April 17 (Bloomberg) -- BCE Inc.'s biggest shareholder said it may make an offer for the Canadian phone company, setting up a possible bidding war with Kohlberg Kravis Roberts & Co. and three pension funds in what would be the second-largest buyout ever.

Ontario Teachers' Pension Plan said today in a statement it will ``review'' its options for BCE, ``including leading an alternative Canadian consortium.'' Teachers' owns 5.3 percent of Canada's biggest phone company.

The Canada Pension Plan Investment Board, the Caisse de Depot et Placement du Quebec, and the Public Sector Pension Investment Board said earlier today they've begun takeover talks with Montreal-based BCE, whose market value is about C$31 billion ($27.4 billion). New York-based KKR would be a minority partner, according to a statement.

A buyout of BCE would be the world's second largest, after the $44 billion acquisition of Texas power producer TXU Corp. by KKR and TPG Inc., announced in February. It would also put the company in private hands for the first time in more than a century.

BCE's shares trailed rivals' including Telus Corp. the past five years as Chief Executive Officer Michael Sabia's efforts to cut jobs and shed units failed to win over investors.

BCE has ``been a dreadful performer for the last several years,'' said Gavin Graham, who helps oversee about $5.4 billion as chief investment officer at Toronto-based Guardian Group of Funds Ltd., including BCE shares. ``I would imagine the pressure'' from investors prompted the announcement.

Stock Gains

Shares of BCE rose C$2.34, or 6.5 percent, to C$38.60 by 4 p.m. in trading on the Toronto Stock Exchange today, the biggest gain in seven months. The Globe and Mail newspaper has reported the buyout funds may bid C$40 a share for BCE.

Since taking over in 2002, Sabia has cut 9,000 jobs and sold stakes in CGI, Canada's biggest computer-services company, and Bell Globemedia, now known as CTVglobemedia and owner of the Globe and Mail. In December he agreed to sell the Telesat Canada satellite unit for C$3.25 billion, among his final steps in undoing the C$13 billion expansion led by his predecessor.

``We're encouraged that the company has decided to become open minded to review alternatives,'' said Jim Leech, a senior vice president at Ontario Teachers', Canada's third-biggest pension fund with C$106 billion in assets. ``We hope to be a participant in the process.'' Leech, who spoke in an interview today, declined to elaborate further.

Providence

U.S. buyout firm Providence Equity Partners Inc. expects to take part in any Teachers'-led bid for BCE, a person familiar with the transaction said today. Teachers' hasn't yet put together a formal investor group for BCE, the person said.

Providence, a buyout firm focused on media and communications, has invested in more than 100 companies since its inception in 1990, including movie studio Metro-Goldwyn- Mayer Inc., Danish telephone company TDC A/S and Warner Music Group. In February, Providence raised $12 billion for its largest-ever fund. The firm is based in the Rhode Island city of the same name. Providence spokesman Andrew Cole declined to comment on BCE.

The Globe and Mail first reported March 29 that KKR might pursue a bid for the Montreal-based company. BCE said later that day it had no plans to go private and that it wasn't in ``ongoing'' talks with buyout funds.

In the past five years before March 29, BCE shares gained 8.2 percent excluding dividends, compared with a 68 percent rise for the Standard & Poor's/TSX Composite Index. The shares of Rogers and Telus more than tripled over that period.

Canadian

Any transaction would have to ensure ``the company remains Canadian, to meet existing foreign ownership restrictions,'' BCE said in the statement today. Canadian law bars foreigners from owning more than 46.7 percent of a domestic phone company.

BCE is one of Canada's oldest publicly traded companies and also is among the country's most widely held stocks. The company, which started operations in 1880, has traded since at least 1905. BCE was known as Bell Canada before 1983, when the holding company structure was created. BCE plans to change its name back to Bell Canada in June.

``We're focused on getting a deeper understanding of the business and the opportunities to unlock value,'' CPP spokesman Ian Dale said today in an interview. ``We are looking forward to working with the company.''

Caisse de Depot spokeswoman Lucie Freniere said the Quebec fund manager has no comment beyond a statement issued by the group today. Public Sector Pension spokeswoman Anne-Marie Laurendeau and BCE spokesman Pierre Leclerc declined to comment.

Not Excusive

The Caisse is Canada's largest pension fund manager, while Toronto-based CPP is second. The talks to take the firm private aren't exclusive, BCE said. The company also is exploring other options, which weren't divulged in the statement.

Buyout firms have announced $274 billion in takeovers this year. That compares with $163 billion of global acquisitions announced in the same period last year, according to data compiled by Bloomberg.

A merger between BCE and smaller rival Telus is more likely to occur than a buyout, Scotia Capital analyst John Henderson said today in a report. That deal would value BCE at about C$42 a share, compared with the C$40 the company may get in a transaction with buyout firms.

Shares of Vancouver-based Telus rose C$1.92, or 3.1 percent, to C$64.57, the most since September. Toronto-based Rogers Communications Inc.'s shares climbed C$1.45 to C$42.18.

Income Trusts

Last year BCE and Telus announced plans to convert to income trusts so they could avoid taxes, which boosted the shares of both companies. The stocks fell after the Canadian government announced Oct. 31 it would start taxing new trusts, prompting the firms to scrap the plans.

The perceived risk of owning BCE bonds surged on concern that a takeover by a buyout fund will saddle the phone company with more debt, according to prices in the credit-default swap market.

Contracts based on $10 million of BCE bonds rose to $172,000 today, and have risen fourfold since March 28, according to CMA Datavision in London. An increase in the five- year contracts, used to speculate on a company's ability to repay debt, indicates a perceived deterioration of credit quality.

Bell Canada's 10-year note maturing in April 2012 fell for a seventh day, down 1.22 cents to 104.46 cents yesterday. The yield on the 6 1/4 percent security rose to 5.22 percent, the highest in almost three years.

Goldman Sachs & Co., Royal Bank of Canada and Bank of Montreal are advising BCE, the Globe and Mail reported today.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Frederic Tomesco in Montreal at tomesco@bloomberg.net

Last Updated: April 17, 2007 18:11 EDT