BCE Relies Again On A Convergence Strategy

| About: BCE Inc. (BCE)

BCE Inc (NYSE:BCE), the Canadian infocom conglomerate, discarded its convergence strategy after the resignation of Jean Monty in 2002, just after the bankruptcy of its long-distance division, Teleglobe. At that time, most media analysts were against the convergence business model of BCE, while some financial analysts were globally positive about it, except for the Teleglobe acquisition. They, however, primarily agreed that the business context of the tech crash of 2001 had put some short-term pressures on this business model. However, the model did need time to be executed properly.

On the other hand, one of BCE's biggest competitors, Quebecor (OTCPK:QBCRF), has closely embraced a convergence strategy since 2001 following the acquisition of Videotron. While most analysts agreed that the price of the acquisition was too high (CAN $5.7M), at the peak of the 2000 tech bubble, Quebecor has since created value with the Videotron acquisition.

Quebecor's 10-year stock performance

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Rogers Communications (NYSE:RCI) has also been using a convergence strategy for many years (with the first convergence play being MacLean Hunter's publications and cable assets in 1994), with huge success.

Rogers Communications' 10-year performance

Michael Sabia, who replaced Jean Monty as CEO at BCE, refocused the company toward its core activities by selling several non-core assets related to Monty's convergence strategy. BCE's stock posted low performance under Sabia, largely due to the lack of a growth plan. Now that the new CEO, George Cope, has completely acquired the CTV network, a minority stake in Maple Leafs assets and recently bought Astral Media (ACM-B.TO), we can assume that BCE is again relying on a convergence strategy.

Again, the Astral Media acquisition is expensive at around CAN $3.4 billion. However, it provides an impressive strategic position to BCE to compete for advertising revenues against Quebecor. Thus, Bell will now have a 32% TV market share in Quebec compared to 6% previously. It can now offer complete advertising packages to its customers covering radio, Internet, specialized TV channels (such as Movie Channel and HBO Canada), smartphones and billboards. By acquiring the content of Astral Media, BCE can share it on all its platforms: tablets, smartphones, radio and TV.

For Dr. Yvan Allaire, Emeritus professor of Strategy from UQAM and HEC, there is a paradox in the business world, omission faults are not really sanctioned by stock markets. However, action faults have usually received hard sanctions from the stock markets. Thus, while former CEO Jean Monty had to resign from BCE, the new CEO George Cope is just using a similar convergence strategy betting on strong links and synergies between content and pipes.

BCE can certainly create value in the medium and long term, like Rogers Communications and Quebecor. However, it will need several years to generate a positive ROI on Astral Media owing to the price of the acquisition. Indeed, Astral Media had been a rumor acquisition target for about a decade, with content providers such as Corus Entertainment too becoming very attractive again to infocom conglomerates.

In the case of acquisitions, timing is everything , and we are in the beginning of an economic recovery and bull market. In fact, BCE's stock price has been performing well and has a Beta around 1.

BCE's 10-year stock performance (stock split in 2009)

One error of the convergence vision, however, could have been to focus too much on acquisitions to rely on the convergence in the infocommunications sector. BCE and the others could have tried more alliances and partnerships at lower costs than acquisitions, while leveraging and not stretching too far the center of gravity of its core competencies. Infocom conglomerates that can extract value from a good mix of internal growth and growth by acquisitions, offer better chances for value creation in the long term. Such firms, I believe, must deal more effectively with the dilemma of buy versus build innovation.

Disclosure: I am long OTCPK:QBCRF.