Death of BCE deal revives `Belus' talk

Analyst cites top 10 reasons for Bell-Telus merger but cash constraint, phone regulators a key hang-up
Nov 28, 2008 04:30 AM

Chris Sorensen
Business Reporter

With the $52 billion deal to buy BCE all but scuttled, investors and analysts have once again turned their attention to the idea of marrying the phone company with rival Telus Corp.

More than a year after Telus abruptly dropped out of the race to buy BCE, one Bay Street analyst claims the Burnaby, B.C.-based phone company is still carrying a torch for the Bell Canada parent.

"We believe Telus remains very interested in entering merger discussions," said John Henderson, an analyst at Scotia Capital, in a note to clients yesterday.

A Telus spokesperson declined to comment.

The speculation follows BCE's disclosure Wednesday that accounting firm KPMG is unlikely to sign off on the $52 billion privatization deal that had been proposed by the Ontario Teachers' Pension Plan and U.S. private equity firms. In its preliminary view, KPMG said the privatized company would not meet the deal's solvency test under current market conditions.

Shares of BCE plummeted nearly 35 per cent as analysts suggested there was little hope of the deal being resurrected.

That left investors looking for an alternative plan.

While the notion of a merger between Canada's two big phone companies is certain to raise concerns in Ottawa, Scotia's Henderson listed 10 reasons why he thought such a deal might be able to win over regulators.

They included $10 billion worth of synergies, a more competitive industry on the horizon and the notion of creating a "Canadian champion" in the telecom sector.

The last point is one that was put forth by Darren Entwistle, the CEO of Telus, in the spring of 2007 when BCE was on the block and private equity groups were circling.

At the time, he said a merger "could be the most critical corporate transaction in Canadian history" and that a Bell-Telus combination would be capable of competing on a global scale should Ottawa decide to one day lower barriers to foreign investment in the sector.

A Bell-Telus union would result in a company that controls nearly all of Canada's local phone service and about 60 per cent of the fast-growing wireless market.

Many believe a merger would be too bitter a pill for Ottawa to swallow – particularly in the wake of a recent federal government auction of wireless airwaves designed to encourage new entrants in a bid to lower prices for consumers. There is also the issue of the cash Telus would have to borrow to fund a takeover offer.

"While we recognize the significant potential synergies, we believe the `Belus' scenario will not pass regulatory hurdles," said UBS Investment analyst Jeffrey Fan.

"We believe the factors that prevented a successful pursuit by Telus in '07 are still present, namely the wireless sector."