BCE’s Cope slams CRTC

BCE Inc.'s (BCE-T) plan to dramatically alter Canada's broadcast and media landscape has fallen off a regulatory cliff. And some industry veterans say the decision marks a dramatic change in how the Canadian Radio-television and Telecommunications Commission (CRTC) will regulate the country's largest telcos and content providers going forward.

On Thursday, the CRTC blocked BCE's $3.4-billion takeover of Astral Media, saying the deal would put too much power into the hands of one company.

"BCE failed to persuade us that the deal would benefit Canadians," said Jean-Pierre Blais, the recently-appointed chairman of the CRTC. "It would have placed significant market power in the hands of one of the country’s largest media companies. We could not have ensured a robust Canadian broadcasting system without imposing extensive and intrusive safeguards, which would have been to the detriment of the entire industry.”

But Richard French, a former CRTC vice-chairman, says the decision is the sign of a new outlook by the regulator in how it views the broadcasting landscape.

"The claim has always been that because Canada is a sub-economic market for…television production -- that's to say there aren't enough people and they're spread out over too large a geography -- that argument has always be a case for not observing what might otherwise be standard competition policy constraints and it certainly has created some large Canadian companies," he says.

"The commission has decided that it's not sympathetic to that argument at this point, when the degree of concentration would in the commission's mind so very substantial -- certainly drastically more than would ever be conscionable in a country large enough to support a truly economic, that is competitive, audio visual market."

He adds that the CRTC also decided the costs of trying to regulate the new company, which it estimates would have more than 42 percent of the English TV market and more than 33 percent of the French TV market -- a claim which BCE refutes -- would be too onerous.

"The commission rightly looked at it in detail, faced what it would imply for its own responsibilities and for costs visited upon the industry and said this is not going to work, there is no point in trying to do this. The whole transaction has to be refused -- that's a clean and clear decision," he says.

Tim Murphy, chief marketing partner at McMillan LLP says the decision also marks a new focus for the regulator: the consumer.

"In the new CRTC chairman they picked someone that has clearly laid out a new path in terms of protecting the consumer which has motivated the decision in this circumstance, although it creates some interesting potential for what it means for…industry more broadly," he says. "There has been a fair degree of focus on the corporate structure and a consumer focus – to be fair – is going to be interesting and a little bit unpredictable."

BCE CEO George Cope fought back against the CRTC decision, saying the regulator changed the rules.

"If you look at what happened here…there were very set market share rules set in place in 2008 by the CRTC and by any definition we met those rules," he says. "Yesterday the rules changed, conveniently Canadian viewership of American channels was taken out of the definition of the market."

Cope adds that BCE would not have moved ahead with the takeover without complete clarity on the rules. "Our competitors won today," he says.

And while BCE has said it plans to fight the decision by asking for a policy review from the federal Cabinet, French doesn't believe the company has the "leverage" to turn this into a sustained battle.

The federal government has also come out and said it "respects" the CRTC's decision, signaling it may not be open to appealing the move.

WHAT ABOUT THAT DIVIDEND?

Some analysts are questioning whether BCE Inc.'s quest to continually grow its dividend may also be at a risk now that its takeover of Astral Media has been blocked.

BCE surprised investors in August by offering a dividend hike earlier than expected. CEO George Cope highlighted the pending takeover of the Astral deal as one of the reasons for the boost.

"Bell's strong year-to-date operating and financial performance, and the positive outlook for the balance of the year, enables the dividend increase and increased 2012 financial guidance announced today. Also providing support for the early dividend increase is our pending acquisition of Astral, which we expect to be accretive to overall earnings and free cash flow in 2013," Cope said in a statement, releasing its second-quarter results.

The boost marked the eighth hike to BCE’s dividend for common shares since the fourth quarter of 2008. BCE's dividend has grown by 55 percent over that time.

BCE's current strategy is to maintain a dividend payout ratio of 65 percent to 75 percent of adjusted net earnings per share. In the most recent quarter, the company expected its payout ratio to fall in the middle of that range.

But that growth may be at risk, some analysts warn.

"We believe BCE's dividend growth strategy is now compromised without Astral. The Astral transaction would have provided BCE with the Earnings Per Share (EPS) and Free Cash Flow Per Share (FCFPS) accretion to fund its 5% dividend growth in 2013," Scotia analyst Jeff Fan said in a note to clients.

Fan estimates that Astral would have added $135 million in free cash flow -- an important financial metric as it is often used to fund expansion -- to BCE in 2013.

He believes that the added cash flow from Astral would have helped BCE fund its accelerated rollout of Fibe – its next generation of internet service.

"Without an accelerated Fibe rollout, there should be less competitive threats against its cable competitors. Further, with less content concentration at BCE, the cable competitors are less disadvantaged through potentially higher prices or less favourable arrangements," he says.

Now that the Astral purchase has been rejected, Fan says BCE may focus on its next acquisition, which he believes could be MTS (Manitoba division) or Bell Aliant.

Canaccord Genuity analyst David Ghose agrees, though he estimates that Astral would have added less to BCE's free cash flow.

"We estimated that the deal was 3 percent EPS and FCF/share accretive in 2013. Consequently, if the deal is not revived, EPS growth could become more challenging for BCE," he says. "We believe that TELUS is much better positioned when it comes to dividend growth and that its dividend growth is not driven by, or predicated on, M&A."

Cope disagrees and says the company will continue to do whatever it takes to maintain its dividend growth strategy.

"There's no doubt Astral executed on out strategy gave us a little punch about our weight on some of that cash flow growth, we're going to have a little bit harder on that front, but our strategy around dividend growth doesn't go away," he says. "Our core business growth is designed to drive that dividend growth for our shareholders and that's exactly the path we are going to follow going forward."

RBC analyst Drew McReynolds adds that while the deal will have an impact on BCE's free cash flow, the dividend strategy is not at risk.

"Despite the loss of adjusted EPS accretion, we do not believe BCE’s dividend growth model is at risk. However, given the most recent dividend increase concurrent with Q2/12 results, we would not expect another dividend increase for several quarters," McReynolds says in a note to clients.

BNN is a division of Bell Media, which is owned by BCE.