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BCE – A Buying Opportunity?

If you’ve been following Canadian financial news lately, you’ve most likely heard about the whole BCE take-over drama and controversy. Is the deal going to go through? Will they pay shareholders the original agreed upon cash amount? Or will they renegotiate the deal with a lower amount?

It all began with the Ontario Teachers Pension group making a bid for BCE with financing from the major banks. Everything was fine and dandy with the deal basically done, then all hell broke loose. There was a court battle along with speculation that the lenders would have trouble funding the deal.

We now have an agreed upon, court approved, all cash deal for $42.75. However, the current share price sits at approximately $39.50. Is this an opportunity to make $3.25 dollars/share or 8.2% with reduced risk? With the deal closing on Dec 11, 2008, that represents about 5 months holding time which, if annualized, would equate to a return of 19.7%.

So what do you think? Is BCE a buy and hold at this price level for a quick profit? Is the 8% return worth the risk that the deal can potentially still fall through?

More info from colleagues:

Disclaimer: I do not own shares of BCE. This article is not a recommendation to buy BCE.

Photo credit: myyorgda

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 27 comments… add one }
  • David July 8, 2008, 10:06 am

    The market is not always ‘smart’ but with a company this big and the economy / banking issues that seem to have popped up in the six months I think there is a reason to be cautious.

    That said, there is still likely little downside. I watch the TSX drop and think “time for more index shares”

  • FT FrugalTrader July 8, 2008, 10:23 am

    Hi David, yes I think you are right about soon buying more Canadian index shares. I have been waiting for a pullback before purchasing the Canadian index for my RESP account.

  • MEG55 July 8, 2008, 10:31 am

    BCE is a good place to park your oil and agricultural money. BCE is a recession proof business…most customers are locked in with contracts.

    With a change at the top with new CEO, Cope, there is going to be a great change to this company to the benefits of the buyers.

    While the market is in a bearish phase, much safer to park your money with BCE and collect an annualized returns of greater than 18%.

  • Chuck July 8, 2008, 10:41 am

    MEG55 – I think you’re missing the point. BCE is being bought out and going private. So at anything buying BCE now is either to hold on and hope the $42.75 price does not change, or the deal falls through and you’re a long term investor.

    As a consumer I’m moving my phone business elsewhere. I just don’t like a regulated company just taking on $30B in debt so they can be owned by a pension fund. In a couple of years they’re going to go to the CTRC and say “We’ve got all this debt and need to up rates”.

  • WhereDoesAllMyMoneyGo.com July 8, 2008, 11:01 am

    Thanks for the mention FT! :)

  • Finance_Addict July 8, 2008, 11:19 am

    BCE will go through for $42.75. I’m very confident now that the banks are on board. I have owned this throughout the past year and just yesterday loaded up with borrowed money to take the ~$3 per share spread. It’s very rare when you basically get free money. Keep in mind BCE could still announce a special dividend at the time of sale. This is unlikely but you never know.

  • ThickenMyWallet July 8, 2008, 11:38 am

    Thanks for the mention.

    The spread is probably the risk of the banks not finding enough other lenders to finance the deal (in a financing this big, the lead banks syndicate the deal to spread risk) BUT the break-up fee also went up $200 million for the buyers so the buyers have even less incentive to walk away.

    The bigger story may be what happens to the consumer once BCE is private and loaded up with debt? Hello price increases!

  • ETF Income July 8, 2008, 11:42 am

    Why don’t we wait for beginning of December to buy BCE, then we can gain more interest by invest somewhere else during this period.

  • FT FrugalTrader July 8, 2008, 11:54 am

    TMW, thanks for the info. I didn’t know that there was a $200 million penalty for walking away.

    ETF, I would say that by the time December rolls around, the spread will be very small.

  • Al July 8, 2008, 12:21 pm

    I’ve owned some shares of BCE for a few years and have been watching the whole thing with fascination. I voted in favour of the buyout of course. I have no intention of buying more at this time (I’m not nearly as optimistic as the addict), but I am struggling with the sell side of the equation. Should I sell for $39.xx to lock in my profit?

  • FT FrugalTrader July 8, 2008, 12:25 pm

    Al, what you could consider is selling half now and half later. That way, you lock in some profits and take money off the table.

  • longtimereader July 8, 2008, 12:42 pm

    There are 150+ days to Dec11, God knows what will happen again to BCE — shareholders might lauch lawsuit for the skipped dividends :-) okay I was kidding . Anyway, I put a limit order to sell all my holdings @ $40,hopefully it will get filled by the end of July, to me , the extra 2.75 + commission fee don’t worth the uncertainty …

  • AndyBuck July 8, 2008, 12:48 pm

    FT, I believe there is actually a $1 Billion penalty. It went up $200 million after the last round.

    All the gushy lawyer-ry details here:
    http://www.bce.ca/data/documents/definitive_agreement_en.pdf

  • 45free July 8, 2008, 12:51 pm

    If I were looking to buy BCE right now, I would look to the options market. Here is how that trade might look. BCE currently trading at 39.00. If the deal falls through, this probably slides to 32, around where itwas trading pre takeover offer. Assume you were to buy 100 shares, you have 375 of upside and 700 of downside. Take that same $700 and buy 4 Jan 2009 $40 call opions at 1.75. This gives you exposure to 400 shares above $41.75 ($40 strike + $1.75 premium). Upside is $400 (42.75-41.75)*400 and downside is $700 so pretty much as being long stock but tying up (and risking) $3,200 less capital.

  • Nicolas July 8, 2008, 1:49 pm

    As a client , like a lot of people, I’ve never liked BCE. On the other hand, I’ve always had a lot of respect for Teacher’s. They have proven over time that they can make quality acquisitions and obtain decent returns for their members. Not much others could try something like this and perhaps even succeed.

    They are the ones we should look at when judging this transaction.

  • Finance_Addict July 8, 2008, 2:20 pm

    I don’t buy into the noise, fear or uncertainty what so ever that the deal dies between now and Dec 11th. If the banks were to walk away (which they never could) without a huge penalty and lawsuits, they would have. The banks got their concessions and basically a $2 cut in price with the suspended dividend. It’s a done deal. This is a rare opportunity to get a nice spread on a all cash commission free sale of your shares. I find it much riskier to buy basically any other stock right now than to wait for Teachers to buy my shares. Buying with borrowed money does take the shine off the return but still I make money with the banks money. As for BCE after the sale, Teachers will clean it up and put it back on the market in a few years.

  • Sarlock July 8, 2008, 11:25 pm

    Way I see it, part of that 8.2% spread is the opportunity cost of locking up your cash for a 6 month investment (so 2-4% or so, depending on what your average annual stock yield expectations are) and the other 4-6% is the risk factor that something, however unlikely, blows up and the deal goes sour and your investment drops down to $30-35 (or more, given current market conditions). Free money? Maybe… but I’d rather put my money elsewhere where I have a higher potential upside. This likely explains some, if not all, of the current spread. The spread will slowly narrow as we come closer to the date.

  • Al July 9, 2008, 10:31 am

    FT,

    I’ve been considering selling part of my holdings in BCE (though not exactly half, I’ve got an odd lot situation due to the spin off of Bell Aliant.) I’ll probably end up sitting tight and waiting for Dec. I’m getting bearish on the TSE so I might as well take the positive return on BCE instead of a negative return on anything else I may buy.

  • Dividend Growth Investor July 9, 2008, 11:42 am

    I found an interesting article on Yahoo finance about this deal:

    http://biz.yahoo.com/rb/080704/e.html?.v=3

    Seems like the break up fee is 1-1.2 bln $ CDN.

    If you really believe that the deal would go through and you would like to use leverage, why not buy the January 2009 40 calls @ 1.90 and then sell them at 2.75 for a huge profit?

    http://www.m-x.ca/nego_cotes_in_en.php?symbol=BCE&insSymbol=BCEA09C40.00&fixeDate=&#cote

    Another thing to do if you are buying the stock now and wait until Dec 11, 2008 is to sell covered calls against your position.

  • Cannon_fodder July 9, 2008, 11:51 am

    There is something in my memory that says the stock wont actually get to the $42.75 price. There will be a slight discount to the target price. it might be only 5 cents or so, but IIRC other situations like this didn’t translate into the exact acquisition price.

    Perhaps it is because no one would be willing to buy them at $42.75 + commissions – where is the profit?

  • Tax & Financial Planning July 9, 2008, 5:12 pm

    You know the other day I heard someone ask where the money that get’s released after the BCE deal closes will end up.

    Some though MTS others thought it would just get absorbed by the market. But it’s a lot of cash and it has to land somewhere.

  • MEG55 July 9, 2008, 7:19 pm

    The smart investors will keep the BCE money in cash.

    This bear market will not turn around for a few years.

  • Sarlock July 9, 2008, 11:30 pm

    Cash will be steadily eroded by inflation over the next few years.

  • Long BCE October 7, 2008, 5:33 pm

    The spread between the expected closing price of 42.75 and now is ridiculous. I put in a buy order this morning for 32.73. That’s over a $10 spread. The risk is the deal could still fall through but the risk reward at this point 2 months away was too good to pass up.

    If the deal doesn’t go through, the stock will likely drop some more but BCE is a buy and hold type of stock anyway.

    What do you think?

  • wearyBear November 26, 2008, 1:27 pm

    And today?

  • FT FrugalTrader November 26, 2008, 1:29 pm

    wearyBear, I’m happy that I didn’t buy into this one. :) As of today, they are predicting that the deal will not be completed by Dec 11th and there is even speculation that the deal will fall through.

  • cannon_fodder November 26, 2008, 2:39 pm

    You could look at it this way… the stock is valued based on fundamentals. The upside is that the deal goes through (although unlikely and probably at a much lower price than originally set) or the deal doesn’t go through, BCE declares a reinstatement of some dividend and the stock gets a pop upon that news.

    Either way, probably worth taking a look at…

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