Bell Canada: Private Equity Provides Less For Investors

Private equity's hunger for takeovers might be lifting stock market indexes, as investors bet on the next targets. But are investors getting a good deal when these voracious buyout firms snap up their stocks? The takeover battle for Bell Canada Inc. (BCE), formerly known as BCE Inc., is a good example of investors' interests being steam-rolled by private equity, which accounts for about 20% of total merger and acquisition activity.

Investors who bought shares in the telecommunications giant have done well over the past few months after private-equity firms expressed interest in buying it. The share price recently passed the C$41 level from about C$30 in March, which is close to a 40% increase.

But investors could get more, and the reason they are not getting more is because private equity firms enjoy considerable advantages during the bidding process. That's because so-called strategic buyers, which buy companies to merge with their own operations, as opposed to financial buyers that merely want to flip a company into the public market somewhere down the road, face impediments to making bids of their own.

In the case of Bell, such potential strategic bidders as Telus Corp. (TU) have been stymied during the bidding process, possibly because Bell did not like the idea of opening its sensitive books to a rival telecommunications company. Private-equity firms did not suffer from this issue because they are not competitors to Bell (Alcan Inc. (AL) is giving a similar runaround to rival Alcoa Inc. (AA) during the ongoing takeover battle for the Canadian aluminum producer).

"How leery would you be, opening up your books to a competitor?" said Paul Gardner, portfolio manager and partner at Avenue Investment Management.

"They see and smell your business."

By some accounts, Telus could outbid a private-equity firm because it can reap advantages from a merger in the form of a streamlined, cost-efficient operation. A Telus bid would also rely to a lesser extent on funding the purchase with debt, which is a big component of the private-equity bid that has been accepted by Bell, but not yet approved.

As a result, some observers believe Telus could bid C$45 a share or more for Bell, which would put additional profits into the pockets of shareholders. What's more, investors who held on to the combined Bell-Telus entity would likely benefit from a stronger, more profitable company down the road.

There is little preventing Telus from making a bid later this year, other than having to swallow an C$800-million break fee that was built into the winning private-equity bid led by Ontario Teachers' Pension Plan last week. But as things stand, investors are on track to get less than full value for their Bell shares.

Most investors like the idea of having their shares taken off their hands at a handsome profit. But when it comes to private equity, that profit is not what it could be.