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October 11, 2006 9:53 pm

BCE returns to its roots in trust move

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Bell Canada Enterprises of Montreal plans to dissolve its holding company and convert to a tax-free income trust, reinforcing a recent focus on its core telecommunications business.

The new structure, to be known as the Bell Canada Income Fund, brings down the curtain on what was once one of Canada’s biggest conglomerates, with interests stretching from property development to e-commerce.

Describing BCE as “a company created in a different time, for a different purpose”, Michael Sabia, chief executive, said that the latest move “confirms our strategic direction – to return to our roots, and to stay there”.

The existing Bell Canada, a wholly owned BCE subsidiary, is the country’s biggest phone company, but has faced intensifying competition from cable-TV and internet telephony operators. Investors have grown restive at its lacklustre stock market performance.

The income trust structure, unique to Canada, enables companies to reduce their tax liability by paying out most – and, in some cases, all – their pre-tax operating income to unit holders.

Once confined mainly to the oil and gas and real estate sectors, income trusts now make up about one-tenth of the Toronto Stock Exchange’s market value.

BCE’s main rival, Vancouver-based Telus, is also in the throes of converting to an income trust.

The new Bell Canada trust plans to pay out 85 per cent of its cashflow to unit holders, resulting in an annual distribution of C$2.55 per unit, almost double BCE’s current C$1.32 per share dividend. BCE shares rose about 6 per cent to C$33.40 in early trading in Toronto.

Some government officials and economists have expressed concern about the leakage of tax revenues caused by income trusts, raising fears of a clampdown.

BCE reported first-half earnings before special items of C$953m (US$839m), with tax provisions of C$367m. “Our job is to act with respect to the rules and the tax code as they exist,” Mr Sabia said. “It’s for the national government to set the rules.”

Standard & Poor’s said conversion to an income trust would constrain BCE’s operational flexibility as it “will only have a relatively modest amount of discretionary free cashflow . . . to fund future growth”.

Nonetheless, the company would continue to enjoy “solid assets, a strong business position, good business diversity, and adequate financial flexibility”.

Bell Canada now contributes more than 90 per cent of BCE’s revenues and operating income. The parent company sold more than two-thirds of its stake earlier this year in Bell Globemedia, which controls The Globe and Mail newspaper and the CTV television network. Most recently, it has unveiled plans for a public offering of Telesat Canada, a satellite operator.

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