Thursday, January 31, 2008

Masters of the Universe take note: Optimization involves maximizing return, while minimizing risk.


By: Brent Fullard, Catalyst Asset Management Inc.

Perhaps now that it’s January 30, 2008 and BCE’s stock is is trading $10.00 below Teachers’ notional bid price of $42.75, and with some pundits going so far as to say the Teachers’ deal has a zero chance of happening, it would be quite instructive and most worthwhile to go back and read the letter that was submitted to BCE’s Strategic Oversight Committee on June 25, 2007 by our firm, Catalyst Asset Management.

Recent testimony in the Quebec Superior Court casts doubt on how well the Board of BCE fulfilled its fiduciary duty to shareholders and other stakeholders of BCE, Canada’s most widely held public company, since it was reported by Canadian Press that:

“The directors of BCE Inc. were kept in the dark about offers for the telecom giant by managers and advisers who manipulated the bidding process to freeze out bondholders in the sale of the company, lawyers for the bondholders said Monday.

The court was reminded that three BCE directors - Tom O'Neill, Jim Pattison and Donna Kaufman, the head of the strategic oversight committee - testified they were unaware or couldn't remember seeing all the details of the bids or how they would affect all stakeholders.”


How does one reconcile that alleged conduct with the Ontario Teachers’ Pension Plan’s position on good corporate governance? The answer: you can’t.

Speaking of Tom O’Neill, Jim Pattison and Donna Kaufman, here were the benefits to BCE described in Catalysts’ June 25, 2007 letter addressed to them and discussed with them and their advisors, starting with how the Catalyst Proposal would have obviated the very risks that are now the source of the current deals’ possible demise, namely the bondholders' lawsuit, CRTC approval and financing uncertainty for the $20 odd billion that Teachers' & Co, don't have to complete this $34 billion acquisition:

· value maximization alternative for BCE common shareholders through use of Stapled Securities and the enhanced annual income of $2.55 per existing BCE common share, a 74% increase from BCE’s current annual dividend of $1.46
· zero transaction risk as transaction is fully self funding
· no regulatory or timing risk when compared with alternative private equity and merger alternatives that will involve extensive parliamentary, regulatory, CRTC and/or competition review with an uncertain outcome and uncertain timing
· preserves BCE’s investment grade credit rating and retains financial flexibility for Bell Canada to continue with significant capital reinvestment in its core businesses to remain a leading and growing competitor
· each Stapled Security will consist of one underlying common share that it is contemplated will pay an annual dividend of $1.46 and one underlying subordinated debt instrument that will pay annual interest of $1.09 for a total income of $2.55
· based on current market conditions and yield expectations in the marketplace for comparable instruments, we are of the opinion that the Stapled Securities will have a trading value in the market of between $42.50 to $52.00 and we are confident in the mid range value of $47.25 being attainable.
· each outstanding BCE share will be exchanged for one Stapled Security and therefore BCE shareholders will be entitled to a tax free rollover for approximately 60-70% of the consideration received. The balance will be treated as a dividend income and taxed at rates not dissimilar to capital gains rates of taxation
· the tax efficient nature of the transaction via a share exchange and the significant rollover of a BCE investor’s cost base, places retail investors on a more equal footing with large pension fund investors
· eliminates "reinvestment" risk for BCE common shareholders
· allows existing BCE common shareholders to participate in ongoing future growth of BCE
· no “frictional costs” or involuntary loss of a latent value to a third party, as full equity value of BCE is retained by existing shareholders
· preferred shareholders will be redeemed for cash, thereby addressing the concerns of these security holders who would otherwise rank junior to the new subordinated debt within the Stapled Security
· Stapled Securities are not affected by the rules governing the taxation of income trusts or the explicit policy intent of the governing legislation, which is to bring income trusts in line with the taxation of corporations. Stapled Securities are issuances of corporations and not tax flow through entities, which are the sole focus of the income trust tax legislation. Other outstanding Stapled Securities are explicitly unaffected by the new taxation on income trusts. There is no policy justification that can be credibly made to deny the tax deductibility of interest on the corporate debt component of a Stapled Security. Direct precedents already exist and have been explicitly unaffected by the income trust tax policy which has now been passed into law.
· maximizes tax collection to Ottawa from the earnings of Bell Canada by preserving the largest proportion of taxable Canadian investors
· preserves existing Canadian ownership and control of Bell Canada and
Head Office location in Montreal
· preserves existing competitive landscape in this key sector of the Canadian economy that touches all Canadians and businesses
· beneficial outcome to all stakeholder groups including customers, employees, union, management, debtholders and preferred shareholders
· most beneficial outcome to Canadians and the country

1 comment:

Dr Mike said...

I am not a shareholder of BCE , but I am still Pissed-off by this whole thing.

If this deal with Teacher`s passes to fruition , I will have to pay more tax to make up for the loss of tax to the gov`t because of this privatization.

When a viable alternative was available to keep this company paying maximum tax , why was it not considered.

All taxpayers should be up in arms.

We are about to be screwed again.

So where is our watchdog Jim Flaherty in all of this--I guess he is too busy figuring out how to shaft a few more old folks instead of doing what is right.

Mike.

PS--Jim, Mayor Hazel says HI!!!!