In what will be the largest leveraged buyout ever of a Canadian company, Bell Canada Enterprises Inc. has agreed to sell its telephone directories business to Kohlberg Kravis Roberts & Co. and Teachers’ Merchant Bank for C$3 billion (US$1.89 billion).
New York-based KKR will invest C$540 million (US$342 million) for a 60% stake and majority board representation in the carved-out publisher, while Teachers’ Merchant Bank will invest C$270 million (US$171 million) for a 30% piece. The remaining 10% equity ownership will remain with Montreal-based BCE, which accepted a 30-year non-compete clause with its former subsidiary. In addition, the new company will use the Bell Canada brand name on its white pages for the duration of the non-compete agreement and on its yellow pages for at least the next five years – although no specifics were includes as to exactly where the Bell Canada logo will be displayed.
“We strongly value the [yellow pages unit’s] partnership with Bell Canada because we serve the same customer base,” said Alex Navab, a partner with KKR. “It’s very important for a yellow pages business to maintain its relationship with the phone company after being carved out.”
Navab added that KKR is excited to once again be working with Teachers’ Merchant Bank, a group formed in 1991 by the Ontario Teachers’ Pension Plan to invest in private companies. In 2000, Teachers’ participated in a C$2.6 billion (US$1.64 billion) KKR-led buyout of Canadian drug store chain Shoppers Drug Mart Corp. The two investment groups had been looking at the BCE offering independent of one another, but got together after learning of each other’s interest in June. “We wanted a Canadian partner on the deal, and reached out to Teachers’ because we had a great experience with them on Shoppers,” Navab explained.
The C$2.1 billion (US$1.33 billion) of bank debt on the directories sale was provided by Bank of Nova Scotia, CIBC World Markets and Credit Suisse First Boston. The deal was priced at a multiple of nine times EBITDA. In a press release announcing the transaction, 2002 revenue is estimated to come in at C$590 million (US$373 million), with anticipated EBIDTA listed at C$345 million (US$218 million).
While it’s been easy to lump the BCE directories sale in with similar sales from incumbent telcos like Qwest and Sprint (See online at www.buyoutsnewsletter.com), the Canadian offering is far different in that it is not specifically motivated by a need to pare down overbearing debt.
Instead, this particular deal is part of a larger effort to finance a C$6.3 billion (US$4.3 billion) repurchase of BCE stock from SBC Communications. SBC gained a 20% stake in BCE as part of the Dallas-based company’s acquisition of Ameritech earlier this year. In addition to the directories sale, BCE floated an additional $2 billion of common stock in August and is rumored to be considering an additional sale of publishing assets (including some co-owned with Buyouts’ parent company, Thomson Corp.).
While most market analysts have applauded BCE for its stock buyback effort, not all reviews for the final sale have been positive when it comes to BCE shareholder value. In a particularly negative assessment, Scotia Capital’s John Henderson wrote in a Sept. 17 report that the C$3 billion price tag made the low-ball assumption that the directories business would grow by less than 1% over the next year.
“Our discounted cash flow analysis shows that if the directories business grows at the same 2% to 3% as it has in the past few years, it should be worth about C$3.75 billion (using 2% growth in perpetuity),” Henderson argued. He did note, however, that 0% growth – a real possibility given the advertising downturn and new competition from Verizon’s Telus unit – would put the group’s value at C$2.75 billion.
Jim Leech, senior vice president of Teachers’ Merchant Bank, said that his group is expecting a continuation of historical growth for the directories unit and increased growth among certain associated online assets such as YellowPages.ca and Canada411.com. As for whether or not Leech feels BCE sold too low, he would only say that the final price was a fair one. “Mr. Sabia [CEO and president of BCE] told us that he had a sale price in his mind and that he wouldn’t sell if we didn’t meet his price or approve of the purchasers,” Leech offered. “So we obviously met that mark.”
If the winning syndicate – or other reported bidders like Bain Capital, TH Lee Partners or Onex Corp. – hadn’t met the minimum threshold, BCE had said that it would have securitized the assets. Dvai Ghose, a telecom analyst with CIBC World Markets, wrote over the summer that an asset-based loan would be slightly more accretive to EPS than would be an asset sale, although he was unable to comment for this story because CIBC ultimately served as an advisor on the transaction.
The sale is expected to close in November pending certain regulatory approvals.
Contact Dan Primack