GMP research brings common sense to curious Telus/BCE proposal

Not to sound too much like a fan, but GMP’s research group makes a good case today about how far-fetched the idea of Telus acquiring BCE truly is. Not to be simplistic about the concept of a single, large national wireless carrier, but Canada’s rates are already much higher than other nations. Nothing in the Telus proposal would drive those prices down, giving the regulators another excuse to block the deal, but here’s GMP’s more thoughtful analysis:

“Yesterday, TELUS held a media conference call to discuss TELUS’ announced intention to bid for BCE. Management went through their case of why a combined Canadian entity would be good for Canada, Canadians and for shareholders of both entities.

Our view did not change as the result of the press release and the conference call. We continue to believe that a combination of the two companies doesn’t make sense on a financial basis at current levels (synergies not greater than premium paid), it faces significant regulatory hurdles which could require them to dispose of duplicate wireless assets (which are most important for value and potential synergies), and it lowers TELUS’ exposure to the wireless growth business (even if it is able to retain both assets). For TELUS shareholders, we believe
a privatization or a share buyback scenario offers value enhancement opportunities and we continue to believe a combination is dilutive.

There was limited information provided on the conference call, but some additional insight was
provided. First, while not stated specifically, we believe that a potential bid could be contingent on regulatory approval for the combination of the wireless asset. This would lower the potential risk to TELUS shareholders. They stated that it would be a combined cash and stock bid.

No price ranges were suggested and the debt-equity split was not provided, but they did say they intended to remain investment grade. Given their combined debt capacity, we believe this could imply a 50/50 cash/stock offer. Last, they stated that they were in discussions with the regulatory authorities and that they have offered a limited amount of concessions, equivalent to what is being proposed in the wireless spectrum auction discussion paper.

We are maintaining our $66.00 target price [on Telus] and our HOLD recommendation.”

MRM
(disclosure – I own BCE)