Rue St-Jacques in Montreal reacted with disbelief, Bay Street brokers in Toronto were nonplussed, and investment experts across the nation professed puzzlement. The object of the reaction was Bell Canada Enterprises Inc. (BCE), parent of a $13.4-billion telecommunications empire, which last week launched a takeover bid on a pipeline company.
BCE’s foray began on Monday with the announcement that it had purchased an 11.8-percent block of TransCanada Pipelines Ltd.
(TCPL) shares from Dome Canada Ltd. for $167 million. Then the prospect arose that BCE might gain control of Canada’s largest gas pipeline firm and its $1.4 billion worth of oil and gas assets when Bell extended the offer to TCPL’s remaining shareholders. If all of the 39.7 million shares outstanding are tendered, the purchase will cost BCE a total of $1.4 billion. But the possibility of a short, sweet victory for BCE vanished last week when TCPL’s directors voted to oppose the $31.50-a-share bid. The offer, said company President Radcliffe Latimer, was “not reasonable from a financial point of view.”
When BCE was created last April as a holding company overseeing Bell Canada, the nation’s largest phone company, and such stellar high-tech performers as Northern Telecom and Bell-Northern Research, experts predicted that an acquisitionhungry corporate colossus had been born. But they expected that BCE, freed from regulatory scrutiny of its growth plans, would expand further into its area of expertise, the rapidly evolving and increasingly unregulated telecommunications field. That view was dashed with last week’s bid for TCPL. The surprise of analysts at the move, however, quickly gave way to a debate over its wisdom. TransCanada’s manoeuvres to thwart the takeover prompted speculation that BCE might have to raise its offer to gain the 20 per
cent of the company it needs to enjoy accounting advantages. Rumors also circulated that other suitors, attracted by TCPL’s vulnerability, might enter the battle.
Investor disappointment at BCE’s bid took tangible form last week as the company’s shares dipped on the stock markets. The reason, said Doug Dawson, research director for Montrealbased Lévesque Beaubien Inc., was that the move created confusion about Bell’s image. Analysts, he explained, had become convinced that BCE was changing from a staid blue-chip firm, whose main attraction was its steady dividend payouts, into an equally attractive highgrowth operation as it expanded into
the unregulated telecommunications business. Investors are bewildered or disappointed, he added, now that BCE has its sights on another federally regulated business.
But J. Stuart Spalding, vice-president of finance for BCE, believes that the analysts became a victim of their own misconceptions about the company’s plans. “The idea that BCE would invest heavily in high-flying growth companies was never realistic,” he told Maclean’s. The problem, he added, is that “returns in the high-tech area are a long way down the line.” Among TransCanada’s attributes, he said, are its sound management and the fact
that it operates in a stable regulatory environment. TCPL is no stranger to Bell. Jean de Grandpré, BCE’s chairman, also sits on the energy utility’s board.
A team of Bell analysts settled on TCPL as a target last month after weeks of study. Then, Spalding set the acquisition attempt in motion with a phone call on Monday, Nov. 28, to an old friend, James Connacher, chairman of Toronto-based R.A. Daly Gordon Securities Ltd., a firm that excels at large block trades. Connacher responded so hastily to Spalding’s request for a meeting that he arrived in Montreal hours later without his coat. Initially, Spalding proposed that TCPL’s stock, apart from Dome Canada’s holdings, could be accumulated quietly on the stock exchanges. But Connacher recom-
mended the broad public offer. From there, events moved quickly. On Dec. 2 the proposal was presented to BCE’s board in a meeting at the firm’s offices in Toronto, and the go-ahead was given. “By happy coincidence,” says Spalding, the board of Dome Canada was also meeting that afternoon in Calgary. As the main middleman in the deal, Connacher, operating from a room in Calgary’s Westin Hotel, relayed the bid to Dome’s directors. Dome finally agreed to the terms of the deal at 11 p.m: Montreal time on Saturday, Dec.'3, just one hour be-
fore the offer expired. Financing the $167-million purchase of Dome’s TCPL shares on Monday was no problem for BCE. As Spalding points out, BCE had $330 million in spare cash that day. As well, it had lined up a $l.l-billion line of bank credit on Dec. 1 to finance further purchases.
For its part, BCE certainly negotiated a good price for Dome’s TCPL shares ($31.50). But the major benefits of the deal for BCE remain uncertain until the results of its matching public follow-up offer for TCPL shares are known on Dec. 20. As a minimum goal, says Spalding, BCE would like to pick up 20 per cent of TCPL’s stock. That is the magic number that would permit BCE accountants to include 20 per cent of TCPL’s earnings on BCE’s income statement. Below that, BCE would only benefit from TCPL’s dividend payments.
TransCanada owns and operates nearly 10,000 km of natural gas transmission pipeline stretching from Alberta to Montreal. As well, it has extensive holdings in oil and natural gas. In 1982 it made a profit of $161 million—a solid performance for a $4.7-billion company that employs only 1,800.
Jonathan Cunningham, an analyst with Montreal-based Nesbitt Thomson Bongard Inc., TCPL’s managing underwriter, is not a disinterested observer. But he maintains that within 12 months TCPL’s shares should rise to around $36, from their current $31 range. Armed with Nesbitt Thomson’s analysis TCPL’s directors last week rejected BCE’s $31.50 offer. As well, the company made two deft manoeuvres intended to repel BCE’s bid at its current level. First, it increased an upcoming annual dividend by 37 per cent. Since BCE’s offer provided that shareholders would not be entitled to TCPL dividends paid after Dec. 5, the move might encourage investors to hold on to their shares. At the same time, TCPL said it was calling a shareholders meeting on Feb. 8 to consider a two-for-one stock split. It is designed, says the company, to “improve the liquidity and marketability of our shares.”
For his part, Spalding is adamant that BCE’s offer will stand firm until Dec. 20, when the results of the bid are known. In fact, there is a good chance that, despite TCPL’s opposition, BCE will pick up a large number of shares. If BCE fails to garner at least 20 to 30 per cent of TransCanada’s widely held shares, Spalding says that he will be “very disappointed.” Indeed, apart from the income benefits of such a stake, it would also make BCE by far TCPL’s largest shareholder and could give it effective control of the company. In that event, BCE would be well on its way to becoming one of Canada’s largest sprawling corporate conglomerates.
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.