Mum’s the Word on Manitoba Telecom

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In this “nearly the holidays” very extra special deluxe edition:

  • Feature: Mum’s the word on Manitoba Telecom
  • Bouch, Bucks, and a Big Bank
  • Trading notes: Advanced Fiber Technologies, George Steinbrenner, Hudson’s Bay

When placing an investment, I consider a variety of different variables. Typically I’ll review the balance sheet, yield, company and sector outlook, key ratios and even technical indicators. Unfortunately (or is it fortunately?), my mind doesn’t work like a computer and I don’t assign individual weights to each of these variables. I take in all the information, let it percolate in the gray matter, and then make a decision. However, sometimes it’s worth trading a stock based on news alone. This leads me to introduce one of the recent additions to the portfolio, Manitoba Telecom (MBT on the TSX), a Winnipeg-based telecommunications outfit. As I mentioned during the last column, I initiated the position at just under $40 and will be holding until I find out what’s going on with the $650 million owed to them by BCE (BCE on the TSX).

Here’s some background: Manitoba Telecom owns 40% of Bell West, a Calgary company that provides telecom services to small and medium sized businesses in Western Canada. MBT holds a put option that compels Bell Canada to buy this 40% stake for $650 million in February 2004. This is a tremendous premium to what the stake is actually worth, which says something about the quality of management over at MBT. There are a number of intriguing possibilities:

1. Bell could write a cheque for $650 million.

Bell already owns over 20% of MBT and could swap these shares back to MBT to pay the bill. This transaction would amount to just over $500 million, so Bell would have to kick in a few extra bucks in order to settle up. MBT would presumably cancel this stock, resulting in a nice one-time pop to earnings per share. But what to do with the left over cash? They could issue a special dividend or use it to fund capital expenditures. Both of these are good, although I’d prefer the cash in my pocket.

2. a) Bell takes over MBT

If you’re going to pay MBT $650 million, why not kick in another $2 billion plus and you can get the entire company? It was interesting that at a recent BCE board meeting, it was decided not to raise the quarterly dividend. Surely they have something planned for all that extra cash. Maybe they plan on increasing their capital expenditures; maybe it’s going to pay down debt. They just redeemed over $300 million in preferred shares, but I don’t think that was an unexpected move. But no matter how you slice it, a takeover would cost BCE a lot of money and few people believe they are willing to spend in Winnipeg.

2. b) Bell tries to take over MBT, so MBT converts to an income trust.

This is the option that has investors frothing at the mouth. We’ve seen so many stocks shoot up when the conversion winds start to blow. The idea is intriguing, but again, few people believe a takeover is in the works. Several commentators have suggested that MBT might convert to a trust at some point anyway. Sure, it’s possible. And the success of the Bell Nordiq Income Fund (BNQ.UN on the TSX) demonstrates that it can be done. However, telecom trusts are likely a rare animal, given that swings in capex requirements aren’t great for stable distributions. It sure is fun to think about, though.

Besides the principals involved, what do these alternatives have in common? They are all good for shareholders. Even the worst case-scenario of no special payout, no takeover, or no trust conversion, there would still be a substantial bump in earnings per share. Plus, I get the 2.3% dividend yield while I wait. If investors aren’t happy with the final decision, then maybe the shares trade back to what I paid. No harm no foul. If investors are happy, then maybe I’ll make a few extra bucks. Apparently the two sides are talking, but for now, mum’s the word on Manitoba Telecom.

Bouch, Bucks, and a Big Bank
My buddy Bouch in Embrun works for one of the big banks and has been participating in a stock picking contest for employees. It’s a one-month contest that wraps up next week.

Here’s how Bouch is playing it: He picks up the top gainers from the previous day (or previous hour, for that matter) runs them as far as they’ll go, then heads for the exit. Today it might be a couple of junior golds, tomorrow a small cap biotech. Such activity rests on the premise that what goes up must keep going up, at least in the immediate term. It also reflects the market maxim, the trend is your friend. When you think about it, the only way to win a short-term contest is to play this momentum game, so Bouch probably has the right idea. However, this is the most volatile type of investing (if it’s investing at all). Bouch summed up his performance this way: “When I do well, I do fairly well – when I crash, it’s truly spectacular.” What a great line. If you’ve even spent time in aggressive growth mutual funds, this sentiment should resonate. Just to illustrate the volatility, consider this: In one week Bouch’s performance had him ranking between #20 to #7232. I’ll keep Market Guy readers updated on his progress. Nothing is more fun that having Bouch in the game. Since I’m fairly conservative, I get to experience the fast lane vicariously through him. I remember during the crazy tech days he was trading some shares. We must have spent 1000 hours on the phone through that one.

I’ve tried the momentum game before and although I made a few bucks, ended up looking like Nick Nolte’s mug shot.

The momentum game can be hazardous to your health…just ask the Market Guy  

I won’t even talk about the fact that a major financial institution that routinely trumpets the buy and hold message to its investors is holding an employee contest that can only be won by violating that very message. Let’s just move on.

Trading notes

  • I picked up some units in the Advanced Fiber Technologies Income Fund (AFT.UN on the TSX), at $12.05. This company provides screening products for the pulp and paper industry and has been doing so for over 100 years. The units declined from a high of nearly $14 after a challenging quarter and some $US concerns. The price fell enough to get me interested, so I initiated a small and rather non-commital position. Although the payout ratio is over 90%, there are a number of intriguing growth possibilities. Last year 50% of the distributions were regarded as a return of capital. The yield on my purchase price is just about 10%.
  • In a fantasy trade, I’d like to send the folks who designed the Ontario property tax assessment scheme to the Yankees for George Steinbrenner. At least there is some sense to what George does, even if he is pure evil.
  • On Wednesday, it was announced that US investor Jerry Zucker had acquired another 25,000 shares of Hudson’s Bay (HBC on the TSX), increasing his ownership to over 10%. HBC owns Zellers, a company that I worked for through my early undergrad days. I worked in pets, plants, hardware, automotive, and patio furniture. Natural combinations, don’t you think? Another one of my interesting tasks was playing the role of Zeddy Bear, that loveable character that showed up at all the charity events and children’s birthday parties.
Yup, that’s theMarket Guy doing it for the company. Then it was back to selling hammers and goldfish.  
  • Anyway, some are speculating that Zucker has a takeover in the works, so I jumped into the shares at $11.40. I held on through part of an afternoon, but didn’t want to maintain the position through the close. So, I popped out at $12.15. After commissions that’s a gain of over 5% for about 30 minutes of ownership. A good news-driven trade, but no way am I interested in an investment. We’ve been hearing about a turnaround at the Bay for quite some time…life is too short.
  • Another reason for me to take the money and run has to do with the press release that came from Zucker’s people after he acquired the shares. Here’s how they explained their outlook: Either we’ll buy more shares, buy the whole company, or sell the shares we have now. How’s that for a tentative maybe? In my portfolio tentative maybes don’t cut the mustard, Pedro. Add this to the fact that Zucker has virtually no retail experience and some say not enough money to launch a bid. Maybe there is a takeover in the works, maybe Target will acquire Zellers and J.C. Penney will run at the Bay. I just don’t want to be stuck with the shares if nothing happens.
  • Besides, the only Jerry Zucker I know was the guy behind the pantheon of movie comedies, Airplane. I should mention that after watching Airplane for the first time, Market Mom kept telling me to stop laughing so much. “It’s not that funny,” she said. Come on. This is the movie that gave us such lines as “Don’t call me Shirley” and my personal favourite, “And Leon’s getting larger.” If you understood the last couple of sentences, then I suppose I should buy you a Coke.

The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets. He’s trying to keep the Market Gal from turning the Market Shack into a replica of the light-covered house on National Lampoon’s Christmas Vacation. There’s never a dim bulb