Back to the future

BCE searches the globe for growth

DEIRDRE McMURDY November 30 1992

Back to the future

BCE searches the globe for growth

DEIRDRE McMURDY November 30 1992

Back to the future


BCE searches the globe for growth

When Lynton (Red) Wilson and Raymond Cyr sit down between Christmas and the New Year for their informal annual review of their company’s progress, the president and the chairman of BCE Inc. will have a lot to talk about. Over the past four years, the $47-billion Montreal-based communications conglomerate, which controls Bell Canada, Northern Telecom and BCE Mobile Communications, has struggled to overcome its unprofitable 1980s drive to diversify, and to return to its roots in the telecommunications business. But only in the past several weeks has BCE’s future finally clicked into clearer focus. On Nov. 11, the company announced a $960-million investment in the Mercury Communications division of Cable & Wireless PLC of Britain, which has an established foothold in Asian, European and Caribbean markets. Just two weeks earlier, it hired Derek Burney, the well-connected former Canadian ambassador to the United States, to spearhead its new global push as executive vice-president. “BCE has invested in international markets before, but this deal is a departure point,” said Robert Hastings, an investment analyst with Winnipeg-based Richardson Greenshields of Canada Ltd. “It is a strategic alliance that could transform the company into a real international player.”

Strategic is a term that has infrequently been applied to BCE’s corporate initiatives for several years. In the heady 1980s, the company was caught up in a feverish acquisition binge, paying top dollar for an extensive portfolio of real estate in Canada and the United States as well as large investments in TransCanada PipeLines Ltd., natural gas producer Encor Inc., Montreal Trustco, printing company Quebecor Inc. and SHL Systemhouse Inc. But as the economy cooled, the company’s aggressive foray into new ventures resulted in a series of significant financial write-downs. And now, even as BCE tries to cast forward to future growth in a clearly defined industry, it is still haunted by its past—and by the task of disposing of its remaining real estate, energy and financial-services holdings. “As the 1980s ended,”

Wilson told Maclean’s,

“there was a shift in every-

one’s view of what made sense for companies. We are now redeploying assets to focus on what we know best. But you can’t do it overnight.”

BCE’s aggressive entry into the global telecommunications arena has not come about overnight either. The company already participates in joint ventures in New Zealand and Russia and it has bid, unsuccessfully, to participate in newly privatized markets in Mexico and Venezuela. But because of BCE’s abrupt and unsuccessful detour into unrelated businesses, the investment community has, until recently, responded coolly to management talk about its planned strategic shift. Referring to BCE’s dismal record with its real estate division, the now-defunct BCE Developments Ltd., one analyst said (on condition of anonymity): “Sure, people are still mad at them. Just ask anyone who is still suffering through the messy workout of all that real estate.” In fact, some industry sources calculate that BCE may still have to write off more than $1 billion because of its holdings left over from the diversification through the 1980s.

Despite its detour away from its core businesses, they have provided the company with a stable source of revenue in recessionary times. In the first nine months of this year, BCE


1983 BCE acquires 42.3% stake in TransCanada PipeLines Ltd. (TCPL).

Price: $605 million

1984 BCE acquires lottery ticket-maker British American Bank Note Inc. of Ottawa and Rochester-based printer The Case-Hoyt Corp.

Price: $111 million

BCE acquires a further 4.9% stake in TCPL.

Price: $109 million

1985 BCE buys 68% of Vancouver-based development company Daon Developments (subsequently renamed BCE Price: $163 million

BCE increases stake in TCPL to 47.8%.

Price: $51 million

1986 BCE acquires Oxford Properties Inc.

Price: $197 million

1987 TCPL makes a complex bid for Dome Petroleum (beaten by Amoco).

Offer: $4.3 billion

TCPL buys Encor Inc. (formerly Dome Canada).

Price: $1.1 billion

1988 BCE acquires 21 % stake in Quebecor.

Price: $161 million (an asset exchange)

1989 BCE buys Montreal Trustco Inc. from Montreal-based Power Financial Corp. Price: $877 million

reported net income of $862 million on revenues of $14.9 billion, down from earnings of $961 million on revenues of $14.6 billion in the same period a year ago. Significantly, the financial terms of the Cable & Wireless deal have won hearty approval from analysts. Indeed, the company intends to pay for its Mercury Communications investment with $656 million from the sale of its remaining 21-percent stake in TransCanada PipeLines. Another $350 million will come from the recent sale of telephone directory and printing division assets. The new investment will even contribute slightly to BCE’s immediate earnings: for the six months ended Sept. 30, Mercury reported a 36-per-cent increase in profits because of an increase in its share of the British market. Said Joanne Smith, who follows BCE for Nomura Securities in New York City: “When a company invests in one of these highhope, high-growth international deals, it’s reassuring to see it structured this way. If something goes wrong, it limits the hammering they’ll take later.” Wilson emphasized that BCE is “not going steady” with Mercury and that it will continue to search for other international ventures. For now, however, the deal will allow BCE to expand its presence in the deregulated British telecommunications market, where cable television

and telephone companies are allowed to share their networks. It has already invested in two cable companies that have access to 1.8 million homes. In the future, Mercury will be able to use that network to transmit telecommunications signals, and BCE will be able to use its new partners’ fibre-optic telephone network for its cable TV signals.

The broad geographic scope of Mercury’s parent, Cable & Wireless, which owns a 58.4per-cent stake in Hong Kong Telecommunications, is another lure for BCE because of its proximity to the massive, underdeveloped market in China. In addition, the British company is “less technology-intensive” than BCE, according to Wilson, and will provide a natural market for equipment developed and manufactured by Northern Telecom.

Although Wilson insists that “we’d like to invest more in Canada,” he says that Ottawa’s regulation of the telecommunications sector is a deterrent. Specifically, BCE objects to the restrictions placed on its investment in related telecommunications companies, including Teleglobe, which has a monopoly on Canada’s international satellite and fibre-optic communications outside North America. Another point of contention with the company is the federal government’s attempt to introduce deregulation and competition into the $7.5-billion domestic long-distance market without permitting telephone companies to re-balance their rates as the British government of Margaret Thatcher did when it broke the monopoly held by British Telecommunications PLC in the 1980s. That would entail increasing local rates, which Canada’s long-distance services currently subsidize, to offset lost revenue from longdistance calls.

Bell, which is currently appealing parts of

the Canadian Radio-television and Telecommunications Commission’s (CRTC) decision in June to allow longdistance competition, has compared the ruling to “expropriation without compensation.” In particular, it is balking at having to shoulder the bulk of the $240-million cost to hook new competitors into the existing communications network. But even if Bell wins its appeal to modify the CRTC judgment, noted Nomura’s Smith, “it has already lost its domestic monopoly—that’s a reality.” She added that, “with competition comes declining margins, which means BCE has to 5 look for growth elsewhere.” 2 As BCE scouts for new u growth opportunities outside § the increasingly competitive H and mature North American g market, the chief scout will 5 be Derek Burney. The forto basics mer diplomat, who was a can-

didate for the job of publisher

of The Financial Post of Toronto, will take responsibility for BCE’s $1.2 5-billion stable of international assets starting in January, 1993. Wilson said that Burney has been assigned “a

real operating job, not something ornamental.” Burney was hired, added Wilson, because of his “excellent” worldwide network of contacts, and because of his firsthand knowledge of the “government process.”

Despite such a strong focus on its future, BCE still has to contend with the past. Last week, debt-laden Encor Energy, in which BCE now holds an 18.7-per-cent stake, suffered setbacks in its protracted attempt to restructure its heavy debt load. But perhaps the most daunting challenge for BCE remains Montreal Trustco, for which it paid $877 million at the height of the market in 1989. Wilson acknowledged that a trust company does not fit in with BCE’s current strategy and Montreal Trust, in particular, is “too small and should be part of something bigger in the industry.”

In the past year, BCE considered a deal with troubled Central Guaranty Trust, which the Toronto-Dominion Bank recently acquired. And although Wilson said that there has been “no indication of interest to date,” he added that BCE would be willing to talk about a possible transaction between Montreal Trust and Royal Trustco Ltd. of Toronto. Wilson said that BCE would be interested in merging Montreal Trust with another company, allowing it to reduce its 100-per-cent ownership position. But as the company has discovered, on its painful road back to the future, it is easier to add than to subtract.