VANCOUVER -- North of the border, the concept of change has never been as widely embraced as it is in the U.S. If it ain't broke, chances are slim that Johnny Canuck will be fixing it.
Even so, most Canadians were willing to go along with the transformation of their most widely held public company, Montreal-based
, from the country's largest telecommunications outfit into a dynamic player on the global new-media stage.
Until earlier this year, however, BCE was valued chiefly for its 37% holding in telecommunications equipment giant
. In fact, Nortel's phenomenal growth in 1999 stole the show from BCE's other high-tech holdings.
In an effort to unlock BCE's true market potential, the firm unloaded almost all of its Nortel investment -- similar to AT&T's divestment of its
holdings in 1996. BCE's approximately 500,000 shareholders received 0.78 of a Nortel common share for every BCE share held. (
wrote about the implications of that deal back in
February.) Meanwhile, BCE held onto 1.2% of Nortel's outstanding shares for safekeeping.
The deal was expected to light a fire under BCE, but judging by the company's performance in recent weeks, that's been anything but the case. Shares, currently trading at 24, are not far off from testing their 52-week low of 19 7/8.
Ironically, Wall Street's skepticism toward BCE has given way to an interesting sideshow: The firm's token stake in Nortel has now climbed to over 15.6% of BCE's value. If both companies continue to trade in opposite directions, the figure should hit 20% in the coming weeks.
The lame performance has left BCE shareholders, and owners of BCE-invested mutual funds such as
Fidelity Select Utilities Growth Fund and
Putnam International Growth Fund, scratching their heads in disbelief. BCE, after all, lays claim to an impressive number of holdings.
"There are a lot of moving parts, but I think the basic thrust is pretty positive," says William Fries, manager of the
Thornburg Value Fund, which maintains a small position in the company and is considering padding those holdings.
Far from being an Old Economy play, the company's active interests run the full gamut of the communications spectrum, from wireless and satellite networks to software and e-commerce to Internet Protocol-based networks. It has stakes in
Bell Canada International
More recently, the company was involved in the somewhat messy acquisitions of Canada's national television network,
, an international voice and data carrier. Some analysts argued that BCE paid too much for the latter company, which has been bleeding red ink. A revised offer, worth about $400 million less than the original, was finally announced last week. Others have been quick to question whether the purchase of a national broadcaster fits into BCE's long-term strategy. Because of the trials and tribulations associated with both deals, analysts were quick to take aim at the company, and BCE's president and chief executive, Jean Monty.
"I've not been tremendously supportive," says one Canadian analyst, who asked to remain anonymous. "The CTV acquisition was high priced. Teleglobe was also a high-priced acquisition. As they move into the New Economy, they've got to make some bold moves, and some of the bold moves thus far have been questioned by investors." (His company has no underwriting relationship with BCE.)
Last month, Toronto-based John Grandy, an analyst with brokerage
, downgraded the stock's rating to accumulate from strong buy. "BCE is still very much viewed as a holding company," says Grandy, who maintains his rating, and a 41 1/2 target price on the stock. "One of the things that management has to do is persuade shareholders that the investments are working together. Most people are not convinced of that." Yorkton does not have an underwriting relationship with BCE.
Institutional investors have been equally unimpressed. Brian Rogers, portfolio manager for the
T. Rowe Price Equity Income Fund, unloaded his fund's sizable stake in the company this past winter. "It began to look like a situation where our assessment of the value of the company and the market price had narrowed," he says. "We decided to invest in things with a better risk/return profile."
BCE management, well aware of its awkward situation, has been quick to respond to its skeptics. In May, Monty told reporters that more than half of his company's revenue will come from new-media services within the next three years, rather than old-school voice calls. The CEO also believes his company's stock will hit C$70 ($47.08) sometime next year.
"Everything is in the execution at this time," says Jean-Charles Robillard, a spokesman for BCE. "We have announced the major investments and, in the next few months, hopefully we'll prove that these pieces fit together."
BCE is saying all the right things. But to attract more investors, the company will have to prove it can change rather than merely talk about it.
Derek Moscato is a freelance financial journalist in Vancouver. At the time of publication he had no positions in any of the securities mentioned, although holdings can change at any time.