Another foreign telcom play to consider. From Barron's:
The company that has caught Geoff's eye[Geoff Tirman the proprietor of Talisman Capital] is no small-cap. Indeed, it boasts a stock-market value of nearly $19 billion and is listed on the Big Board. But it enjoyed better recognition among South-of-the-Border investors, we'd wager, back when its moniker was the infinitely more descriptive Bell Canada Enterprises. Yes, the company that Geoff finds woefully undervalued is BCE Inc., the huge Canadian telecommunications provider.
BCE is the functional equivalent of what AT&T was, before Judge Greene dismantled it in 1984. In other words, it's an immense and complex telecommunications and technology empire, utterly dominant in most of its endeavors but facing regulatory and competitive challenges. The fact that BCE's asset structure is complex, Geoff notes, is just the sort of thing to put off investors. Also why he espies opportunity.
Geoff sees a catalyst, too, in the person of Jean Monty, recently named Canada's 1997 CEO of the Year by the Financial Post Magazine for turning around Northern Telecom during his four and a half years at its helm. BCE, which happens to own 51% of Nortel, recently plucked M. Monty from its telecommunications equipment subsidiary, naming him president and chief operating officer (and promising him the CEO title next May, when the current chief retires).
"My thesis is that when Jean Monty was brought into NT, it took him about three years to go from losing hundreds of millions to making half a billion or so," says Geoff. "And the process of surfacing values has already started in BCE. They've IPO'ed out parts of some of their underlying businesses." But that's only one way that BCE -- solidly in the black but sometimes misperceived as a dinosaur -- can unlock values.
It's not that he gainsays the challenges M. Monty will face. Bell Canada, which up until a few years ago controlled 100% of that nation's long-distance business, has seen its market share whittled to around 65% under deregulation. But it now seems to be holding its own, Geoff says. And, while the monopoly Bell Canada and the rest of BCE's wireline entities currently enjoy in local phone service is slated to end next year, Geoff doesn't expect the erosion in BCE's local market share to be as sharp as it was in long-distance. The regional Bell operating companies have so far been successful in fending off new rivals in the U.S., he points out, by either blocking access to their local loops or charging dearly for it.
So, what are the parts (some wholly owned, some partially; some publicly traded, some private) of BCE worth? The businesses involve everything from phone-book publishing to satellites, from Bell Canada, the dominant telecommunications provider in Ontario and Quebec, to little Northwestel, which serves 100,000 hardy souls spread out across the Northwest Territories and the Yukon -- not to mention rapidly growing Bell Canada International, a cellular operator in China, India and Latin America.
Geoff valued the pieces on a cashflow basis -- or, in terms of what the proverbial private buyer might be willing to pay for those assets. A stingy buyer, at that, Geoff avers, because at every turn he was careful to lowball his estimates of EBITDA multiples and such.
The upshot, he reckons, is that, net of debt, the private market value of the sum of BCE's parts works out to a bit more than $42.50 a share. Yet those same telecommunications properties are currently on sale on the Big Board at a discount of better than $10 a share.
Or look at it another way, Geoff suggests. Consider just the value of BCE's Bell Canada unit on a per-access-line basis.
"It's ridiculous," he insists. "The market is saying Bell Canada is worth about $750 per access line -- adjusted for debt -- while U.S. wireline companies are valued at $2,000-$2,500 per access line, with some recent transactions at $3,000. At the low end of the U.S. range, Bell Canada-alone-would be worth $33.30 per BCE share-or more than the entire holding company is currently trading for."
If you've guessed by now that Geoff has been buying BCE's shares, you're only half right. Geoff is hedging his bets. In this case, by selling short 0.211 share of Northern Telecom for each share of BCE he buys. NT, Geoff explains, has had an enormous run this year and has just lost M. Monty, the architect of its good fortune. He doesn't expect it to crater, merely be a market performer. But by selling NT against his BCE position, Geoff effectively pays just under $13 a share for the "stub," or all the rest of BCE's assets.
"Just the Bell Canada piece is worth 140% of what I'm paying for the stub," marvels Geoff. "There's all this money fleeing Asia, looking for a safe haven. BCE, the stock, doesn't have a lot of volatility. Pays a big fat dividend. The blue light won't flash for long."
There is a BCE thread on SI but it's been moribund sinch October.
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