What Might Happen Next with BCE?

The wait is over, and we now know that the Ontario Teachers’ Pension Plan, which is also Bell Canada Enterprises Inc.’s (BCE) major shareholder, has won the bid for Canada’s battered telecom. This was the easy part of sorts. Moving forward, it will be anything but!

In all likelihood, and unless the federal government eliminates foreign ownership limits, running BCE will be a game of catching up. Let’s just say that in order to stay competitive, the new BCE owner(s) should prepare for some major capital spending in excess of the $51.7 billion (debt and equity) that has already been dumped to close the deal. The one and only good thing about that prospect is the fact that, as a private company, there will be no more worries about short-term shocks and their effects on the stock price.

For a while now, BCE was trying to transform itself through internal consolidations, as well as expansion into the wireless industry. For a while, this worked. But after the company lost its monopoly in the long-distance and landline markets during the 1990s, and especially after cable companies moved into telecommunications, Bell Canada has lost almost a million customers. For a population of almost 33 million, we are talking about a significant loss of the market share.

Bell Canada is behind technologically as well. For example, Verizon in the U.S. is now installing fiber-optic cables directly to people’s homes. On the other hand, Bell delivers its fiber-optic cables first to the so-called “neighborhood hubs,” which are then distributed to customers’ homes, losing quite a bit of bandwidth along the way.

Obviously, if Ontario Teachers’ decides to go the route of implementing technological improvements and modernizing all business segments, it will have to budget serious money to pick up the tab (probably again in the billions of dollars) if it wants to bring Bell up-to-date.

If only Bell’s other business segments were working well. Bell Wireless, the company’s segment that many analysts saw as potentially the only one capable of continuing as a public company, has also offered sort of a lukewarm performance. First it was a new billing system that seriously angered cell phone subscribers. Then it was changes to dealers’ pay structure. As a result, for the recent quarter, Bell added only 13,000 new cell phone subscribers, which lagged significantly behind the company’s two major competitors: Telus and Rogers.

The only way for Ontario Teachers’ to avoid making any of those decisions is to hope Ottawa eliminates foreign ownership limits in the telecom sector. If and when these regulatory changes are introduced, all that Ontario Teachers’ would have to do is cut the cake and sell the pieces to highest bidders. Considering there is plenty of time left until the transaction is complete, foreign ownership legislation might just be the wild card that Ontario Teachers’ would need to make money on BCE investment.