Genuity Capital Expects BCE Deal to Close

BCE Inc. (BCE) will report its results for the first quarter of 2008 today. As is the case with much of the reporting in this crazy market, don’t expect the financial results to drive the stock. Genuity Research reminds us that the CRTC has extended the deadline for a follow-up proposal until May 12th, and there’s always the court action brought by grumpy BCE bond holders to keep an eye on (see prior post “Another way to play BCE” May 1-08).

The wildcard in this deal remains Citigroup (C) and the LBO banking syndicate (see prior post “Maybe BCE/Ontario Teachers needs JPMorgan” April 30-08).

Here’s the precis from Genuity Research:

Expect modest revenue, EBITDA, and EPS growth – BCE will report its Q1/08 results before market open Wednesday. Excluding Telesat, which was sold in Q4/07, our consolidated revenue forecast of C$4,256 million is in line with consensus and implies that revenue will be flat YoY on a pro forma basis. Our EBITDA estimate of C$1,716 million is slightly above consensus and implies a pro forma YoY increase of 2.6%. Finally, we forecast EPS from continuing operations of C$0.54 versus C$0.52 in Q1/07. The consensus forecast is C$0.57.

We expect a significant decline in residential lines and long distance revenue – We forecast that Bell Canada lost 100,000 net residential lines in the quarter, implying a 9.5% YoY decline in total residential lines. We forecast a 6.5% YoY decline in local revenue and a 9.7% YoY decline in long distance revenue.

While voice declines should be offset by wireless, data, and ExpressVu growth, Bell has growth challenges – On the wireless side, we assume that Bell Mobility only accounted for 20% of industry postpaid net additions. Also, we only forecast 1,400 ExpressVu net additions and 3% YoY data revenue growth.

But reduced pension expense and margin expansion in both wireless and ExpressVu should drive up EBITDA – We project Q1/08 Bell Canada EBITDA of C$1,415 million or a modest YoY increase of 2.6%.

Results unlikely to impact the LBO – We believe that those looking for information that could impact the LBO process will be disappointed. While we expect modest Q1/08 results, we believe that they will be very much in line with the performance of the company over the last few years.

LBO firms have until May 12 to submit to the CRTC; Bondholders appeal ruling should be decided by then – While delays in CRTC approval may be nerve-wracking, the CRTC’s conditions do not seem onerous. We also expect the bondholders appeal to be rejected by the Appeals Court and a close of the LBO by quarter-end. Consequently, the biggest risk remains that financiers pull out. We expect the deal to close.

That penultimate sentence can’t even be called an “understatement.” The CRTC has already given the nod to the proposed deal, and the bondholders lost their first round in Court. The Quebec Appeal Court would have to find that the initial Judge was patently wrong for it to overturn the lower Court decision that concluded BCE bondholders had no ability to block Teachers et al.

The largest LBO deal is history rests entirely on the broad shoulders of the lending syndicate. With JPMorgan (JPM) having the gumption to support Mars’ acquisition of Wrigleys (WWY), the BCE deal has a positive aura about it right now. Although there’s no direct linkage between the April 29 announcement of the $11 billion Mars financing and the BCE/LBO, the tug of war between the hedge funds has tilted to those who think the deal will close at C$42.75.

Disclosure: I still own BCE in RRSP but ditched the non-RRSP position [see prior post “Are the lawyers turning BCE documents?” April 18-08]).

Comments

[User 190518:]

My opinion is that there is some obstacle among the buyers preventing them submitting the revised documentation required by the CRTC. It probably relates to loss of equal control by the US buyers as ordained by Konrad Von Finckenstein. The request for a delay cannot be logically attributed to a logistical logjam at the buyers law firrms. They have teams available 24/7 for deals like this. The request curiously was sent at a very late stage to the CRTC leading me to conclude that the buyers were bargaining among themselves furiously hoping to reach a settlement up to the last possible moment.

My second worry is that the bondholders can drag this case on easily past November financing commitment deadlines by appealing to the Supreme Court. One month in our (in fact most) court system is the equivalent of the blink of a layman's eye.

Clearly there are still big hurdles. The Clear Channel deal looks like the banks will have to pay up. The BCE committed banks may be saved by either the CRTC or the bondholders protracted legal proceedings.

2008 May 08 04:19 AM