BCE Sells Nortel

If it's true that you've got to be smart to be lucky, then Jean Monty is one heck of a smart businessman. A year ago, the chief executive officer of BCE Inc. flirted with the idea of swapping the conglomerate's 39-per-cent stake in Nortel Networks Corp. for a controlling interest in Qwest Communications International Inc. of Denver, the world's fourth-largest long-distance company. But after meeting twice with Qwest executives, Monty resolved to hang on to Nortel a bit longer. It's a decision he does not regret. Since hitting a peak last spring, Qwest's market capitalization has dropped by a quarter, while Nortel's has more than tripled - making it by far Canada's most valuable company. Last week, Monty moved to cash in his chips by spinning off most of BCE's stake in Nortel in a series of transactions that will leave BCE with $4 billion for future acquisitions. "We're in discussions now with a potential partner," he told Maclean's, adding that he expects to announce a major Internet-related transaction within weeks.

Monty is often criticized for being too cautious and slow-moving for the Internet era, but he may yet have the last laugh. Last week's spinoff, combined with his decision last April to sell 20 per cent of BCE subsidiary Bell Canada, has given him a war chest totalling at least $6.2 billion with which to expand BCE's presence in both Canada and the United States. Some analysts believe he will soon move to unload BCE's 22-per-cent stake in Montreal-based Teleglobe Inc., which would add another $2.7 billion to the kitty. Whether or not that happens, it's clear Monty is serious about making BCE a major player in the exploding world of e-commerce. "We're continuing a massive transformation of this company," he says. "I can tell you that it's happening too fast for some people inside the company, but in the Internet economy it's never fast enough."

Once seen as a sideline for giant telecommunications companies, the Internet is now at the heart of everything they do. In BCE's case, the decision to end its 105-year-old relationship with the former Northern Telecom was dictated by Nortel's stunning 366-per-cent share-price increase over the past 15 months, an increase driven by the market's recognition of Nortel as a major supplier of the switches and software that make the Internet run. The problem for Monty is that Nortel's success was overshadowing the rest of BCE's holdings, including Bell Canada, Bell Canada International, Teleglobe, Bell ExpressVu, Telesat Canada, CGI and BCE Emergis. As of last week, BCE's minority stake in Nortel accounted for 78 per cent of BCE's total market value. In effect, investors were saying that all of BCE's other properties were worth only about $20 billion. Analysts say a more realistic price is about $32 billion.

Under the terms of the spinoff, BCE's 500,000 shareholders - along with individual investors, the list includes most of the country's pension funds and domestic equity mutual funds - will receive 0.78 of a Nortel share for every BCE share they own. Some media reports last week described the deal as a $73-billion "windfall" for investors, but that ignores the fact that when the deal closes this spring those BCE shares will be worth far less - falling from last week's close of $142.25 to a predicted trading range of between $42 and $56. Assuming that Nortel shares stay close to their current price, the "windfall" will be about $20 per share, a fraction of the gains investors have already made thanks to Nortel's soaring share price.

What the deal will do is allow BCE much more freedom in plotting its future. The spinoff will leave it with two per cent of Nortel's shares, worth $4 billion at current prices. That money, plus the cash it already has in the bank and the value of its own shares, which can be used as currency in future takeovers, gives Monty ample resources to carry out his expansion strategy, part of which rests on the planned acquisition of a local telephone company and Internet service provider in the U.S. northeast. (Such a deal would give BCE a significant presence in the U.S. market without intruding on territory already served by SBC Communications Corp. of San Antonio, Tex., the U.S. phone giant that now owns a fifth of Bell Canada.)

In addition, Monty faces growing pressure, both inside and outside the company, to strengthen BCE's Internet operations. In an interview with Maclean's last summer, Nortel CEO John Roth, a longtime associate of Monty, criticized BCE's Internet service, Sympatico, as a "backwater kind of thing" that has failed to get the attention it deserves from BCE's senior executives. "You go to their annual meetings and see how much they talk about Sympatico as a big moneymaker for Bell," Roth said. "They don't talk about it. It's a little fledgling thing and it's actually a threat to them, because it sells services at ridiculously low prices" compared with the money Bell has traditionally made from long-distance service.

Monty readily admits he has been slow in developing an Internet strategy, but says that is about to change. Within the next few weeks, he hints, he will announce the sale of a significant minority stake in Sympatico to a U.S. company that can supply leading-edge software as well as online content. "We are in discussions with a potential partner, and that might mean a joint ownership of Sympatico," he says. "Right now, we don't have the scale to afford the leading-edge technologies and applications - free e-mail, instant messaging, chat, Web site creation sites and so on. So we will partner to get that technology, plus foreign content."

Although Monty declines to identify the prospective partner, the most obvious candidates include America Online Inc. and EarthLink Network Inc., the world's largest and second-largest Internet service providers, as well as Internet portals Yahoo! Inc. and Lycos Inc. At the same time, Monty dismisses speculation that BCE is planning a takeover bid for Canada's largest private television network, CTV Inc. "There's no question we need more content for ExpressVu [BCE's digital satellite TV service] and Sympatico. But there are better ways to do that than to spend billions. If we did that, it would have to be very attractive financially. But there's no fact behind those rumours."

Rather than seeking to buy domestic content providers, Monty says, BCE is hoping to negotiate partnerships with Canadian media companies. "We would like to set up more alliances with print, radio and TV companies in Canada so Sympatico becomes the leading business-to-consumer marketplace in Canada." Adds Monty: "We can't attract Canadians by giving them only Canadian content, so we've got to give them U.S. content. What we're saying is we're going to do that, plus Canadian content."

With those tasks ahead of him, it's doubtful Monty will have an awful lot of time to lament the severing of BCE's ties with Nortel, a company he ran from 1992 to 1997. He does say, however, that he does not expect Nortel to cease being a Canadian company - or to become a target of a foreign takeover. Thanks to its $200-billion market capitalization, "Nortel is now an acquirer, not an acquiree. If ever somebody wanted to do a deal with Nortel, it's not an acquisition. It's something like Time Warner and AOL - a marriage. But even that is only a five-per-cent possibility because of its size and success. Unless Nortel falters, it's very unlikely." Meanwhile, Monty has more immediate things to worry about - chief among them the job of proving that Nortel's former parent has just as much claim to be an international powerhouse.

Maclean's February 7, 2000