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Bell acquisition met with skepticism

Market analysts aren't as optimistic as CEO George Cope.

Bell_CEO_George_Cope

BCE CEO George Cope announces the take over of Astral by Bell in a deal worth about $3.38 billion Friday, March 16, 2012 in Montreal. (Photo: Paul Chiasson/Canadian Press)

With BCE’s purchase of Astral Media, it’s more and more evident that history is repeating itself. The $3.38-billion deal gives BCE access to Astral’s suite of radio stations, specialty channels and pay-television stations, such as The Movie Network, significantly boosting the conglomerate’s stake in the media business—one in which it was trying to reduce its presence just a few years ago.

Convergence is once again all the rage for traditional telecom companies, a point emphasized by BCE CEO George Cope’s comments about the deal. Specifically, BCE is pushing mobile television and wants to secure programs and sports content to provide to its wireless customers’ smartphones and tablets. During a conference call this morning, he said the deal gives “content cost certainty to Bell” and increases its French-language assets in Quebec, previously an underrepresented market for the company’s media business. He also referred specifically to competitors boosting their own media presence, singling out Shaw Communication’s purchase of the Global television network in 2010.

Response to the Astral deal has been tepid. No analysts have upgraded their view on BCE’s stock so far today, and the share price actually closed 1.05% lower. Indeed, not everyone is convinced that convergence makes sense. Telus CEO Darren Entwistle, for instance, has refused to drink the Kool-Aid. Back in late 2010, he explained in a speech that television and specialty channels are not where the company’s strengths lie. He thought it would distract Telus from its primary business of wireless, home-phone and Internet distribution.

Cope clearly does not share those concerns about BCE. He has proven to be a somewhat voracious dealmaker since becoming CEO in 2007, most notably with the purchase of Maple Leaf Sports and Entertainment for $1.32-billion, along with Rogers Communications, last December. In that sense, Cope is a leader in the mold of one of his predecessors: Jean Monty. He headed the company during the dot com era and pushed a convergence strategy, scooping up the CTV television network in 2000. Monty left behind a financial mess, and his successor, Michael Sabia, reversed course and refocused on the company’s core telecommunications business, even reducing the ownership stake in CTV. Cope acquired full control of the network again in 2010, spurred on by Shaw’s acquisition of Global a few months earlier. 

Some analysts are still skeptical about the convergence strategy at BCE, particularly in light of the Astral deal. “Content creation is a distinctly different business,” wrote Neeraj Monga, a cable and telecommunications analyst with Veritas Investment Research, in an email. “Cope is undoing Sabia’s work. To what end and why is not clear. Bigger will be worse in this instance.”

Part of the reason is that the Canadian Radio-television Telecommunications Commission implemented rules preventing telecom companies such as BCE and Shaw from hoarding content on their mobile platforms and denying access to competitors. That limits the benefits BCE can gain through purchasing Astral’s assets, in Monga’s view. “BCE’s deal makes little strategic sense,” he wrote.

Worse, it could prove distracting. The biggest problem for BCE, according to Canaccord Genuity analyst Dvai Ghose, is that it has not kept pace with competitors in terms of upgrading the infrastructure used by its cable subscribers. Telus, for example, is taking significant market share away from Shaw in British Columbia and Alberta partly through providing faster, more efficient television technology. “The Astral acquisition diverts management’s focus and the company’s capital,” Ghose wrote. He also noted that one of Astral’s prized assets, The Movie Network, will lose market share to streaming services such as Netflix in the future.

How such deals will ultimately work out is hard to say, but BCE’s content strategy has yet to dramatically affect the bottom line. Some analysts are concerned that after the acquisition of CTV again in 2010, the company’s growth on an EBITDA basis (earnings before interest, taxes, depreciation and amortization) actually slowed toward the end of 2011.

But Cope contends BCE will be a stronger company with Astral, and that BCE will not lose focus on its other businesses, largely because of the media expertise it will get with Astral. “We now have access to the leading media content team in the province of Quebec…and their CEO is joining our board,” Cope said in a conference call, referring to Astral co-founder Ian Greenberg. “It doesn’t get any better than that.”

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