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Sabia signals a bold, new course for BCE

Asset spinoffs, job cuts aimed at adjusting to a changing market

TELECOM REPORTER

BCE Inc. revealed an ambitious corporate makeover yesterday with a plan to spin off assets, cut jobs, and reduce debt -- moves that chief executive officer Michael Sabia hopes will help it adapt to the rapidly changing telecom market.

Montreal-based BCE aims to create shareholder value by forming a new income trust that will own and manage 1.6 million of its local phone lines in Ontario and Quebec, and by selling a stake in its Telesat Canada satellite business in an initial public offering.

The initiatives, coupled with previously announced asset sales, will raise about $6-billion, BCE said. The country's biggest phone company will also cut up to 4,000 jobs this year to shore up profit.

"Over all, I think it's fair to say we have a full agenda," Mr. Sabia said yesterday at the company's annual investors day.

Competition is the catalyst for this transformation. The telecom market has changed significantly as the country's cable companies have all entered the local phone market and gained market share. BCE's shares have been stuck in neutral, lagging rival Telus Corp., which generates more of its revenue from the fast-growing wireless market.

"The focus of [BCE's] management is on unleashing shareholder value," telecom consulting firm SeaBoard Group wrote in a note. "This financial market inertia has been a key source of frustration for the company and its leadership."

The latest steps in BCE's transformation came as it reported a slight dip in fourth-quarter profit to $413-million or 44 cents a share. That compares with profit of $417-million or 45 cents a year earlier, when it had a one-time gain.

Revenue rose 4.6 per cent to $4.99-billion in the three months ended Dec. 31 from $4.77-billion.

Growth in wireless and Internet services revenue offset a decline in local and long-distance revenue.

For the full year, BCE's profit rose to $1.89-billion or $2.04 a share from $1.52-billion or $1.65 in 2004. Revenue advanced to $19.1-billion from $18.37-billion.

BCE expects 2006 share profit will fall to between $1.80 and $1.90 because of higher pension expenses. Revenue is expected to rise between 1 and 3 per cent as growth in wireless and Internet services is offset by declines in local phone lines, also known as network access services (NAS).

The company announced a program to trim between 3,000 and 4,000 jobs this year, representing as much as 8.7 per cent of its work force. Half of the cuts will be through attrition. The current work force reduction, along with cost-cutting efforts in procurement and other areas, are expected to contribute to the $1.2-billion to $1.4-billion in cost savings expected by the end of 2006, and $2-billion by the end of next year, the company said.

While BCE embarked on its transformation process two years ago, Mr. Sabia acknowledged yesterday there are no "quick fixes."

"I think the makeup of the company is to get through this transformation, get through this initial wave of NAS erosion, build growth engines, then as we go forward . . . the complexion of the company will begin to change," he said.

One of Mr. Sabia's clear priorities is to unlock shareholder value. In that vein, BCE plans to distribute about 50 per cent of its interest in the income trust for some of its regional phone lines to all of its common shareholders in exchange for a reduction of about 75 million BCE common shares. And BCE plans to recapitalize Telesat and then sell a minority stake in an IPO in the second half of this year.

These latest initiatives come after the company said in December it would divest the majority of its holding in media unit Bell Globemedia, which owns The Globe and Mail and the CTV television network, and its stake in computer services company CGI Group Inc.

The four asset sales will raise about $6-billion. BCE plans to use some of the proceeds to buy back about 5 per cent of its shares; $300-million will be used for pension plan funding, while $1-billion is earmarked for debt reduction.

In response, Standard & Poor's Ratings Services cut BCE's credit rating to "A-minus" from "A," citing insufficient debt reduction.

In a note, RBC Dominion Securities analyst Jonathan Allen questioned how much of a lasting impact the asset sales will have on BCE's share price.

"The changes announced do not substantially address our growth/asset concerns," he wrote in the note. "As a result, once the near-term rally subsides, we may see BCE shares again stall as investors again focus on challenging quarterly results in the face of residential access line erosion and only modest asset sale upside from converting Telesat to an income trust."

Mr. Sabia continues to tackle the challenges facing BCE's main Bell Canada communications unit. Bell's new president, George Cope, is spearheading a plan to generate more revenue from so-called next generation services, such as wireless, TV and high-speed Internet.

Mr. Cope, who was hired away from Telus's wireless business, believes more revenue needs to flow through to Bell's profit. "That will be an intense focus of this management team going forward."

BCE's big play

The strategy

BCE is reviewing all of its holdings with an eye to unlocking shareholder value and streamlining its business. These moves are expected to release about $6-billion in value from the company.

The trust

About 1.6 million local Bell Canada phone lines in Ontario and Quebec will be turned into a trust. Forecast annual revenue is $1.2-billion and cash available to be paid to investors is estimated at $380-million. About 1,000 Bell Canada employees will be transferred to the trust. BCE expects to hold 50 per cent of the new entity.

The IPO

Telesat Canada will be recapitalized, and spun off as an initial public offering in the second half of this year. BCE will hold a majority stake. It expects proceeds of $1-billion.

The cutbacks

Bell Canada will cut between 3,000 and 4,000 positions out of its total 60,000.The debt

Pay down $1-billion in debt.

The buyback

Spend $1.3-billion to buy 5 per cent of the shares outstanding.

We are now moving through a transition, equipped to accelerate the change in Bell's revenue mix. There are no shortcuts, no quick fixes.'

Michael Sabia, CEO of BCE

INSIDE

Sabia says he isn't going anywhere, despite critics. B8

BCE's plan may be too cute, Derek DeCloet writes. B17

Biggest change could be cultural, Andrew Willis says. B18

© The Globe and Mail

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