Over the decades, Bell Canada has acquired the kind of reputation coveted by thousands of companies. Executives and consumers around the world admired the giant telephone company known familiarly as Ma Bell for being a solid corporate citizen that pursued prudent fiscal management. According to myth at least, Bell was the stock of choice for widows and orphans because putting money into the company was as safe as buying Canada Savings Bonds. As a result, when Bell Canada’s corporate parent, Montreal-based BCE Inc., invested in real estate in 1985, many of the company’s 310,000 investors seemed to consider it safe to buy shares in BCE’s new real estate subsidiary, BCE Development Corp. (BCED). But when BCE and BCED wrote down the value of their shares, many of those investors declared that thay had been betrayed. About 500 of them even formed a group, the Preferred Shareholders Protective Committee, and hired a lawyer, Eugene McBurney of Toronto, to pursue their concerns. Says committee member Maxwell Rotstein, president of the Barrie, Ont.-based Municipal Financial Corp.: “What BCE did may be legal, but it certainly isn’t moral.”
The man who now has the task of restoring
public faith in the Canadian corporate icon is Raymond Cyr, the 56-year-old chairman, president and chief executive officer of the giant conglomerate. In his 21st-floor offices in Montreal’s business district, Cyr oversees not just Bell, the nation’s largest telephone utility, but Northern Telecom Ltd., one of the world’s leading communications equipment manufacturers, and Bell-Northern Research Ltd., Canada’s largest private research firm. He acknowledges that his company has “learned the hard way” to stick to what it knows best—and that is telephones and telecommunications. But seven years ago, Cyr’s predecessor, Jean de Grandpré, launched the telephone monopoly into a series of forays into oil and gas, real estate and printing. Now, just as Cyr is struggling to disentangle BCE from many of those ventures, it faces a bold new threat to its hugely profitable telephone business. In May, Unitel Communications Inc., an alliance of Canadian Pacific Ltd. and Rogers Communications Inc., unveiled a plan to end Bell’s longdistance telephone monopoly. But in a recent interview with Maclean’s, Cyr said of the challenge, “A handful of large companies will benefit and everybody else will pay for that.” Even though it is under siege on several
fronts, BCE retains a formidable empire. Its 1989 revenues of $17 billion were the highest of any corporation in Canada. It is also the nation’s largest private employer, with more than 120,000 employees across Canada. Its stock remains the most widely held in the country. But despite Cyr’s attempt to refocus BCE since he became president in January, 1987, the firm has suffered a series of major setbacks in recent months. This past January, BCE wrote down the value of its 67-per-cent stake in its controversial real estate subsidiary by $440 million. Then, in April, Kinbum Technology Corp., an Ottawa-based high-technology firm, defaulted on $831 million in loans, including about $420 million to BCE.
Last week, BCE closed a deal to reduce its 48.9-per-cent stake in money-losing Encor Inc., a Calgary-based oil and natural gas producer, to less than one per cent. After searching unsuccessfully for almost a year to find a single buyer, BCE sold its Encor shares and warrants to a syndicate of brokerage firms.
For his part, Cyr, the plainspoken son of a Montreal trucker who graduated as an engineer from the University of Montreal in 1958, carefully avoids criticizing de Grandpré’s ambitious diversification strategy. Despite the nearcollapse of BCED and the other losses, Cyr— who joined Bell in 1958—says that BCE is still in a very strong financial position. “ Going back to 1983, we have created more wealth than we have actually lost, ” he says. Even after the $440-million BCED write-down, the parent
company earned a profit of $761 million in 1989. That allowed BCE to continue its policy of paying dividends of $2.49 per share—the stock closed at just over $38—which is one of the main reasons it is such a popular holding for both small and large investors. However, Bell Canada’s core business and that of its telephone affiliates generated close to three-quarters of BCE’s profit.
Since 1906, governments have regulated the activities of Bell Canada, which was formed in 1880. While allowing Bell a monopoly in certain areas, federal regulatory bodies also allowed Bell a specified range on its rate of return but required that Bell put some of its profits back into the company to reduce basic phone rates. In 1983, however, de Grandpré restructured the company. He created the holding company BCE, which took Bell Canada under its wings as a wholly owned subsidiary. At the same time, he turned other businesses such as Northern Telecom into separate BCE subsidiaries. That left only Bell Canada under regulatory control and freed the others to make whatever profit—or loss—the market allowed.
Under de Grandpré, BCE then began buying everything from a 42.3-per-cent stake (now 48.9 per cent) in TransCanada PipeLines Ltd. (TCPL), the largest Canadian pipeline company, to printing and publishing companies. In total, BCE’s assets swelled to $39.3 billion in 1989 from $14.8 billion in 1983.
In 1985, however, BCE invested in what would become its biggest failure. After being wooed by Jack Poole, a Vancouver real estate developer with a strong appetite for risk, BCE acquired 68 per cent of Poole’s Vancouverbased Daon Development Corp. for $162 million and renamed it BCE Development.
By the fall of 1988, however, BCED was losing millions of dollars each month on its partially empty office towers in such depressed U.S. real estate markets as Phoenix, Ariz., Denver and Minneapolis. At that point, Cyr decided that BCE should get out of real estate. In August, 1989, he engineered BCED’s sale for about $557 million to Olympia & York Developments Ltd., the massive holding company owned by Toronto’s billionaire Reichmann family. But the deal fell through when only 87 per cent of the shares were tendered, instead of the minimum 90 per cent required by the Reichmann bid. Even though BCE and many institutional investors tendered their stock, thousands of small investors refused the $2.80a-share offer. At the end of last week, the shares in the developer traded at 29 cents.
After the Reichmanns’ deal collapsed, BCED’s fortunes deteriorated dramatically. Last October, BCE reached a management deal with Carena Developments Ltd., the real estate arm of Peter and Edward Bronfman’s sprawling Toronto-based financial empire. After BCED also wrote down its assets by $610 million, Carena and BCE transferred the remaining assets to a BCED subsidiary, now Brookfield Development Corp. They then each injected $250 million into Brookfield to complete unfinished construction projects.
Still, analysts such as John Drolet, formerly with Toronto-based Loewen Ondaatje McCutcheon Inc., says that while BCED certainly caused its parent huge problems, they were not big enough “to risk the integrity of the whole organization.” But some vocal BCED shareholders say that that argument simply is not good enough. Says lawyer McBurney for the group of 500 dissident shareholders: “Over 90 per cent of them are elderly or widows. They are very annoyed.”
The shareholders are angry that while money-losing assets such as the U.S. properties remain on BCED’s book, one of the few gems, the BCE Place development in downtown Toronto, is now held by Brookfield. As well, McBurney says that the shareholders are angry because they thought the parent BCE provided a safety net for their investment. “By
changing the name from Daon to BCED,” McBurney adds, “they put the BCE imprimatur on it.”
For his part, Cyr puts up a vigorous defence. “If anybody investing in a real estate company thought they were buying a BCE share,” he says, “then I can’t say anything—they should have bought a BCE share.”
Cyr had barely resolved the BCED situation when Kinbum defaulted on its loan. Although BCE took possession of the voting rights of more than five million shares of SHL Systemhouse Inc., one of Kinbum’s subsidiaries that it had put up in part for collateral, it will take months to resolve that situation. As for the Encor sale, Cyr says that divesting those assets is part of BCE’s plan to concentrate on what it knows best. But Cyr says that BCE will likely continue to maintain its TCPL interest because the pipeline, like Bell Canada, is a regulated utility. Financial services also fit in with BCE’s core business, he says, because BCE has always been “a big financial player.” In April, 1989, BCE bought Montreal Trustco Inc., the country’s fifth-largest trust company, from Montreal-based Power Corp. for $877 million.
Still, as BCE strives to return to its roots, it also has to protect itself from the Unitel threat. In May, Unitel applied to the CRTC to set up a competing long-distance service. While the CRTC rejected a similar bid in 1985 from CNCP Telecommunications, as Unitel was then called, this time it has ordered Bell and five other telephone companies to answer 49 out of 53 questions that Unitel had submitted regarding their operations and costs. Unitel claims that competition will reduce long-distance rates with no increase in local rates, which Bell now subsidizes with its long-distance profits. In the United States, where longdistance service was opened to competition in 1984, there are 466 longdistance companies, and the average five-minute phone call from Buffalo to Seattle costs $1.45. In Canada, a similar call from Toronto to Vancouver costs $2.85.
BCE flatly rejects Unitel’s claims. Says Cyr: “Anybody who says the local rates are not going to go up, they’ve got be out of their mind. Somebody’s going to pay—and I can tell you it’s not going to be Bell. It’s going to be the users.” He adds: “We have built a telephone system which, for 100 years, has subsidized the farmers, has subsidized the rural user, has subsidized the local user, from the toll rates. I can tell you now that if we hadn’t had that, there wouldn’t be a telephone in every household.” Clearly, Ma Bell is up for yet another fight.
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