadian pension fund that has the muscle - the Caisse de depot et placement du Quebec, which has already made it clear it wants no part of any such play for Bell.

Teachers' had a good year in 2006, growing its assets from $96 billion to $106 billion. The Caisse had an even better year, growing from $122 billion to $143 billion.

The only circumstance under which the Caisse would ever become involved would be in a rival bid to make sure Bell stays in Quebec.

Teachers' would do well to appreciate that this isn't just business, it's also about politics. And there is an old political saying - don't bring a knife to a gunfight.

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