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BCE falters

BCE last week became the latest LBO to falter in the current tricky market conditions. The C$52.7bn (US$51.8bn) take-private transaction, which was expected to close on December 11, seems in doubt after independent valuation firm KPMG delivered an opinion that the combined company would be insolvent. A favourable solvency opinion is a condition to the closing of the transaction.

At the same time, KPMG indicated that BCE would meet all solvency tests under its current capital structure. BCE naturally has a different opinion.

“We are disappointed with KPMG’s preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing. The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition,” said Siim Vanaselja, BCE’s CFO in a statement.

A solvency opinion, a staple of buyout agreements, was until recently considered only a formality. However, as the credit markets have frozen, private equity shops have used claims of insolvency to invoke material adverse change clauses. For example, earlier this year a solvency opinion derailed the Huntsman/Hexion Specialty Chemicals merger.

BCE’s stock was trading on Wednesday last week at a level that signalled that the deal was not going to happen. The shares were changing hands at C$25.10, down 35.7% on the day and well below the C$42.75 buyout offer.

The banks involved, Citi, Deutsche Bank, RBS and TD Securities, would be the ultimate beneficiaries of a failed sale. If the deal were to collapse, the banks would not have to chose between carrying the US$34bn financing on their books or offloading it at uneconomic terms.

The company can wait for a final solvency opinion until the merger’s deadline and says it will continue to work with KPMG and Teacher’s Private Capital, Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch to satisfy all closing conditions. It acknowledges, though, that the transaction is unlikely to proceed if KPMG does not deliver a favourable opinion by December 11.

The sponsor group agreed to buy Canada’s largest telecoms group in June 2007. Since then, the deal has faced significant hurdles. In late June, the Supreme Court of Canada ruled in favour of BCE and its prospective buyers, and approved the buyout. The verdict reversed a lower court’s ruling that sided with bondholders and their claim that they were damaged by the buyout.

At the time, the underwriting banks and the buyout firms were understood to be renegotiating the terms of the financing. Prior to that, the company also had to adjust its board governance policy to receive approval from Canadian industry regulators.

Hurt by the ongoing credit market crisis, market participants have become cynical and developments that would have raised eyebrows a year ago have become a matter of course. If BCE collapses, it will join the list of failed buyout deals that have faltered since the summer of 2007. These include United Rentals, Sallie Mae and Penn National Gaming.