BCE Deal Stands On Brink Of Collapse

The C$34.8 billion ($27.6 billion) leveraged buyout of BCE Inc., Canada’s biggest telecom company, is all but certain to collapse later this week as the prospects of a last-minute rescue grows dimmer.

Ever since BCE said late last month that its accountants, KPMG, had ruled the company that would emerge from the deal would fail a solvency test because of its huge debt load, hopes for the completion of the world’s largest leveraged buyout deal have sunk along with its share price.

KPMG’s opinion on the financial viability of BCE after its buyout is a condition to the deal’s closing, which is scheduled for Thursday. Without it, the transaction is unlikely to proceed, BCE said.

“This deal is all but dead,” National Bank Financial analyst Greg MacDonald said on Monday.

After Monday’s closing bell, BCE issued a statement saying that the transaction was unlikely to proceed if KPMG be unable to deliver a favourable opinion on Dec. 11. The company also said it continues to disagree with KPMG’s preliminary findings and that it’s hired PricewaterhouseCoopers LLP to perform valuation work on the proposed deal. The Wall Street Journal reported Tuesday that PricewaterhouseCoopers has given BCE a positive solvency opinion.

His assessment is shared by most investors who have dumped the stock since BCE’s solvency announcement on Nov. 26, driving it from C$38.35 the day before the news down to current levels of just C$23.39 on the Toronto Stock Exchange .

BCE’s buyers, a group of private-equity funds led by the Ontario Teachers’ Pension Plan, have offered C$42.75 a share for the company. MacDonald thinks the chances of a repriced deal are slim because if the existing financing agreement dies on Thursday, new funding costs will likely be much higher.

As well, with credit markets still in a deep freeze, banks have little appetite to lend — especially on a massive scale like what would be needed for the BCE deal.


Further feeding negative sentiment is the icy reception that a scaled-down, alternative proposal floated by the buyers last week received from the banks contacted for financing.

That proposal would have involved the buyers taking a minority stake for an investment of up to C$10 billion. Less than a day after it surfaced, it was shelved because the banks were not interested, sources familiar with the situation told Reuters.

“It’s not going to happen,” Gavin Graham, director of investments at BMO Asset Management, said of BCE’s buyout. He added KPMG is extremely unlikely to make an about-face on its solvency opinion.

“Having made that commitment, it would be exceptionally hard for them to now turn around and go, ‘Oh, by the way, we’ve changed our mind.'”

Many BCE investors who have endured the drop in the stock price are now hoping Montreal-based BCE will bring back the dividend it suspended in late June. The move was part of its efforts to close the buyout.

There’s also the chance of a merger with Telus Corp., Canada’s No. 2 phone company, but analysts think that is a longer-term scenario rather than an imminent proposal.

Meanwhile, BCE says it is still trying to close the original deal.

“BCE continues to work closely with KPMG and the purchaser to seek to satisfy all closing conditions,” spokesman Mark Langton said on Monday.

($1=$1.26 Canadian)

(Reporting by Wojtek Dabrowski; Editing by Frank McGurty)