BCE Takeover part 11

News item: BCE and Telus in non-exclusive talks to combine businesses.

Your first reaction might be “wow”. But if you’ve ever worked at, or engaged, an investment bank, you’ll know how this came to pass. A few weeks ago, BCE’s financial advisors would have tabled a presentation for the board of directors. In it, there would have been something called an “ability to pay” analysis. That analysis would have outlined what a generic LBO buyer, for example, could pay for BCE and still make an acceptable return. According to research analyst reports, the range might have been in the low to mid $40s per BCE share.

The “book” would have also included a review of precedent transactions, but that approach speaks more to the fairness of the deal than what someone is going to actually pay.

It is highly likely this presentation included a rough outline of what a merger of Telus and BCE could look like. After all, an LBO of BCE produces not a dime of synergies, although it would certainly be expected to produce some “efficiencies”, as they say in England. But, a Telus/BCE merger is going to be knee deep in synergy dollars, and if you apply an 8x multiple to them, all of a sudden you’ve created investment banking magic: hundreds of millions of notional shareholder value dollars are produced out of thin air.

This is referred to as the Goldilocks approach. You know: “this one’s too hot, this one’s too cold, but this one is just right!” An LBO could get shareholders, say $42-$45 per BCE share. A standalone recap might surface $38-$42. But a merger with Telus gets you $8 on top of the BCE standalone recap range of $38-$42…”so it’s the board’s fiduciary obligation to explore that deal, Madam Chair”. And, voila, without having the foggiest idea if the Competition Bureau would approve the merger, and in the absence of precise GR advice, the i-banker moves this along the field. No self-respecting MD could have gone to that Board meeting without knowing the answer to the question: what would a merger look like?

And, assuming the investment banking fees are structured based on value created for shareholders, millions more are added to the i-bankers’ fee opportunity should a Telus/BCE deal actually fly.

Of course, it can’t possibly get through the Competition Bureau, even with the current Industry Minister and his laisse faire approach to such matters. The Bureau had an issue with Labatt acquiring tiny Lakeport. And they would’ve likely blocked a TorStar/Sun Media transaction, for example, had they been given the chance back in 1998.

What are the chances that a BCE/Telus deal gets through their sieve? Zippo. (Unless, of course, they’re prepared to approve a bank merger soon thereafter, ’cause you’d have to assume someone would try it if they hear that the Competition Bureau didn’t think two of Canada’s to three wireless carriers getting together might lessen competition for cell phone rates.)

But, in the meantime, many Bay Street summer holiday plans are being cancelled as the deal-of-the-year takes another twist. In the end, whatever BCE shares do tomorrow, Rogers’ voting shares are up approx. $5 in just over one week. So perhaps we are all mistakenly focussed on the BCE soap opera, and missing a better way to make money in the telecom/wireless space.

MRM
(disclosure – I own BCE)