The Canadian Telecommunications Industry

EXECUTIVE SUMMARY

The Canadian telecommunications industry is growing at a rapid pace and growth is projected to remain high and steady over the next five years as the telecommunications industry look to play a vital role in the development of the Canadian economy. The revenues of the Canadian telecommunications industry is split between the wireless business (high growth) and the wireline business (decreasing revenues and margins).

BCE currently has three revenue generating business segments: Bell Wireline, Bell Wireless, and Bell Aliant. BCE’s strength is in its legacy services (Bell Wireline) and its wireless segment is lackluster compared to its competitors. As a result BCE’s share price has appreciated at a much slower rate compared to both its competitors and the Canadian market over the past seven years; as well, BCE’s EV/EBITDA and P/E ratios are also at a discount compared to its peers.

Going into the future BCE can do the following to improve its current conditions: increase prices, attract more post-paid subscription, invest more in Bell Wireless, allow itself to be acquired by a PE firm, or merge with TELUS.

BCE will be a decent LBO candidate as it will provide a 20% IRR and a 2.48x CoC return over 5 years. However, the need for BCE to make significant CAPEX at the beginning of the LBO period will not allow a LBO financed heavily on debt. On the other hand, the guarantee that BCE will produce stable cash flows as a market leader hedges against the risk of a major loss.

All in all, given the safety and returns of this investment, an LBO is recommended.

SITUATIONAL & STRATEGIC ASSESSMENT

External Analysis

The North American markets are in a bullish state and interest rates are high compared to the five-year average rate. The economies of the US and Canada are currently experiencing a high rate of inflation and slowing GDP growth. Moreover, recent trends of real estate slowdown in the US as well as Bank of Canada’s decision to stop its planned interest rate hike can all be taken as signals that a recessionary period is forthcoming. Nonetheless, the Canadian telecommunications industry doesn’t seem to be affected as it is growing at a rapid pace – it generated service revenues of $36.1 billion in 2006, growth of 4.5% over the previous year. Growth is projected to remain high and steady over the next five years as the telecommunications industry look to play a vital role in the development of the Canadian economy.

The revenues of the Canadian telecommunications industry is split between the wireless business and the wireline business. Wireless revenues comprise of 35% of total industry revenues, yet the demand for this service has skyrocketed over the past few years – revenues had grown 1.7 billion from 2005 to 12.7 billion in 2006; wireless revenues has had a 16% CAGR since 2002. However, only 67% of households have wireless services, this low penetration rate means there are still large amounts of the market to be tapped into. On the other hand, wireline revenues comprise of 65% of total industry revenues, but demand for traditional wireline services are decreasing: revenues have been declining at a CAGR of 1% since 2002.