Small Business Blog from Atlantic Canada

Today’s Globe and Mail has the article US equity firm stalks BCE, plots takeover. Why is Kohlberg Kravis Roberts (KKR) hoping to takeover? After all, they do not know anything about running a telecommunications business – or do they? 

A private equity firm essentially buys out public companies in the hope of unlocking value. This could be in the form of cost-cuts, product changes, efficiency improvements – anything that will increase value. Just like venture capitalists, they tend to get involved in the management of companies they buy.

By going private, companies are answerable to only few large investors unlike a public company. This saves a lot of management time that would otherwise have been spent on reporting to shareholders. Moreover, in the recent past, equity markets have generally been strong in addition to low interest rates. This has enabled many private investors to leverage buy-outs (borrow to purchase a company)and exit their investments with a good rate of return.  In Canada, OMERS Pension plan, Canada Pension Board and Ontario Teachers are some of the large investment funds that private equity players can tap into.

From a strategic perspective, I think this take-over would be a good thing for BCE. It now operates like a lumbering giant – moving slowly and reacting rather than being proactive. Agreed that they have been divesting of late and returning to their roots - telephony. But they are slow. An organization of this size would be trapped in bureaucracy and red tape and will not be agile. By taking BCE out of the public ownership domain, KKR will be free to implement strategies that increase BCE’s profitability. I am sure KKR has the management team and commitment to drive change at a quicker pace.

There is definitely value to be unlocked from a BCE takeover. It remains to be seen, if the Canadian funds will agree to mutually hold majority stake and if existing shareholders are willing to sell. The deal is worth at least $30 billion. I am sure the next few weeks are going to be interesting.