ike,
what ya think of this?
mike
BCE burdened by Nortel's success
Saturday, November 13, 1999
Michael Lewis
Financial Post
One problem with
Nortel Networks
Corp.'s emergence as
Canada's market
heavyweight is that by
comparison, most of
the other
telecommunications
companies look
emaciated.
That diminishment by
association is
particularly
troublesome to BCE
Inc., the Montreal
holding company
whose assets include
phone utility Bell
Canada, e-commerce
firm BCE Emergis and
wireless service
provider BCE Mobile.
BCE also holds 41.6%
of Atlantic Canada
phone company Aliant
Inc., 20% of Manitoba
Telecom Services
Inc., and 38% of
Brampton, Ont.'s
Nortel.
While BCE's share value has risen 65% since the start of the year, that
pales beside Nortel, whose stock has soared 173% over the same
period.
At the close of markets yesterday, BCE (BCE/TSE) was trading in
Toronto at $97.20, down 25¢, while Nortel (NT/TSE) fell $2.45 to end
the session at $106.40, near its 52-week high of $110.50.
BCE shares have traded in a range of $99.50 to $51.05 over the past 12
months, with the stock ramping up in November after the company said
it may consider issuing its stake in Nortel in the form of a dividend to
shareholders. The goal would be to remove BCE from Nortel's shadow
and ultimately free up its full market value.
Nortel has a capitalization of more than $142-billion, compared to about
$61-billion for BCE, with Nortel far and away the most highly valued
company in Canada.
Aside from the concentration of risk that Nortel's dominance of
Canadian stock markets implies, the company's remarkable
performance has had the effect of draining investors' dollars away from
BCE.
That has contributed to a whopping discount of nearly 30% in the value
of BCE stock compared with the intrinsic book value of its assets,
according to a report by Scotia Capital Markets in Toronto.
BCE's statement that it may eliminate its Nortel holding has reduced that
discount by at least two percentage points, but analysts say a buying
opportunity remains.
In fact, undervaluation of BCE's sprawling empire offers "compelling
opportunities for surfacing additional value, up to $40 per share,"
according to Scotia's John Henderson. He said the value could be
unlocked through an ongoing corporate reorganization that is
transforming BCE into an operating company, whose shares are
typically more highly regarded than those of a holding company.
Mr. Henderson has a one-year price target of $100 per share and a
two-year target of $120, rating BCE a "strong buy" with moderate risk.
He says BCE without Nortel is "the most undervalued telecom carrier in
North America" with an implied price-to-earning multiple at least several
times below its rivals -- even though its balance sheet shows $8-billion
in cash and equivalents and $16-billion of book asset value. Analysts
forecast annual earnings growth of 17%.
BCE, Canada's second largest company behind Nortel in market value,
had revenue of $16-billion in its last fiscal year, including contributions
from Aliant, and expects baseline earnings of $1.9-billion in 1999.
Dvai Ghose, a telecommunications analyst with CIBC World Markets
Inc. in Toronto, rates BCE a "strong buy," with a 12-month price target
of $120 and forecast earnings per share next year of $3.36.
He bases his bullish view on the fact that Bell remains the dominant
Canadian communications carrier, despite the deregulation of local and
long-distance markets. As well, Bell is set to increase its national
presence through entry into British Columbia and Alberta markets.
With its 22% stake in overseas long-distance carrier Teleglobe Inc.,
BCE has "significant exposure" to growth in the international data
market, Mr. Ghose said. And the move earlier this year by Chicago's
Ameritech Corp. to acquire a 20% stake in Bell Canada for $5.1-billion
offers opportunities for significant margin and revenue enhancement, he
added.
Finally, analysts say, there's the Jean Monty factor. The BCE chief
executive has a reputation for value creation -- Nortel shares rose 400%
during his tenure at the company's helm from 1993 to 1997.
In his two years at BCE, Mr. Monty has refocused the company on
data, information technology services and e-commerce, while
consolidating BCE's hold on core assets and selling $4-billion in
non-core properties.
Behind the scenes, Mr. Monty is marshalling considerable executive and
cash resources to bolster Bell Internet service provider Sympatico, and
is seeking licensing and agreement and other alliances with major U.S.
Internet portal companies.
Mr. Monty has taken some media heat for failing to make a major
acquisition of an Internet company, but the Sympatico executive in
charge of Internet portal issues said the company's goals can be
satisfied through non-equity alliances.
"Bell is taking Sympatico very seriously," said Gary Anderson, who
resigned from his post earlier this month as Sympatico operations are
being consolidated within BCE's cable and media operations.
Nevertheless, according to telecommunications industry consultant
Eamon Hoey, BCE can be faulted for not moving quickly enough in the
data and Internet realm, citing the comparatively rapid progress by such
U.S. carriers as Ameritech.
Moreover, while BCE now derives some 15% of its revenues from data
services, that still leaves a heavy reliance on long-distance and local
voice services, areas where growth rates are flagging. And while
baseline earnings jumped 23% in BCE's most recent quarter, some 18%
of the growth came from Nortel.
The underlying weaknesses in the telecommunication sector -- falling
prices for both voice and data traffic due to the "commoditization" of
those services -- have put executives in the sector on the firing line.
Those factors led to a hostile takeover bid for Toronto's Call-Net
Enterprises Inc., an alternative long-distance and local provider that has
sustained mounting losses through price wars with Bell and others.
They also cost Juri Koor his job as Call-Net CEO.
While not to suggest a company specializing in acquisitions of
undervalued firms is planning a run at BCE, the Call-Net experience is a
reminder of the pressure on telcos to sustain strong growth -- in
earnings and share value.
BCE INC.
CEO: Jean Monty
Ticker: BCE
Listed: Toronto Stock Exchange, Montreal Exchange,
Vancouver Stock Exchange
Head office:
3700, 1000 de la Gauchetiere St. W.,
Montreal, Quebec H3B 4Y7
Telephone:
(514) 397-7056 |
