MONTREAL – Facing a huge tax burden in 2008 if the company did not alter its structure, Bell Canada announced this morning that it will convert to an income trust.
The new Bell trust’s initial annual cash distribution will be $2.55 per unit, compared to the current BCE dividend of $1.32 per share, and represents a targeted payout ratio of 85%. Under federal rules, income trusts pay far less tax than corporations. Holding company BCE would disappear.
To be known as the Bell Canada Income Fund, the trust is "designed to create value for shareholders through increased cash distributions and to ensure there will continue to be competitive parity in the capital markets within the telecom sector," says the press release today.
However, given that income trusts are beholden to paying their unitholders first, analysts during this morning’s conference call explaining the move wondered if the new company’s structure and its 85% payout ratio will leave it enough flexibility and enough cash to invest in new technology, given the ongoing changes in the global telecom sphere.
For example, U.S telco Verizon is spending over US$22 billion to bring fibre almost to the home of every customer so that the company can offer voice, video and data the same way its American cable counterparts can.
Not a problem, said Sabia. "We have a very high degree of confidence that we’ll be able to continue to invest in and grow the business," he said, adding later that this move, and others, has the company on the path to turn into "the new kind of telecom company Bell is becoming and needs to be."
“The elimination of BCE is a further step in our plan to focus on Bell and our communications operations,” said Sabia. “That is the business we know. That is the business we will stick to.
“Our efforts over the past three years to lower costs and improve our execution capabilities have set a solid foundation. As we look to 2007, we expect to see trends we thought we would only achieve in 2008. As well, we are confident that the improving financial performance of our growth businesses in 2007 will drive improvements in both operating profitability and free cash flow," he added.
“Going forward we will continue to build a company based on a differentiated customer experience, offering leading edge products and services, running over the most advanced networks,” said Sabia. “As a trust, Bell will continue to execute its existing strategic plan based on business transformation and investment in growth services. More than 50% of our revenue will come from growth services (Iike wireless, video and data) by the end of this year.”
The transaction will not change current operations or affect employees or customers. The conversion to an income trust is timely for the company as its tax shelters would be fully used in the first half of next year, triggering a substantial increase in cash taxes payable beginning in 2008.
– Greg O’Brien
