BCE to Spin Off 37% Stake in Nortel to BCE Shareholders

This story has been updated from 4:30 p.m. EST.

Canadian telecommunications holding company BCE (BCE - Cramer's Take - Stockpickr) said Wednesday that it would spin off a $50 billion stake in Nortel (NT - Cramer's Take - Stockpickr) to BCE shareholders as part of an effort to emphasize the underlying value of its other holdings and expand their operations.

BCE, which owns about 39% of Nortel, one of the world's biggest communication equipment makers, said it would distribute about 37% to BCE shareholders while retaining the remaining 2%.

BCE shareholders will receive 0.78 of a Nortel common share for each share of BCE they own. BCE, Canada's largest communications company, said the transaction would be completed by the end of the second quarter.

Speculation emerged Wednesday afternoon that a spinoff was near, and Nortel dropped 8 15/16, or 8%, to 99 15/16, while BCE gained 3 1/2, or 4%, to 99 1/2, before trading was halted shortly before the 4 p.m. EST stock market close. After the spinoff was announced, Nortel dropped to 97 in after-hour trading, while BCE surged to 104, according to Instinet.

BCE had been under pressure from investors to spin off its Nortel stake in order to increase the value of the company's other holdings.

Jean Monty, BCE's president and chief executive, said in a telephone news conference that the transaction would enable the company to underscore the value of BCE's other assets, which have been overshadowed by highflying Nortel.

"Without this transaction, BCE has an unrealized value for shareholders of about $30 billion in non-Nortel assets," he said. "The assets are worth something like $40 billion and at most $10 billion is accounted for in BCE shares."

BCE's other holdings include Bell Canada, the nation's biggest phone company, as well as CGI and BCE Emergis, which are involved in systems integration and electronic commerce, and BCE Media, a programming and content company.

Monty said that as a result of the spinoff, BCE's stock could be used "as a currency for acquisitions." He declined to elaborate, but said BCE would consider expanding its holdings "south of the border."

Nortel was also enthusiastic about the deal, saying it would allow the company to develop its Internet business.

"It will unleash us as a totally independent global company focused squarely on the growth engines of the Internet," John Roth, Nortel's president and chief executive, said in a statement.

"It will put us on an equal footing with our peers in that our ownership and stock will be widely held," he said.

A BCE spokesman said the company decided to split off the Nortel shares rather than sell its holding because such a transaction would be tax-free for the company.

Canadian BCE shareholders won't be taxed either for the Nortel windfall, but Americans will be.

Earlier Wednesday, BCE reported fourth-quarter earnings of 659 million Canadian dollars ($458.1 million), or 1.02 Canadian dollars a common share, compared with 547 million Canadian dollars, or 86 Canadian cents, in the 1998 quarter. The earnings were in line with expectations.