BCE has announced:

BCE Inc. will, on September 1, 2007, continue to have Cumulative Redeemable First Preferred Shares, Series AA (“Series AA Preferred Shares”) outstanding if holders of at least 2.5 million of its Series AA Preferred Shares elect not to convert such shares into Cumulative Redeemable First Preferred Shares, Series AB by August 22, 2007. In such a case, as of September 1, 2007, the Series AA Preferred Shares will pay, on a quarterly basis, as and when declared by the Board of Directors of BCE Inc., a fixed cash dividend of $0.300000 based on an annual dividend rate of 4.800% for the five-year period beginning on September 1, 2007.

As previously discussed, the Teachers’ bid includes cancellation of BCE.PR.A (the fixed rate) for $25.76 and of BCE.PR.B (the ratchet rate) for $25.50.

BCE.PR.B does not currently exist; according to the prospectus the initial rate will be 80% of prime, ratcheted. If we assume that two dividends will be paid prior to cancellation and that this rate increases at the maximum speed of 4% per month and that prime continues to be 6.25%, then we arrive at an average rate of 90% of prime, which is 5.625%, which is dividends per share of about $0.70.

Two dividends on the “A” at 4.80% will come to $0.60.

Thus, if one were absolutely sure that the Teachers bid will take be consumated as advertised, one would stick with the BCE.PR.A at 4.80%.

I’m not convinced, though. I think there is a significant chance that the bid will not be completed as currently envisaged and that the preferred shares will continue to exist in some form or another at a reduced credit rating. Should this come to pass, a ratcheting floater will almost certainly be much more valuable than a 4.80% fixed rate to be reset/exchange in 2012. Given that the potential reward for keeping the BCE.PR.A issue is so low – only sixteen cents per share, net – I believe that the risk/reward profile makes conversion to BCE.PR.B the path of prudence.

Others may disagree!

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