BCE, Telus Should Consider a Merger of Equals - RBC Capital Markets

With as many as five new wireless carriers launching service in Canada during the next year, the Competition Bureau is likely to see less market power for incumbents, paving the way for a merger between BCE Inc. and Telus Corp. (TU).

That’s the view of RBC Capital Markets analyst Jonathan Allen, who told clients that the rationale for a tie-up between the two telecom players is becoming more apparent.

He highlighted wireless as what has been the biggest hurdle to getting such a deal through the regulator. But the environment has changed significantly from two years ago, when significant divestitures would have been required.

“The more disruptive the new entrants are, the better the merger odds will be,” the analyst said.

Mr. Allen also noted that the incumbents are already competing more aggressively with flanker brands and wireless average revenue per user (ARPU) will likely continue its downward trend even with an economic recovery.

Back in the spring of 2007 when BCE was in play, Telus considered making a premium bid for its rival. This time, instead of bidding a premium, the analyst suggested both companies consider a simple merger of equals. In this, Telus shareholders would get roughly one-third of the combined company and BCE shareholders two-thirds.

“Furthermore, with no premium paid, there would be no additional debt leverage,” Mr. Allen said. "BCE CEO George Cope’s experience at both firms would be very helpful in bringing the two companies closer together and eventually merging the operations."

Based on estimated synergies of $10-billion for the combined company from Telus during BCE’s privatization process, the analyst estimated that the 1/3-2/3 split amounts to roughly 33% upside to both stocks.

“Even if investors give only partial credit to the synergies, this could still be meaningful upside to both shares,” he added.

Mr. Allen said in the event of a BCE-Telus merger, there is a high likelihood Bell Aliant Regional Communications Income Fund would also be folded in. He also said Telus non-voting shares should receive the same value as the voting class, so the spread between the classes should tighten.

The analyst noted that the growth rates between BCE and Telus are converging, top-line growth is coming under increasing pressure, wireless substitution is likely to re-accelerate line losses, the need for cost-cutting will become paramount to sustain positive EPS growth and the companies are already working together on wireless and satellite.