With the largest attempted leveraged buyout ever, of Canada’s BCE Inc. (TSX: BCE), now officially dead, the company has a chance to set back the clock 21 months, before it was reluctantly put in play by its largest shareholder, Ontario Teachers’ Pension Plan. To a point, of course: the CEO at the time, Michael Sabia, has left the building. And though they are suddenly again in charge of forging BCE’s future, many of the company’s directors should consider quitting en masse as well.
You can blame the board for inadvertently blowing the buyout, due to the company’s insistence of the inclusion of a “solvency” clause that could prove to be the deal’s demise. But that’s not why BCE desperately needs fresh blood around the boardroom table.
Look at the make-up of the board in spring 2007, when the company was under siege by suitors. Chairman Richard Currie’s career achievement was transforming Loblaw into a grocery juggernaut. Jim Pattison was the west’s most successful entrepreneur, in such eclectic businesses as billboards, car sales, consumer packaging and novelty entertainment. The board contained a Trudeau-era cabinet minister, Ed Lumley, fellow Bay Street investment banker Tony Fell, experienced CEOs (Brian Levitt and Paul Tellier), the dean emeritus of Harvard University’s MBA program, and of course Mr. Sabia, a former top Ottawa mandarin. Seven of the 15 directors were members of the Order of Canada.
For such impressive pedigree, the board suffered from a surprising lack of brainpower from the very field of BCE’s specialty: telecommunications. Where were the dealmakers that had built modern-day successes in wireless, the entrepreneurs that had put together competitive upstarts in voice over Internet calling or made cable companies the worst enemies of incumbent phone companies?
The answer to that question should embarrass the board of BCE: they were the ones trying to get in the front door. Teachers and its main partner, U.S. private equity firm Providence Equity Partners LLC, had an impressive track record of co-investing in numerous global telecom deals, and offered to bring the best ideas from around the globe into BCE. They could also clearly spot BCE’s main failing as the company and its main holding, Bell Canada, treaded water under Sabia’s watch: Bell’s inability to hold onto its early leadership in the wireless business.
Wireless is simply the hottest growth area in telecommunications. Bell’s rivals realized that and made it their focus, with gutsy, expensive bets that paid off. Telus Corp. bought Clearnet Communications in 2001, while Rogers Communciations Inc. in September 2004 went deeper into debt by buying the U.S. minority partner in its wireless division and gobbling up the nation’s fourth-place wireless carrier Microcell Telecommunications, owner of the Fido brand. In his recent autobiography, Relentless, the late Ted Rogers marveled at the Fido deal, saying that without it, “our company would now be worth half of what it is worth today.”
What did Bell do? It dropped from first to third place in the single hottest growth area in the telecommunications sphere, ceding leadership in a country that offered better growth prospects than just about anywhere else owing to the low degree of ownership of wireless phones by Canadian consumers. Providence CEO Jonathan Nelson zeroed in on the issue when I spoke to him in July 2007, shortly after his group had won the auction for BCE: “In a three-player market [Bell] should have a third of the customers,” he told me (I worked for the National Post at the time). “We have to offer great service, as expressed in coverage and quality, dropped phone call rates and customer interaction, whether it’s phone activations or the look and feel of a store.”
BCE’s board stood firmly behind Sabia for his gradual cost-cutting efforts and praised his success in selling the company’s phone book business and satellite division for decent amounts. Nobody was asking, or at least not loudly enough, What’s happening with wireless?
The answer: in 2006, Bell earned 18% less revenue per customer and sharply lower operating profits than Telus in wireless and it was plagued with customer service problems, for which Sabia turned down his bonus one year. The poor performance in wireless was a key reason the company was undervalued, and what attracted the barbarians to the gate in the first place.
At the end of the day, what was the board’s main accomplishment in the Sabia years? “$42.75” was Mr. Currie’s repeated answer to that question last year, as if to imply, “Well, we got shareholders a hell of a good deal for their stock.” So much for that. What’s number two on that list? Saving the company from its past mistakes, and finally increasing the dividend after years of neglect. Not terribly inspiring.
If the company learns anything else from this experience, it should be to acknowledge and embrace the discipline and focus its new owners were going to bring to the table. Fortunately, the new CEO, George Cope, is well suited to the task, having built wireless specialist Clearnet Communications Inc. before it was sold to Telus, working with well-versed private equity sponsors along the way. He could use a few directors to match his talents and experience, not just a group that reads like a roll call of Canada’s Who’s Who.