BCE may dump Nortel stake, analysts say|
Spinoff expected to ease massive discount
afflicting holding company's shares
Investment Reporter globe and mail
Friday, October 15, 1999
Speculation is growing that a frustrated Jean Monty, president and chief executive officer of BCE Inc., will soon move to boost his company's stock price by
parting with its 40-per-cent stake in booming telecommunications equipment maker Nortel Networks Inc., possibly by simply giving the Nortel shares to BCE
"What could be done? They could spin off Nortel," said Goepel McDermid analyst Bob Hastings.
News of such a handout would almost certainly send Montreal-based BCE's shares soaring, perhaps by one-third, as investors grab BCE to ensure they receive
But it could hurt the stock of Brampton, Ont.-based Nortel by creating a huge "overhang" of shares, in the hands of investors who might want to sell them
because they are uncomfortable owning an unpredictable technology company.
"At some point, possibly in 2000, BCE will give up" trying to get rid of the massive discount afflicting its shares, Goepel's Mr. Hastings argued in an Oct. 5
report. "The solution for BCE is to dividend out its Nortel shares."
He estimated that a Nortel spinoff would add about $20 to each BCE share and that the discount on the company's remaining, less volatile assets would shrink,
adding another $3 to $4. "If so, BCE shares could appreciate over 30 per cent."
The company's problem, analysts agree, is that while Nortel shares have climbed 111 per cent this year, closing at $81.15 on the Toronto Stock Exchange
yesterday, shares in BCE have risen only 36 per cent to $78.95, reflecting the traditional discount given to assets contained in holding companies.
The discount appears to be getting out of hand at BCE, despite a pledge by Mr. Monty last year to narrow it.
"A year and a half ago, Jean Monty, who's a very credible guy, said he was going to work hard to bring this discount down," Mr. Hastings said. "In that time
frame, it doubled. So he's got to be an unhappy camper."
Stock market investors are now valuing Nortel at $109.5-billion, implying that BCE's 40-per-cent stake is worth about $43.8-billion. BCE itself has a stock
market capitalization of $50.8-billion -- which means investors are assigning a value of only $7-billion to the company's vast Bell Canada operation in Ontario and
Quebec. It also assigns hardly any value to its $4-billion-plus BCE Mobile Communications Inc. mobile phone subsidiary, plus BCE's major stakes in a host of
communications companies including Atlantic Canada phone utility Aliant Inc. and international carrier Teleglobe Inc.
"They still say [Nortel] is a core business operation," another company watcher said. "But I would say over the next year or two, if they can't achieve a
significant narrowing of the discount then they would definitely pursue that kind of option."
Goepel's Mr. Hastings estimated in his report that BCE's shares are trading at 30 per cent less than the real value of its sprawling telecommunications empire,
compared with 10 per cent last fall.
In a report on Tuesday, CIBC World Markets analyst Dvai Ghose calculated that BCE's stake in Nortel, combined with its interests in other publicly traded
technology and phone companies in Canada and abroad, is worth $84.50 a BCE share.
He then added the company's $5.6-billion in cash, working out at $9 a share, for a value of $93.50 a share -- or 14 per cent more than BCE's recent stock price
But that doesn't even include BCE's 80-per-cent-owned Bell Canada operations in Ontario in Quebec, which Mr. Ghose reckons are worth $16.4-billion to BCE or
another $25.50 a share. BCE sold 20 per cent of Bell Canada to Ameritech Corp. of Chicago for $5.1-billion in March.
"Investors who buy the stock at current prices are essentially getting Bell Canada's non-publicly traded operations for free," Mr. Ghose wrote, assigning a "strong
buy" to BCE shares.
BCE spokesman Don Doucette acknowledged that "the trading discount is an issue."
He pointed to the company's recent moves to simplify its structure, becoming more of an operating company than a holding corporation, by taking majority
control of Aliant and buying out all of the minority stockholders in BCE Mobile. "We can go a long way toward narrowing the discount," he said.