Bell Canada’s retailers in Ontario and Quebec is suing the company for $135 million what dealers on Tuesday described as a flat refusal to let it follow the phone giant’s example in forming an income trust.
The suit, which was filed in a Quebec Superior Court, is being led by the Independent Communications Dealer Association of Canada (ICDAC). Its membership includes less than 100 of the approximately 288 Bell World stores in the two provinces, but they employ more than 1,000 people.
In a press conference that was teleconferenced from Montreal, ICDAC president Scott Phelan said the association was outraged after protracted negotiations with Bell Distribution Inc. to form an income trust with a group of capital investors that would be known as the Wireless Distribution Income Fund (WDIF). Although WDIF first made the offer in late 2004 and was initially turned down, the ICDAC expected momentum to pick up after the government lifted its freeze on new income trusts late last year, Phelan said.
Under the terms of their agreements with BDI, Phelan said Bell had the option of either approving it or matching it with its own offer. Otherwise, it can refuse the sale of the stores to an income trust on reasonable grounds that there would be a clear unsuitability with the new operator.
“There was no question of the suitability of the operators, because it was the same people. This was a transfer, not a departure of current management,” Phelan said. “Our enthusiasm was now met with a ‘Hold on, not so fast’ response from BDI.”
Phelan said ICDAC was angry at the time they believe Bell has wasted and are appalled at the lack of vision in their decision. Although Bell sent its lawyers a letter outlining some of its objections to the income trust, Phelan said those issues had already been addressed earlier in the negotiations.
“Frankly, it was a done deal. We were looking at early fall (to complete the transaction,” he said. “A lot of groundwork had been done.”
A Bell spokesman said the company was prepared for the ICDAC’s suit, and that it disclosed information about the negotiations in both Bell and BCE’s 2005 annual information form. In those documents, Bell noted that it had received a letter from ICDAC about its refusal to give the WDIF deal a go-ahead.
“The Demand Letter alleges that BDI’s refusal to consent to the sales and the assignments is unreasonable. The letter demands that the consents be given and threatens recourse by way of injunction and/or damages for loss of opportunity caused to each Dealer,” the document says.
“Because we’ve only receive it today, we’re still examining it,” the Bell spokesperson said. “We do plan to vigoriously defend ourselves.”
The potential to create constant cash flows for investors has spurred the popularity of income trusts, which are ownership vehicles for certain assets or businesses whose shares or “trust units” are traded on securities exchanges just like stocks, the income from which is passed on to the investors, called “unitholders,” through monthly or quarterly distributions. Earlier this month, Bell said it was forming its own income trust that would combine substantial assets of East coast telecommunications firm Aliant, including its wireless operations.
Bell has used its retail stores as a means to bring next-generation mobile technology to its customers, including the launchits Bell Digital Voice VoIP kits last year.
Owen Mitchell, a Toronto-area consultant who has a background in the investment banking business, was among the principals behind WDIF, though Phelan said a large financial institution was also involved. In an interview with ITBusiness.ca, Mitchell said ICDAC had great optimism that BDI would be willing to sign off on the income trust.
“The growth of the wireless sector generally is a very attractive concept for the capital markets today, and it’s something that people would like to participate in directly,” he said. “Today they can only do that through Bell, Rogers or Telus, who obviously have lots of other lines of business besides Rogers.”
Bell’s only response, according to Mitchell, was that the proposed WDIF income trust did not fit with its corporate direction.
The 10-month negotiations came to a dead end in January, even as plans were being made up to transfer Bell’s corporately-owned stores into the income trust, Phelan said.
“Despite continual assurances from BDI that everything was on track, the process of obtaining Bell’s green light was agonizingly slow,” he said.
Mitchell said as it stands now, WDIF is non-existant, though he did not rule out a change of heart on the incumbent’s part.
“Our hope was that Bell would see this is a practical and sensible approach to the future of the distribution network,” he said. “To the extent that this lawsuit prompts them to reconsider, we believe this is a product that would be very well received.”
Phelan said the WDIF and the ICDAC had plans to expand the income trust to other dealers one it was formed. About 75 per cent of Bell’s retail dealers are independently operated.