BCE converting Bell Canada into income trust; follows lead of Telus

While companies who convert to trusts have tapped into a new lucrative investment market, they also are forced to pay most of their profits to unitholders, which prevents them from using excess cash for internal growth.

As well, many trusts are in boom-to-bust industries where markets are volatile and can often lead to a suspension of payments when the business environment changes.

The winding down of BCE "certainly does mark the end of an era in Canadian business," said Michael Sabia, CEO of BCE and Bell Canada.

Sabia said the income trust - the Bell Canada Income Fund - will be strictly a telecommunications business. The move by Telus was an important factor in the BCE decision, he added.

"It further confirms the focus that we have in our overall strategic direction, which is returning the company to its roots and building a business in the business that we know - telecommunications - and sticking with that," Sabia told a conference call.

He said the BCE conglomerate, also known as Bell Canada Enterprises, was created in a different era with a different purpose that focused on diversification.

"But the strategy we've been pursuing over the last three or four years is not about diversification, but about focus with Bell as the centrepiece of that focus."

BCE stock increased more than four per cent in trading on the Toronto Stock Exchange, gaining $1.37, or 4.34 per cent, to close at $32.92 with 35.74 million shares changing hands.

The conversion would likely create Canada's largest trust by a wide margin - BCE's current market value stands at around $25.8 billion - and would simplify the telecom company's corporate structure.

The Bell Canada Income Fund would have an initial annual cash distribution of $2.55 per unit, compared with the current BCE dividend of $1.32 a share.

Income trusts have grown in popularity in recent years in Canada as they face a lower tax burden than regular corporations, passing the tax bill on to individual unitholders who receive monthly distribution payments.

Finance Minister Jim Flaherty said he wouldn't comment specifically on BCE's conversion plan and the potential loss of federal tax revenue.

"We do remain concerned about the issue and we do continue to monitor the situation in Canada," Flaherty said after a speech in Vancouver.

The decision to convert to a trust was based on existing federal income tax rules and didn't require an advance tax ruling, Sabia said.

It will be financially advantageous because BCE will avoid an $800-million tax bill in 2008 when the company would no longer have tax losses or shelters, he said. The expected tax bill with remaining shelters is pegged at $250 million for the next year.

Merrill Lynch analyst Joel Sutherland said as a result of the "trusting" of BCE, the spectre of repercussions from the federal government has been removed.

Many Canadian companies will see it as "a milestone in terms of 'If they can do it, why can't we?' " Sutherland said in a research note.

He said he doesn't expect the Conservative government to act as long as it's in power and budget surpluses continue to last.

BCE will save corporate tax but taxes still will be paid, said portfolio manager Leslie Lundquist of Bissett Investment Management.

"Unitholders will still have a tax bill at some point down the road," she said from Calgary, adding she doesn't believe the Conservative government will move to clamp down on income trusts.

She said the challenge will be to maintain business growth and capital spending while still being able to pay out the distributions to unitholders.

Sabia said there are no plans to lower the company's 15 per cent ownership in Bell Globemedia, owner of the Globe and Mail newspaper and CTV, which BCE sees as a content provider for its telecommunication businesses. He also said he plans to remain as CEO of the income trust.

BCE is widely held by individual shareholders and pension funds and analysts had been waiting to see if Sabia would follow Telus's recent move to become an income trust.

Sabia said he couldn't have made the move to an income trust any sooner. He said he needed to ensure the new entity could support growth and pay the higher distributions to unitholders.

He also said he needed to see the ability to win back customers lost to cable companies, retain customers and see positive changes to cost structure, service levels and pricing.

"To have tried to do this six, eight, 12 months ago would have not have not been the right thing because we wouldn't have had the same level of confidence," Sabia said.

Income trusts are typically valued higher than corporations in the market because of their lower tax structure, Lundquist said.

Sabia expects reduced costs of about $10 million annually and possibly up to $20 million once BCE is dissolved.

BCE is Canada's largest communications company. Under the Bell brand, its services include local, long-distance and wireless phone services, high-speed and wireless Internet access, broadband services, information and communications technology services and direct-to-home satellite and VDSL television services.

Other BCE businesses include satellite Telesat Canada, which is itself in the middle of a spinoff process and an initial public offering of stock.

Separately, Bell Aliant Regional Communications Income Fund announced Wednesday its intention to take private the Bell Nordiq Income Fund, which serves northern Ontario and Quebec.

As part of the BCE wind-down, already approved by the board of directors:

-Each BCE share would be exchanged for one unit in the Bell Canada Income Fund.

-BCE and Bell Canada will make a cash offer to buy back all of their outstanding preferred shares.

-An issuer bid circular is to be mailed to preferred shareholders in December. A special meeting of common and preferred shareholders will be held in Montreal in January.

-Bell Canada Income Fund units are expected to begin trading in the first quarter of 2007.

Bell Aliant units ticked 55 cents lower to $34.10 Wednesday afternoon on the Toronto Stock Exchange.

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Some facts about the dissolution of BCE Inc. (TSX:BCE) and the planned conversion of subsidiary Bell Canada into an income trust:

BCE Inc:

-Current market value: About $27 billion.

-Operations: Bell Canada, Telesat (to be spun off), 44.7 per cent stake in Bell Aliant Regional Communications Income Fund (TSX:BA.UN), 15 per cent stake in Bell Globemedia Inc.

-Annual dividend: $1.32 per share.

-Tax crunch: BCE's tax shelters run out in mid-2007.

New Bell Canada trust:

-No more BCE: Holding company to be replaced by Bell Canada Income Fund.

-Big newcomer: Canada's largest income trust, eclipsing Telus (TSX:T) at about $20 billion.

-Exchange: One new trust unit in return for each BCE share.

-Annual planned distribution to unitholders: $2.55 per unit.

-Payout ratio: 85 per cent of distributable income.

-Debt buyback: Will make cash offer for all outstanding preferred shares.

-Conversion expected by: First quarter 2007.

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