BCE's confirmation that it is holding talks with pension funds and a private equity group that could lead to its sale came after months of speculation. The business media have been flush with leaked reports and anonymous sources saying that Canada's biggest telecom company was being actively pursued by a variety of potential suitors.

The driving force for all this interest in the company is the widely held belief in the investment community that BCE's share price doesn't reflect its true worth. Some call it the "conglomerate discount" — the view that the market is valuing BCE's diverse business interests lower than they would if they were valued individually.

There is huge public interest in BCE's future for a number of reasons. After all, it's Ma Bell — one of the oldest companies in Canada delivering a service millions of Canadians have relied on for generations. Its stock is also among the most widely held in Canada. In the past, it has often been referred to as a suitable investment for "widows and orphans," because of its low risk and steady dividend.

Now, the suits are imagining a possible future for BCE under new ownership: Corporate cost cutting, a sale of under-performing or non-core assets, and presto! You have a 127-year-old company with a jolt of new energy to boost the stakes of its new proprietors. At least, that's the idea.

BCE chief executive Michael Sabia has held the top job at the telecom giant since 2002. (Kevin Frayer/Canadian Press)

Ironically, BCE in the last few years has been cutting costs and has sold off billions in assets. But the market just doesn't seem to be giving BCE any respect.

Already, various scenarios are on the table for the future of BCE.

1. The Canadian Pension Funds/KKR consortium

BCE says, yes, it is talking to a deep-pocketed group led by three Canadian pension fund giants — the Canada Pension Plan Investment Board (assets $110.8 billion), the Caisse de depot et placement (assets $143.5 billion), and the Public Sector Pension Investment Board (assets $28 billion). The New York-based private equity group, Kohlberg Kravis Roberts & Co. (KKR), is a minority partner.

The Public Sector Pension Investment Board later dropped out of the consortium. In June 2007, its place was taken by Onex Corp., which said it would join the CPPIB-led group.

There was a time when pension funds confined their investments to bonds. No longer. The big pension plans are increasingly turning to equities, real estate, and infrastructure to diversify their portfolios and reduce risk. BCE would be a natural extension of that diversification.

KKR is the best-known private equity buyout firm in the world. It has been behind hundreds of takeouts in the last couple of decades, including Shoppers Drug Mart in 1999 and BCE's Yellow Pages business in 2000. It was also the winner in the bitter fight for RJR Nabisco in the late 1980s that was immortalized in the bestseller Barbarians at the Gate.

In March 2007, BCE denied a media report that it was in talks with KKR. "There are no ongoing discussions being held with any private-equity investor with respect to any privatization of the company or any similar transaction," BCE said at the time. But it didn't deny that it had been in talks.

2. Cerberus Capital Management/Canadian investors consortium

The New York-based private equity firm Cerberus Capital management — which paid $7.4 billion US to acquire the majority of Chrysler Group in May 2007 — is also in talks that could lead to it bidding for BCE. The telecom company confirmed it's in discussions with a consortium led by Cerberus.

BCE said the consortium includes Canadian investors, which it didn't identify. But the Hospitals of Ontario Pension Plan confirmed it is part of the group. Private equity firm Pacific Century Group, which is controlled by Canadian Richard Li, also said it was talking with Cerberus about taking a minority stake in BCE. Reports say other possible consortium members include CanWest Global Communications and the Ontario Public Service Employees Union Pension Trust.

3. An Ontario Teachers' Pension Plan/Providence Equity Partners consortium

The Ontario Teachers' Pension Plan (Teachers' for short) has assets of $106 billion. In early June, BCE announced that Teachers' was heading the third consortium to join the hunt for the telecom company. It is partnered with Providence Equity Partners, a private equity firm from Rhode Island. Teachers' had acknowledged earlier that it might enter the race.

Teachers' is also the largest single shareholder in BCE, with about 6.3 per cent of the stock. It has been at the forefront of efforts to try to drive up the share price of BCE, which had been languishing before all the takeover chatter.

In a regulatory filing in early April, Teachers' said its status as a passive investor in BCE was history. It would now be actively urging BCE to consider selling assets or agree to a merger or takeover. A BCE director who also sat on the board of Teachers' resigned, citing the potential of a conflict of interest.

4. A merger between BCE and Telus

In June 2007, BCE and Telus announced that they are in preliminary talks that could lead to the two telecom companies merging. Telus called the idea "an all-Canadian solution" for BCE. The other three scenarios for BCE all have American private equity involvement.

Long before the confirmation of BCE-Telus talks, several analysts had said they saw more value in BCE merging with Telus — or at least merging parts of their operations.

But some analysts say the regulatory hurdles in combining the No. 1 and No. 2 phone companies in any significant manner would be too high to overcome.

There has also been speculation that someone might make a run at acquiring Telus. Certainly the market considers that a possibility. Telus shares have risen in tandem with speculation of a BCE buyout.

5. The Catalyst Asset Management proposal

On June 22, 2007, Toronto-based Catalyst Asset Management unveiled its proposal to keep BCE in all-Canadian hands (unlike scenarios 1, 2 and 3) and overcome the competition concerns raised by a merger of BCE and Telus (scenario 4). It wants to swap BCE shares with a special kind of security that would include equity and debt components, resulting in a richer payout than the current dividend. Catalyst said more detail would be known once the other bidder(s) table offer(s).

6. The status quo

There was a time when this looked like the most probable scenario. BCE chief executive Michael Sabia was long known to be unconvinced that a takeover of BCE would be the elixir for its lagging stock price. After all, Sabia had already been busy doing the same kind of cost cutting and asset shedding for which leveraged buyout firms are famous. But the market wasn't impressed and his company now appears to be ready to listen to offers.

The takeover genie finally appears to be out of the bottle. BCE shareholders are clearly expecting some scenario that will give them at least $40 a share for their stock.

A lot of widows and orphans are counting on nothing less.

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