Opinion: Bell Media is a distraction – BCE Inc. should just sell it off

Bell Media, which accounts for a fraction of BCE Inc.'s revenue, has proven to be a distraction, as evidenced by the recent Lisa LaFlamme controversy.Fernando Morales/Tausi Insider

Dvai Ghose is principal at Ghose Investment Corp. His clients include Telus Communications Inc. He is the former head of global research and strategic development for Canaccord Genuity Group.

Despite significant opposition, the market seems to be confident that the proposed Rogers-Shaw telecommunications merger will be approved.

A seismic shift in industry dynamics looms. What should Rogers’s and Shaw’s rivals do in response?

Well, BCE Inc. BCE-T, for one, should use this as a catalyst to refocus on its core telecom operations, invest in IT growth – and shed legacy assets such as Bell Media, which has proven to be a distraction, as evidenced by the recent Lisa LaFlamme controversy.

If the market is right, Rogers will create a coast-to-coast broadband carrier with unprecedented scale to complement Canada’s largest wireless carrier. This should result in significant competitive and strategic advantages, including being better positioned to win national corporate and government contracts, secure lower prices from vendors and build partnerships with technology behemoths such as Microsoft and Alphabet.

This creates issues for Rogers’s primary competitors – Bell Canada and Telus. A potential response would be to mirror the Rogers-Shaw merger by seeking approval to merge Bell and Telus’s wireline assets and spin off either Bell Mobility or Telus Mobility. (Rogers and Shaw were obligated to spin off Shaw’s Freedom Mobile). However, this would be difficult to accept, because unlike Freedom, Bell Mobility and Telus Mobility are large and profitable.

Given the lack of obvious strategic responses, selling its media division should be an obvious focus for Bell Canada.

Bell Media was created through Bell’s acquisition of CTV (including TSN) in 2010 at a valuation of $3.8-billion, followed by its acquisition of Astral Media in 2012 for $3.4-billion. Unfortunately, analysts now value Bell Media at just $4-6 billion.

Globally, legacy media asset valuations have declined significantly owing to disruption from streaming services such as Netflix and YouTube. In 2019, AT&T paid US$85-billion for Time Warner. Earlier this year, AT&T decided to merge Time Warner with Discovery and spin out AT&T’s stake in the combined entity to its shareholders at a valuation of US$30.5-billion. Verizon acquired AOL in 2015 for US$4.4-billion and Yahoo in 2017 for US$4.5-billion. Earlier this year, Verizon announced it was selling 90 per cent of its media group to private equity for just US$5-billion.

Conventional media in Canada operates in a tough regulatory environment. Unlike online content providers, legacy Canadian media are still bound by Canadian content regulations (even though they are largely unenforceable in the age of streaming), have to pay into government media funds and are subject to foreign ownership limits. Regulations also ensure that Bell and Rogers must allow their telco competitors equal access to their content, negating any real competitive advantage.

Moreover, the argument is equally true for Bell’s rival Rogers. Rogers’s conventional media (Citytv, Sportsnet, Omni and radio stations) operations are much smaller and less profitable than Bell Media. Analysts value Rogers Sports & Media (excluding the Toronto Blue Jays) at $600-million to $700-million. If Rogers is successful in acquiring Shaw, it will have a more immediate reason to sell: to pay down the $26-billion of debt issued to acquire Shaw. After all, Rogers has already sold off Maclean’s and its other magazines.

In addition, it could also sell other non-core assets such as the Blue Jays (valued by analysts at $1-billion), its stake in MLSE (valued at $900-million) and its stake in Cogeco (worth $1.1-billion in the market), for a total of $3.6-billion. Coupled with the $2.85-billion being offered by Quebecor for Freedom Mobile, it could result in $6.5-billion in gross proceeds for Rogers – 25 per cent of the price paid for Shaw.

As with Bell, these assets are of little value to Rogers operationally, are a distraction for management, and as they do not generate profits, their value is not reflected in Rogers’s stock price. Cogeco’s controlling shareholders have made it clear they have no interest in selling control to Rogers, rejecting a generous offer in 2020 and leaving Rogers with a stranded investment.

If Bell and Rogers sell media, the question is what to do with the proceeds. Apart from paying down debt, proceeds should be used to expedite the installation of fibre-optic cable to homes, especially in Rogers’s case, as it is well behind Bell. Rogers and Bell should also invest in IT assets that exploit their strong networks, as Telus has done in IT outsourcing, health and agriculture.

While selling media and the other non-core assets would likely be a highly emotional issue for the Rogers family and so may never happen, it could happen at Bell.

Mirko Bibic took over as CEO in 2020 and has increased Bell’s focus on technology. When asked on a recent public conference call why Bell had relaunched its venture capital arm, Mr. Bibic said the investments will “both showcase the value of our networks, not just for the connectivity part of it or the connectivity revenue part of it, but to move up the solution stack,” signalling that Bell wants to capture 5G applications revenue as well as connectivity revenue.

Mr. Bibic and Bell should be applauded for this approach, but they should also help finance growth investments and increase focus by selling the company’s legacy media.

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