Now that was exciting, wasn't it? All those weeks of anticipating what Michael Sabia would do with his billions in cash, all those months of waiting to hear what direction BCE will go next. A captivated nation held its collective breath.
Okay, that's overstating it. In place of "captivated nation," insert "a bunch of money managers who are waist-deep in BCE stock and don't know why." Desperate for something, anything, that would lift the share price, aka the Great Immovable Object, shareholders had turned their hopes to financial engineering. Yesterday, Mr. Sabia delivered some. Trouble is, his plan is too cute.
Don't take my word for it. Look at the numbers. BCE plans to buy back 5 per cent of its stock -- that's $1.3-billion going back to shareholders, using today's stock price. The company is spinning 1.6 million phone lines into a new income trust; it says the lines are worth $3-billion more this way, and it's keeping a 50-per-cent stake. Then, the surprise move: BCE is taking public its satellite infrastructure arm, Telesat.
It adds up to a multibillion-dollar package for the benefit of shareholders. And the market responded by adding all of $450-million to the market capitalization. This is the sound of one hand clapping. Perhaps these changes were already reflected in the share price, but probably not: The price is still lower than it was last summer, when the rural-lines trust idea began to take root, and only 45 cents higher than it was at the end of Mr. Sabia's first day, in 2002.
Why so little enthusiasm for BCE's new blueprint? Just about everyone is in favour of selling or spinning off assets that aren't central to Bell Canada's mission. BCE's net asset value is probably between $33 and $40 a share. The share price is $28. But asset sales will close the gap only if they simplify the company, something Mr. Sabia seems genetically incapable of doing. If Paul Martin was Mr. Dithers, Michael Sabia is Mr. Half-Measures, always selling bits and pieces but never quite letting go.
Tally it up: When this plan is complete, BCE will hold major stakes in four public companies -- Aliant, Telesat, Bell Nordiq, and the new trust. It holds minor ownership positions in others (Nortel Networks, for example). When Bell Globemedia, owner of this newspaper and the CTV network, goes public, that will add one more (unless the company sells its remaining 20 per cent). No wonder there's a holding company discount. Is this a telco, or a closed-end mutual fund?
But there's another reason for the market's ho-hum reaction, one that is no fault of Mr. Sabia's. Trust spinouts, once the greatest thing since mint toothpaste, are losing their punch. BCE hit $33 in September on speculation of a trust, and now the stock is $5 lower. CanWest Global got to nearly $16 just before it put its newspapers into a trust; now it's treading water near $9.
The biggest convert to the trust-as-saviour movement is ACE Aviation boss Robert Milton. When he spun Aeroplan into a trust last summer, ACE was around $40. He followed that with the Jazz Air Income Fund, which started trading last week. ACE, the parent of Air Canada, closed just above $35 yesterday.
The common theme with all of these companies is serious operating problems. In Bell's case, it's the loss of customers to the cable companies and weak profit margins in wireless (weaker than they should be, anyway). In CanWest's, it's a prolonged slump at Global television. As for ACE, it's high fuel costs -- not to mention that it operates in an industry that one analyst calls "perhaps the most volatile and unprofitable in the history of capitalism."
At one time, CEOs could minimize these problems with a little income trust pixie dust. That game is over. Ralph Goodale, the soon-to-be-former Finance Minister, helped bring it to an end, first by proving the government could fiddle with trust law, then by reducing their tax advantage over dividend-paying companies.
But even if he hadn't, trusts no longer have scarcity value; there are more than 200 of them trading in Toronto.
Time for Mr. Sabia, and others, to turn their focus away from financial paper-shuffling and back to the real job: fixing their businesses.
© The Globe and Mail
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