Betting on the BCE deal's fate is such fun

The credit crunch makes talk of whether the BCE pact will close a topic that trumps all in BNN's Green Room

By Kevin O'Leary
Globe Investor Magazine Online, November 4, 2008

Kevin O'Leary is the chairman of Gencap Funds LP, the manager of the O'Leary Global Equity Income Fund, (OGE.UN-TSX) and the co-host of BNN's Squeeze Play.

At BNN it's called the "Green Room" but it's not painted green. At 4:01 p.m. right after the market closes there is no place I'd rather be. The Green Room is the holding tank where guests that are scheduled to appear on TV wait their turn to go in front of the cameras. These days there is one topic of discussion that crops up in the Green Room and trumps all others: Is the BCE deal going to close?

The BCE deal is different than any other transaction that has preceded it. As contemplated, it is the largest private equity deal yet, requiring a stunning amount of debt at a time when banks are not lending. There is also an emotional element to this transaction that is unique. That is because BCE, or Bell Canada as many remember it, is as Canadian as pouring maple syrup on snow or watching the Toronto Maple Leafs lose a hockey game.

My own memories of Bell go back to the late 1950s. My mother, along with her sisters, all worked at a Montreal clothing company called Kiddies Togs. They were the daughters of the owner. My mother was a very prudent investor. She told me that every two weeks she took 20 per cent of her paycheque and bought Bell Canada bonds. She had a very simple investment philosophy: Don't spend the principal, spend the interest.

She had a basic mistrust of any security that did not pay a dividend or have a yield. Today, this philosophy is the core of my own investment strategy and it has served me well.

As Bell grew it became the "people's" company. Almost every Canadian owned some Bell stock or bonds in their investment account or in a mutual fund. But, in recent times, something went wrong and the company began to lose its way. After the tech bubble burst in 2000, BCE stock became "dead money." While competitors like Rogers and Telus continued to ride the explosive growth of wireless, Bell seemed to do nothing.

During this period, like many Canadians, I owned both BCE stock and bonds. Wow, was I frustrated. Quarter after quarter management failed to articulate any semblance of a growth strategy and the stock languished in the low $30s.

By 2007, BCE was so fat, bloated and mismanaged it was like hanging red meat in front of a starving dog for private equity players. The private equity guys could see that there were billions in savings to be had if they could only get control of the company, take it private, whack the deadwood management and put some professional management in place to get it growing again. After some interesting jostling around in the private equity market place, Jim Leech and his team at the Ontario Teachers' Pension Plan launched the largest private equity transaction since the pharaohs built the pyramids. Will it close? Well, I have my own story to tell to add gasoline to the fire. As an investor, I like the business services space. I am a director and shareholder in a company called Stream that provides call centre services around the world.

We are competing with many other companies that do the same thing for some of BCE's business, and in the past, I have met with BCE's management. The process was slow and painful until recently. I have never met George Cope, BCE's new chief executive officer, but I can tell this guy gets it, because as soon as he became CEO things began to change.

Lately, the management I have been meeting at BCE are all new faces. Some are veterans of the Verizon integration. These guys are Vikings, exactly what BCE needs right now. They are tough, smart and aggressive and they take no prisoners. They are the kind of management I like.

This new team is making changes at BCE, cutting costs, consolidating billing systems and implementing strategies that the company should have done years ago. My thinking is this: Why work so hard if you are not planning on closing? And if it does not close I'm going to be a lot happier as a shareholder of the new lean and mean BCE than I was with the old, fat, bloated one.

To be safe, here is how I have played the BCE deal. I recently added to my BCE stock position at $35 a share. At the same time, I bought the 2035 BCE bonds at 81 cents. If the deal closes anywhere between $38 and $42.75 I'll make a spectacular return on the stock. I'll still own the bonds and they will turn to "junk" but I'm confident that the new BCE can pay the interest. If the deal blows up, the bonds I own will go back to parity, offsetting some of the loss from the stock that will plunge into the mid-20's. I'm okay with that outcome, too. I love the new private equity-induced mode BCE is operating under these days. I have to give credit where it's due. I got this idea in the Green Room from legendary bond investor Barry Allen. Will the BCE deal close? I have no idea, but it sure is fun talking about it.

Special to The Globe and Mail