The country's No. 2 telephone company, Telus Corp., confirmed Thursday it is in merger talks with BCE Inc., the parent company of industry leader Bell Canada.

In a release issued before the opening of stock market trading, Telus said a possible deal with BCE would establish a national telecommunications company that would remain under Canadian control.

"[A Telus-BCE merger] would be an all-Canadian solution for both immediate and long-term value creation, whilst ensuring a vibrant player continues in this increasingly competitive industry," said Telus president and CEO Darren Entwistle.

The two companies would have a combined market worth of more than $53 billion, with more than 20 million customer accounts.

   Telus  BCE
 Q1 Revenue  $2.2B  $4.4B
 Q1 EBITDA  $764.3M  $1.7B
 Wireless customers  5.1M  5.8M
 High-speed internet customers  949,000  1.9M

During a conference call Thursday, Entwistle said the acquisition of BCE makes "enormous sense" for Canada because it would create "a truly national provider with the size to stand along side any telecom company in the world."

The combination of the two biggest telecom companies would create major cost savings, Entwistle said. Analysts agree, pointing out that a BCE-Telus combination would be able to wring more cost savings out of a merger than if BCE were acquired by a private equity/pension fund suitor.  

BCE shares jumped $1.57 in TSX trading Thursday to close at $40.74 — a new high. Telus shares slid $2.11 to $63.65.

The announcement adds another player to a growing list of groups taking aim at Montreal-based BCE, which signalled in April that it was reviewing its strategic options, including a possible sale or merger.

Other bidders in the running for BCE include:

  • A group that includes the Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Quebec, Onex Corp. and U.S. private equity investment firm Kohlberg Kravis Roberts & Co.
  • A group led by the private investment arm of the Ontario Teachers' Pension Plan — the largest shareholder in BCE — and Providence Equity Partners, a private equity fund based in Rhode Island. 
  • A group led by the New York-based private equity firm Cerberus Capital Management, along with the Hospitals of Ontario Pension Plan and Pacific Century Group. Some reports say OPTrust and CanWest Global Communications are also part of the consortium.

A union of BCE and Telus would face a high level of scrutiny, from government and consumers, over concerns about what a merger would do to competition in the telecom market.

Tom Vassos, a professor at the Rotman School of Management in Toronto, said the closest scrutiny would likely take place in their wireless businesses, where both companies go head to head across the country.

"Those two companies merging would have about a 60 per cent market share with 10 million [wireless] customers," he told CBC News.

"That would be a formidable giant, so there could be some concerns about that portion of their businesses," he said.

Telus alters position

Mindful of those concerns, Telus has changed its position on the federal government's upcoming wireless spectrum auction and is urging that new spectrum be set aside in each region exclusively for new wireless players.

Pat McHugh, of MFC Global Investment Management, said some longtime BCE shareholders would prefer a deal with Telus because a cash offer from any of the private equity/pension fund groups could lead to a big capital gains tax hit.

"With Telus, you'll be offered a tax-free roll-over," he told CBC News.

But the idea of a BCE-Telus combination doesn't sit well with the Public Interest Advocacy Centre. 

"The idea that creating a gigantic company with about 70 per cent of all telecom revenues could be good for consumers belongs in a satire, not in economic policy," said executive director Michael Janigan.

BCE has set a deadline of June 30 for any formal bids from the three private equity/pension fund groups. It hopes to make a decision on its future by September. 

With files from the Canadian Press