What BCE's Nortel spinoff means to investors: the post-Nortel BCE will be technologically diverse and may narrow the holding company discount

Money Digest, May, 2000

If you are a BCE Inc. (TSE: BCE) investor, you already know that in May BCE proposes to get rid of all its holdings in Nortel Network (TSE: NT) by issuing 0.78 NT for each BCE share.

This move will result in a BCE that is very different from its current form. BCE has already announced its intention to acquire Teleglobe and CTV. From the accompanying panel, which shows the holdings of the post-Nortel Networks BCE, it is clear that a substantial part of BCE's holdings will derive their revenue from sources other than local and long distance telephone services.

The new BCE is a company with interests in different technology sectors. It can be considered a holding company of many publicly traded technology companies (e.g., CGI, BCE Emergis and Bell Canada International) in addition to its own non-publicly traded entities (e.g., CTV, Teleglobe and BCE Media).

Given this new structure, what are the prospects for the new BCE? On balance, this move by BCE is advantageous to investors for several reasons.

First, it will narrow the "holding company discount." (When a company holds other companies, the holding company is likely to sell at a discount to the combined value of the companies. This is to account for the fact that investors have no say in the buying and selling of the component companies.)

Second, the new BCE will be more narrowly focused, even though technologically diversified.

Third, the recent acquisitions of BCE, Teleglobe and CTV have been perceived to be expensive by investors. When this typical over-reaction is corrected in due course, BCE will stand to benefit.

There is very little downside to the spinoff of Nortel. From the analysis of the current status, the new BCE (called BCE `stub') has the potential to appreciate in price in the coming months.