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This time, the hedge funds are on the sidelines

Date: Friday, June 22, 2007
Author: Boyd Erman and Lori McLeod, Globe and Mail.com

Telus Corp. will have to solve many problems, including satisfying competition regulators and keeping its own shareholders onside, to win BCE Inc. with its planned cash-and-stock bid. But one aggravation Telus may not face is opposition from hedge funds.

Unlike last year's Inco Ltd. and Falconbridge Ltd. battles, hedge funds looking for a quick win so far appear unlikely to be the deciding factor in this tilt, which takes away a major roadblock for Telus.

With Inco and Falconbridge, hedge funds held the keys to victory because they amassed huge stakes in the companies. Inco's plan to merge with Falconbridge and Teck Corp.'s proposal to buy Inco held little appeal for the hedge funds, largely because both proposals involved stock rather than cash.

Instead, the hedge funds handed their shares to foreign buyers offering all-cash bids that could close quickly, with little interference from competition regulators.

Telus plans to offer a mix of cash and stock, and the three private equity groups eyeing BCE are likely to pay cash. But because the bidding is unlikely to go sky high, the hedge funds aren't playing as big a part. The betting among hedge funds right now is that private equity firms will offer around $41 a share for BCE, while Telus could pay $43.

"Nobody I know is in BCE in a huge way," said a manager at one of the biggest U.S. hedge funds. "I don't think people are in it in size because the upside seems relatively capped."

One person involved in the bidding said that by his firm's estimate, only about a quarter of BCE's shares are held by hedge funds.

In the case of Inco and Falconbridge, people working on the deals said hedge funds held more like half, giving them much more say and tilting the playing field more in favour of cash bidders.

This time, there may be more buying by hedge funds once bids are actually tabled.

"There are simply not enough details out there right now to figure out how to play this," said another hedge fund manager. "We don't have details about the bids yet, how much cash, how much stock, what the government will do. There are too many what-ifs out there right now to make a good bet."