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Bell hopes size is new trust's trump card

Existing trust faces less competition

TELECOM REPORTER

Prospective investors in Bell Canada's income trusts will have to weigh the greater size and liquidity offered by the new trust against the fewer competitive threats facing its existing trust, Bell Nordiq Income Fund.

BCE Inc. recently unveiled plans to bring a new trust to market as soon as the third quarter, hiving off 1.6 million of Bell's regional phone lines and merging them with Aliant Inc.'s land-line operations in Atlantic Canada.

Bell will also transfer to the new trust its 100-per-cent stake in Bell Nordiq Group Inc., which owns majority stakes in Télébec LP and NorthernTel LP that are convertible into Bell Nordiq Income Fund units. Bell Nordiq Income Fund will continue to trade separately.

While observers acknowledge the new trust faces more competition, they believe its larger size is a selling point.

"Just on the size of their footprint, the size of the trust, that will certainly encourage more investors to look at it," said Jonathan Popper, a portfolio manager at MFC Global Investment Management, which has a stake in BCE and Bell Nordiq.

Bell Nordiq is a small regional player with a market capitalization of about $580-million. BCE's new trust is expected to be Canada's third-largest telecommunications company.

There is also the broader geographic and customer reach to consider. The new trust will offer phone and Internet service in Ontario, Quebec, Nova Scotia, New Brunswick, Newfoundland and Prince Edward Island.

Bell Nordiq Income Fund, through its 36.6-per-cent stake in NorthernTel and Télébec, sells phone, Internet and wireless services in Northern Quebec and Northern Ontario.

Bell Nordiq Group, led by chief executive officer Roch Dubé, will continue to operate separately within the new trust. Bell Nordiq Group manages NorthernTel and Télébec. (BCE controls Bell Globemedia, the owner of The Globe and Mail.)

Rory Buchalter, an analyst at Dominion Bond Rating Service, said the economic focus of the territory in which Bell Nordiq Income Fund operates is on the resource sector.

"Whereas if you go into the new Bell-Aliant territory, of course you've got all kinds of different commerce, a little bit more diversity," Mr. Buchalter said.

However, competition is more intense in the Bell-Aliant trust territory, observers say. Halifax has been the most competitive city in Canada as Aliant had lost 28 per cent of its share in the residential local phone market by 2004.

"The difficulty is [the Bell-Aliant trust] will have one or two of the same problems that BCE is perceived to have had, in terms of erosion of a portion of its [customer] base," said Gavin Graham, chief investment officer at Guardian Group of Funds Ltd., which holds BCE shares. "But it's a lot more controllable."

Bell spokesman Mohammed Nakhooda acknowledged there's a lot of competition. "However, there's less exposure from cable competition specifically in the Bell regional territory," he said.

As for Bell Nordiq Income Fund's territory, competition in the local phone market in NorthernTel's territory isn't allowed, according to John Ripplinger, head of investor relations at Bell Nordiq Income Fund. And Télébec has more than 99-per-cent market share, he added.

Of course Bell Nordiq Income Fund won't forever be shielded from new competing technologies such as voice over Internet protocol (VoIP) phone services. Mr. Ripplinger expects cable operators will launch VoIP services in its territory this year.

"We experienced what we call a lag effect in our regions," Mr. Ripplinger explained. He added later that "we feel that we're in a strong position and we'll be able to compete accordingly."

Both trusts will pay out a similar proportion of their cash flow. Bell Nordiq Income Fund's payout ratio was 87 per cent last year, while the new trust's is slated to be 90 per cent.

The Bell-Aliant trust is expected to have a higher yield. National Bank Financial analyst Greg MacDonald estimates the implied yield of that trust is close to 8 per cent, based on Aliant's current share price, compared with 6.4 per cent at Bell Nordiq Income Fund.

"Income investors have to consider risk versus reward," Mr. MacDonald said. "How much of a premium should Bell Nordiq have? We think at most a 1-per-cent yield premium" considering the Bell-Aliant trust's liquidity and potential capital appreciation.

Battle of the Bells

Bell Nordiq Income Fund is a small regional player with a market capitalization of about $580-million while the new trust is expected to be the third largest telecom company in Canada. With greater size comes more competition.

Financials

52-week intraday high$19.85
52-week intraday low$14.60
P/E ratio, trailing16.63
Dividend yield6.41%
Market cap$581.7-million
Price/book ratio1.88
1-year total return11.39%
Revenue, fiscal 2005$36.6-million
Profit, fiscal 2005$34.8-million

SOURCE: THOMSON DATASTREAM; BLOOMBERG FINANCIAL SERVICES

© The Globe and Mail

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