Do I hear the BCE train coming???????Where will all the money go?
David West
Canadian Business Online, February 21, 2008
The jury is still out on whether the BCE Inc. (TSX:BCE) deal will go through as planned. Way out in left field, if you ask me.
Sure, there are a few ‘ifs’ and ‘buts’ about it: whether the financing is solid; whether the all-cash price of $42.75 per share will get renegotiated downwards; whether a group of bondholders will succeed in being included in the deal.
All takeovers have their uncertainties until they’re closed. That’s why the stock of the acquired company trades at maybe a dime or quarter below the takeover price.
BCE shares should be trading right now at about $42.50 per share. The fact that they’re trading at about a $7.00 per share discount to that (today they’re at $35.50 per share) speaks volumes, not about how unlikely the deal is to close on its current terms, but about retail investor sentiment at this time. Retail investors are clearly afraid of their own shadows right now. I say, resist that impulse.
At any rate, if (when) the BCE deal closes as I expect that it will, then a few months from now there will be quite a bit of money looking for a new home. If we can figure out where that money might be headed, possibly we can make some money on that information. Here’s what I mean.
The total value of the BCE privatization is commonly pegged at $52 billion. However, if you exclude the debt and preferred shares being assumed by the acquirers, you end up with the deal’s equity value. Last time I looked, BCE had 805.1 million shares outstanding. Multiplying each of them by $42.75 gives you an equity value of somewhere around $34.42 billion.
Ordinarily in a leveraged takeover like this one, we can expect that the new owners will fund between one-fifth and one-sixth of this amount in cash, with the rest being borrowed. To put it in a mirror-image perspective, and using the one-fifth measure, about 80% of that common equity value comes to $27.53 billion.
Imagine that. With reasonable certainty, assuming the deal goes through as planned, you can predict that about three months from now, some $27 billion-plus in cash that was formerly invested in telecommunications will be looking for a new home.
A lot of that money will go to retail investors, and there’s no real telling where they might redeploy it within the market when they get it — if, that is, they reinvest it at all. Maybe a new car is where this ‘found money’ might end up.
But institutional investors, and some thinking retail investors too, will want to maintain a telecom representation in their portfolio. If we look to which incumbent phone companies might inherit this cash, there are only a few choices. Only Telus Corp (TSX:T), Manitoba Telecom Services (TSX:MBT) and Bell Aliant Regional Communications Income Fund (TSX:BA.UN) come to mind.
Now, just how much money is $27.53 billion? To put a sum like that in perspective, consider that Telus has a market capitalization right now of about $13.8 billion, and that Manitoba Tel has a current market cap of about $2.7 billion. Bell Aliant’s is about $3.6 billion.
In other words, these about-to-be-displaced BCE Inc. investors could buy all three of those companies outright, and have plenty of money left over.
Phone utility stocks in particular, and the Canadian equity market in general, could get a nice boost if the BCE deal does go through.