The Globe and Mail have reported today that KKR (one of the world’s largest private equity firms) is planning on launching a friend take-over bid for BCE. Apparently KKR has already met with BCE’s management twice about the buy-out, although neither company is commenting at this time.
BCE is currently trading at C$30.13, giving it a market capitalisation of C$24.3bn, and has net debt of c. C$12.3bn, giving the company an Enterprise value (“EV”) of c. C$36.6bn. Compared with other North American wireline operators BCE looks a bargain. One of the metrics typically used to value companies in the Telecoms industry is EV/EBITDA, EV being the Enterprise value (marketcap + net debt) and EBITDA being Earnings before interest, depreciation and amortisation (a proxy for cash flow before any investments). BCE is currently being valued at an EV/EBITDA of c. 5.2x, which is low compared to other North American wireline companies (average is c. 6.0x). In addition, the fact that Canada’s Telecom industry is less competitive than the US and Europe, as well as there being lower wireless penetration, make BCE an attractive target.
The Globe mentioned that typically there would be a takeover premium of 15-20% in deals like this, but as the company is already undervalued this premium could be higher. Lets assume a 20% premium, this would result in a transaction cost of C$41.5, making it by the largest of Leveraged buy-out (“LBO”) in Canada and also one of the worlds. What makes this particularly interesting is that Canadian regulations stipulate that a foreign firm can not own more than 46% of a Telecom operator. KKR is apparently looking to form a consortium with Canadian PE and pension funds to make the deal happen, including the Ontario Teacher’s Pension Plan (who currently own 5.3% of BCE). It will be very interesting to see what firms they are able to find in Canada with deep enough pockets to do this.