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ANDREW WILLIS

Thursday, February 02, 2006

As compelling as the financial logic may be for spinouts at BCE, and the numbers are truly astounding, the biggest change that Michael Sabia set in motion yesterday is likely to be in the phone company's culture.

BCE, never known as a hotbed of entrepreneurs, will give birth to two bouncing new babies this year. Mr. Sabia unveiled plans for a $4.5-billion income trust that will be home to 1.6 million rural phone lines, along with a $1-billion initial public offering of satellite division Telesat. Leaving the corporate finance plumbing for a moment, consider what's about to happen at these two companies.

BCE has spun off two other divisions in recent years; a smaller collection of rural lines in Bell Nordiq, and the leveraged-buyout-turned-trust that is Yellow Pages Group.

At Bell Nordiq, chief executive officer Roch Dubé and his team have gone from an obscure backwater of the phone company to running their own $544-million company. The quality of customer service is up, employees act like owners, and the financial performance is staggering. The trust went public at $10 three years ago, has paid a steady stream of cash, and closed yesterday at $16.60 a unit. BCE is one proud parent.

At Yellow Pages, the transformation is even more remarkable. CEO Marc Tellier and colleagues have created a dominant national player with double-digit growth out of what was a moribund regional phone directories unit, buried in Bell Canada.

BCE got $3-billion for Yellow Pages in 2002. The market capitalization is now $7.5-billion.

So in addition to getting investors to show the love for some underappreciated assets, Mr. Sabia is hoping that history repeats itself as the next round of restructuring plays out.

On the rural phone spinout, a yet-to-be named management team will be given their own company to run, backed by the full support of parent Bell Canada. This squad will offer phone and Internet services to farm communities and small towns that aren't really in the sights of cable company competitors.

Bell Canada will enjoy the strategic benefits that come from controlling the trust, as it does with Bell Nordiq, but the company's focus will be relentlessly rural.

At Telesat, the potential for cultural change is even greater. Around the world, satellite ownership is consolidating and company valuations are soaring. Once Mr. Sabia quite rightly decided that owning the birds isn't essential to the phone company's future, an IPO of Telesat became a logical way to give Canada's satellite company the currency it needs to play in this space, as either a buyer of rivals, or an independent company that can strike alliances.

While federal regulations prevent a foreign company from taking over Telesat, it's easy to imagine larger satellite companies lining up alongside public investors to take a stake in a business that recorded $156-million of profit last year on revenue of $475-million.

Within Bell Canada, one of the great management challenges remains turning the old monopoly phone culture into a client-focused business before competitors steal the best customers away. The new rural lines trust and an independent Telesat can only put the spurs to that transformation.

The numbers

Taking a glance at the math behind an income trust shows why Mr. Sabia, a former civil servant, was so clearly frustrated when Ottawa's review of the trust sector last fall put off the BCE spinoff.

BCE's internal calculations, which match those of the Street, value the rural lines at 4.5 to 5 times their earnings before interest, taxes, depreciation and amortization, or EBITDA. That works out to about $1.7-billion of equity value as a unit of the phone firm

By simply handing a 50-per-cent ownership in the rural lines to BCE shareholders in a tax-free exchange, and promising to distribute 90 per cent of the cash the business generates, BCE will create a tax-efficient trust with an equity value of between $4.5-billion and $5-billion, along with $1.2-billion of debt. That number reflects the concept that the rural lines will offer investors a 7.5-per-cent yield on what will be one of the two or three largest trusts in Canada.

On Telesat, BCE estimates the company will command a multiple of 8.5 times its EBITDA to get to the $1-billion valuation on the IPO, which again is well above the price ascribed to Telesat as a division of the phone company.

While investment dealers charged with advising on the trust spinout and underwriting the Telesat IPO have not been officially named yet, they have been chosen. BCE is sensitive to the fact that big investment banks have deep and occasionally painful relationships with the company that include all sorts of lending, and mandates are awarded accordingly. CIBC World Markets is expected to win part of this round of business.

Mr. Sabia joked yesterday that there was no more need for pilgrimages to BCE's headquarters, as "enough trees have died to make the bankers' pitch books."

awillis@globeandmail.com

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