BCE Says Buyout In Jeopardy, Shares Sag

BCE Inc. said on Wednesday it was unlikely its C$34.8 billion ($28.2 billion) leveraged buyout would close next month after its accountants ruled that the company that emerges from the deal would not meet a solvency test because of its huge debt load.

Shares of BCE, Canada’s biggest telecom company, plunged almost 40 percent as investors reacted to the latest twist in the saga of the world’s largest leveraged buyout, which is being led by the Ontario Teachers’ Pension Plan.

The deal has already faced regulatory scrutiny as well as a Supreme Court of Canada challenge by angry debt investors as it inched its way forward to the scheduled December 11 closing date.

And on Wednesday, BCE — the parent of Bell Canada — said its accountants, KPMG, have found the company would not meet the buyout agreement’s solvency test because of current market conditions and the amount of debt involved in the financing.

“This is the best Thanksgiving gift for the banks,” said a global head of investment banking at a U.S. bank, who declined to be named because he was not authorized to speak with the media. “They get to walk away — it’s the ‘easy out’ that they dreamed of but never thought they’d get.”

BCE shares plunged 38.3 percent to C$23.65 shortly after market open on the Toronto Stock Exchange as investors digested the news.

Shareholders and analysts have long speculated that the banks underwriting the buyout — Citigroup, Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank — would try to seek a way out of their commitments as financial markets deteriorated.

Those concerns lingered even as Teachers, TD Bank and BCE repeatedly reassured investors that they remained pledged to the buyout and were working toward its close.

The U.S. investment banker, who is not involved with the deal, said the banks funding the takeover would have faced a massive legal battle if they had just walked away. But now, with BCE failing to get a solvency opinion, the banks have an escape and protection.

“The banks get to say ‘We were willing and ready to do it. It’s just BCE wasn’t able to meet their side of the bargain’,” the investment banker said.


A source familiar with the situation said BCE’s board of directors inserted the solvency opinion into the deal as a condition of its closing. However, BCE spokesman Mark Langton said both the purchasers and the company agreed the clause should be written into the agreement.

The company said it disagreed with KPMG’s preliminary view of post-transaction solvency and that it continued to work with the accounting firm and the purchaser to seek to satisfy all closing conditions.

“The deal is unlikely to proceed if we do not get that positive opinion,” Langton said.

Aside from Teachers, the buyout group includes Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity.

BCE shares have long languished below the offer price of C$42.75 a share as investors fretted that the deal could be repriced, delayed or abandoned altogether because of problems in global financial markets.

Citigroup, Royal Bank of Scotland and Deutsche Bank had no comment. TD Bank was not immediately available for comment.

KPMG also declined comment, citing “our professional obligation to maintain confidentiality concerning the affairs of our clients.”

In mid-June, BCE won the backing of the Supreme Court of Canada, which overturned a Quebec Court of Appeal decision that had said the plan, to be funded partly by taking on new debt, did not take adequate account of the interests of existing bondholders.

Should the BCE buyout fail, the bankers who advised the company and the purchasers could also lose their fees. Typically, such fees are paid on completion of a deal.

Advisers to BCE — Goldman Sachs, BMO Capital Markets, RBC Capital Markets, Greenhill & Co and CIBC World Markets — were to earn an estimated $68.27 million in target adviser fees according to data from Thomson Reuters and research firm Freeman & Co.

Advisers to the consortium buying BCE — Citi, Deutsche Bank, RBS, TD Securities and Morgan Stanley — were to earn $61.18 million in estimated fees.

By Wojtek Dabrowski and Megan Davies

(Additional reporting by Scott Anderson and Lynne Olver in Toronto and Jessica Hall in Philadelphia; Editing by Lisa Von Ahn, Peter Galloway and Rob Wilson)