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What a Bell deal means to Quebec
Published: April 20, 2007

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MONTREAL -- Few Canadian chief executive officers know the inside of Montreal's Trudeau airport better than Michael Sabia. Like so many of his own BCE Inc. underlings, Mr. Sabia has spent such a huge chunk of his five years as CEO in the air between Montreal and Toronto, he could practically fly the plane himself.

It's an open secret that, even though the head office of BCE and its predecessors has been based in Montreal since 1880, top management spends a lot of its time at BCE's offices in Toronto. Somehow, teleconferencing -- BCE's supposed forte -- just doesn't cut it.

The Montreal head office is hardly an empty shell. Unlike Royal Bank of Canada and Bank of Montreal -- which are both officially based in Canada's second city but whose head offices are really the corporate equivalent of Potemkin villages -- the BCE headquarters in Montreal actually has real live people making real live decisions.

Still, the laws of financial gravity have increasingly pulled BCE toward Toronto.

Now that Kohlberg Kravis Roberts has acknowledged it's in talks with three Canadian pension funds to take BCE private, the fate of BCE's head office location is potentially in the air. Or not. Most observers expect the Caisse de dépôt et placement du Québec, one of the funds that's joined up with KKR, to flex its muscles to ensure BCE remains Montreal-based.

"It would really be the wrong conclusion to draw that there would be any intention to move the head office," said a source close to the consortium, although he refused to say whether the Caisse has made a Montreal head office a condition of its participation in a buyout.

What's clear, though, is that the Caisse only joined the buyout group in the past few days, having vigorously denied just last week that it was part of any attempt to take BCE private. So, what changed?

Pressure had been mounting in recent days for the Caisse to get involved. A Monday editorial in Le Devoir warned: "Quebec City cannot remain indifferent with respect to what is being hatched behind the scenes. If BCE falls under Teachers' control, it's a given that it will repatriate the head office to Toronto. . . . If the Caisse de dépôt needs to take a more active participation to avoid such a catastrophe, why not?"

The consortium source refused to say whether Mr. Sabia personally sought out Caisse chief Henri-Paul Rousseau in a bid to thwart a competing buyout group coalescing around the Ontario Teachers Pension Plan, the Caisse's principal Canadian rival. Of all the possible outcomes for BCE, a Teachers-led takeover would be Mr. Sabia's personal disaster scenario.

The Caisse, however, now finds itself in the potentially sticky situation of owning major chunks, and having board representation, in telecom archrivals BCE and Quebecor Media. "The caisse has to be careful that is not perceived as being too present in two competing local telephone providers," said a veteran Montreal financial executive.

Mr. Rousseau said in a statement yesterday that the "size of the Caisse's investment in a potential transaction involving BCE will take into account its [43.5-per-cent] investment in Quebecor Media." That likely means the Caisse will opt to take a smaller chunk of BCE than its other partners. But will that be enough to address a real or perceived conflict of interest? Needless to say, Pierre Karl Péladeau would like to know.

A Caisse source said the $143-billion pension fund manager currently has no intention of reducing its stake in Quebecor Media, the Quebecor unit that owns the Vidéotron cable empire. The latter has been eating deeply into BCE's local phone monopoly with aggressive pricing and packaging of home phone, Internet and cable TV services.

Mr. Péladeau learned only on Monday night, after a Caisse representative placed a courtesy call to Quebecor, that the pension fund was preparing to line up with KKR, the Canada Pension Plan Investment Board and the Public Sector Pension Investment Board.

Coincidentally, the Caisse announcement came the same day that Mr. Péladeau revealed, in an Ottawa speech yesterday, that Quebecor is preparing to enter the wireless business on its own when Ottawa auctions off new spectrum in 2008. Vidéotron recently began offering customers cellphone services through an agreement with Rogers Communications.

Ideally, Mr. Péladeau would have liked to have scooped up Microcell Telecommunications when it the feisty wireless provider became the subject of a bidding war in 2004. But Quebecor's balance sheet, then still recovering from the $5.4-billion Vidéotron purchase, couldn't support another big deal. Rogers eventually won Microcell.

A restructured BCE would be a more formidable competitor for Quebecor. But Mr. Péladeau remains uninterested in joining forces with Rogers, given that both companies are family controlled with strong-headed CEOs. Besides, Quebecor -- and not Ted Rogers -- owns Vidéotron precisely because the Caisse wanted to keep the cable company's head office in Montreal.

BCE would be no different -- and not just for political reasons. Quebeckers still account for about 40 per cent of the customer base of BCE's bread-and-butter unit, Bell Canada. .

"Vidéotron has become a very dangerous competitor for Bell," noted Louis Hébert, a business professor at HEC Montréal. "Unlike in the past [when Bell had a monopoly on local telephone service], there is a competitor that can take BCE's place if it's seen to be distancing itself too much from Quebec."

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