Bell Canada to wind down BCE

BCE Inc. on Wednesday announced that it will unwind its holding company operations and convert its Bell Canada assets into an income trust.

The Bell Canada Income Fund’s initial cash distribution will be $2.55 per unit, up from the current BCE dividend of $1.32 per share, with a targeted payout ratio of 85 per cent in 2007.

Bell Canada will host a special meeting of common and preferred shareholders in January – the same time Telus shareholders will meet to discuss Telus’s conversion to an income trust model. Last month, Telus announced that it would take its entire business into an income trust.

Michael Sabia, chief executive officer of BCE and Bell Canada said the timing of the conversion is in line with the incumbent’s strategy going forward and the direction of the telecommunications industry as a whole.

“In our minds, BCE was a company that was conceived in a different time for a different purpose — a purpose that was all about diversification away from Bell,” he said. “The strategy we’ve been pursuing over the last three years is not about diversification but about focus.”

In 1983, as a result of deregulation, Bell Canada Enterprises, which was later shortened to BCE, was formed as the parent company to Bell Canada and Northern Telecom (now Nortel Networks).

Sabia added that he will continue his role as CEO and that the transaction will not change current operations or affect employees or customers.

George Athanassakos, a finance professor at the Richard Ivey School of Business at the University of Western Ontario said the move means that there will be more cash for shareholders.

“Historically, the shareholders haven’t had any good return from (BCE) management,” he said, citing poor investment decisions BCE had made in the past on companies that went bankrupt or that it sold at a huge loss. “Now the markets will feel more comfortable about the company by the virtual fact of income trusts. They will not be able to take all of the cash and abuse it.”

Scott Phelan, president of the Independent Communications Dealer Association of Canada (ICDAC), which is suing Bell for $135 million for allegedly disallowing it to enter into its own income trust last December, said BCE had become a “very unwieldy entity.”

“It’s going to have to fly a little bit leaner and meaner in terms of now being in effect a public offering,” he said, adding that the decision is a good for the market, the company and its retailers.

The move not only follows fellow incumbent carrier Telus but the incumbent itself. In March BCE announced that it would form an income trust that would combine assets of its East Coast telecommunications firm Aliant, including its wireless operations.

Sabia also said Telus’s announcement last month was an important factor in BCE’s decision.

“The action we’re taking today does help to ensure greater parity in the telecommunications sector,” he said.

Likewise, Iain Grant, an analyst with The SeaBoard Group, said Telus’s conversion pushed BCE in the same direction.

“Telus’s decision and the reaction the market had to it gave the BCE decision an element of inevitability,” he said.

Sabia said Bell Canada as an income trust allows the company to grow its business and continue to bring innovation in communications to the Canadian market.

“We believe that this is the right structure, this is the right move and this is the right time to make an important change for Bell,” he said.

Sabia added that the combination of voice, video and data services will be integral to the incumbent’s future growth.

“This will prepare the company for the next wave of growth in telecommunications which will be the integration of all communications,” he said.

Grant and other telecom experts say the next one to watch is Manitoba Telecom Services (MTS). In 2004, MTS bought Allstream (formerly AT&T Canada) for $1.7 billion and merged both companies. Grant said the threat of converting to an income trust caused former CEO Bill Fraser to diversify and buy Allstream.

“I think their pressures will mount to reconsider their decision,” said Grant.

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