Acquire BCE Inc. when it acquires Bell Aliant

BCE Inc. wants to buy the Bell Aliant shares that it doesn’t already own. BCE (TSX—BCE) remains a buy. If you hold Bell Aliant (TSX—BA), you should perform your own ‘reverse takeover’. That is, you can acquire BCE shares when it acquires your Bell Aliant shares.

BCE expects to profit from the acquisition of Bell Aliant. It will eliminate Bell Aliant’s costs as a public company and other unnecessary costs. BCE expects this will produce $100 million or so in pre-tax yearly ‘synergies’ (largely cost savings). It also expects the acquisition to raise its free cash flow to about $200 million a year, after common share dividends.

BCE says, “Privatizing Bell Aliant within BCE supports our dividend growth model and capital investment strategies, while maintaining a strong balance sheet and strong investment-grade credit ratings with significant financial flexibility.  … Bell Aliant enhances our EBITDA (earnings before interest, tax, depreciation and amortization) margin, EPS (earnings per share) and FCF (free cash flow), generating attractive synergies to support BCE’s ongoing investment in communications growth services.” The latter refers to BCE’s broadband investment strategy. This will benefit you as a BCE shareholder.

The transaction benefits all shareholders

The transaction also benefits shareholders of Bell Aliant for four reasons. First, they can choose among several options: cash of $31 a share; 0.6371 shares of BCE; or cash of $7.75 and 0.4778 BCE shares. In the end, they’re likely to receive both cash and shares. That’s because BCE wants to pay 25 per cent of the cost in cash and the other three-quarters in shares. If you don’t need cash, opt for BCE’s shares.

A second benefit to Bell Aliant shareholders is that BCE’s $31 a share offer was 11.6 per cent above Bell Aliant’s stock market price. Financial advisor Barclays Capital Canada says that the fair market value of Bell Aliant’s shares is from $27 to $31.50. So BCE’s offer is near the high end of this range.

A third benefit is that Bell Aliant shareholders will likely profit more with BCE’s shares. For instance, BCE has raised its dividend 10 times since the last quarter of 2008. Bell Aliant, by contrast, cut its dividend from $2.90 a share in 2010 to $1.90 a share in 2011. It has continued to pay that same dividend ever since. Partly offsetting this disadvantage it that Bell Aliant’s dividend now yields 6.1 per cent. This beats BCE’s yield of five per cent. Then again, BCE’s shares have gone up more in price and the company has better long-term prospects.

Defer Canadian capital gains taxes

A fourth benefit for Bell Aliant’s shareholders is that they’re likely to receive favorable tax treatment. BCE writes, “Taxable Canadian shareholders who receive BCE shares as consideration under the offer will generally be entitled to a roll-over to defer Canadian taxation on capital gains.” That’s another reason to opt for BCE’s shares. The forthcoming directors’ circular will provide full details.

BCE expects to acquire Bell Aliant by November 30. There should be little problem satisfying the regulator. For one thing, BCE already controls Bell Aliant, so owning its entire subsidiary will make little difference to competition in the industry. For another thing, Bell Aliant will give BCE no wireless spectrum. (The federal government seems to have a vendetta against the big three wireless telecommunications companies. It has forbidden them from taking over small competitors and it has curtailed their scope to acquire additional spectrum.)

BCE remains a buy for long-term share price gains as well as high and rising dividends. For now, Bell Aliant remains a hold. Vote in favor of the transaction and tender your shares when the time comes. Only sell if you need the cash before November 30. Even if you don’t need the cash, you might sell if Bell Aliant trades at more than $31 a share and the brokerage fee per share to sell. (But remember this may trigger a taxable capital gain on the transaction rather than the expected roll-over provision for the share exchange.)



The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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