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 The C$52.3 billion ($52.3 billion) buyout of Canadian telecom BCE Inc. remains in limbo. The Supreme Court of Canada on June 17
will hear an appeal of a lower court ruling that could topple the deal,
though a dispute over the buyout's financing could prove the real
dealbreaker.
On May 21, a Quebec appeals court ruled in favor of a dissident group of bondholders that claimed the buyout -- staged by Teachers' Private Capital, Providence Equity Partners Inc., Madison Dearborn Partners LLC and Merrill Lynch Global Private Equity, which will be the largest take-private to date if it goes through -- is unfair to those holding debt securities issued by Bell Canada. It was the second hurdle BCE ran into in a week. The news came days after reports of renegotiations surfaced. The Deal's Peter Moreira noted May 22: On Monday, The New York Times reported that the buyout group's banks -- led by Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group plc -- want the deal renegotiated as credit markets have been in turmoil since the deal was struck last June. There apparently has been no resolution of the financing problems.
The week before, Clear Channel Communications Inc. and its buyout
sponsors settled out of court with the lenders behind their deal --
many of whom are also funding the BCE buyout -- with a plan to fund the
deal at $36 per share, down from the agreed-to $39.20 per share. While
it isn't all too surprising the banks might be looking to renegotiate,
BCE's hand is stronger than Clear Channel's so the price may not be cut, The Deal's Scott Stuart
pointed out: The Canadian telecommunications company is a better credit than Clear Channel's radio and billboard businesses, which advertising fuels, and the BCE merger agreement affords the company greater protections than the original Clear Channel pact did, arbs said. FIRST-QUARTER BUILD UP
At the end of March, Ontario
Teachers' Pension Plan was crossing its fingers that its BCE buyout would close by the end of the second
quarter. A Canadian judge on March 7 dismissed the debtholders lawsuit and gave them five days to appeal. A regulatory review in late February was at the time the latest obstacle to stand in its way. According to reports Feb. 27, the Canadian Radio-Television and Telecommunications Commission postponed a hearing on the deal, which was agreed to June 30, 2007 and while it is led by Ontario Teachers', it has the backing of Providence Equity Partners LLC, Madison Dearborn Partners LLC, Merrill Lynch Global Private Equity and Toronto-Dominion Bank. "The move was made so the agency can study whether the telecom giant will retain bona fide Canadian control, according to media reports," Moreira noted, and came in response to Ontario Teachers' recent clarification on the board and ownership structure if the deal goes through. The regulator wants to make sure the company stays in Canadian hands. Canadian takeover law prevents foreign investors from owning more than 46% of a telecom company, while The Globe and Mail noted Ontario Teachers' is restricted from holding more than 30% voting shares in a company. Moreira wrote:
WHATEVER IT TAKES BCE shares have long traded at a discount to the
C$42.75 per share bid and hovered near $33 per share May 22. Earlier in
the year, the financing began to draw scrutiny, The Deal's Vipal Monga noted. The Canadian bondholders suit made the picture cloudier still. In late January, it looked like the deal could be in trouble, and BCE chief executive Jim Leech days later again made moves to dispel fears. The auction in 2007 came as Canadians were voicing more concern about the takeover of homegrown companies by foreign buyers and consequently, as the auction progressed, the bid groups and their proposals became more interesting. Merrill Lynch stepped forward Oct. 25 saying it had paid $494 million for a 1.4% stake in the deal. Until late June 2007, the bidding for BCE demanded foreign investors team with Canadian-rooted bidders, either strategic, pension funds or both, for control of the entity. On June 22, Catalyst Asset Management Inc., a Toronto investment bank and advisory firm proposed a recapitalization of the company, which would have left it in Canadian hands. The news came a day after Telus Corp., Canada's No. 2 phone company, joined the bidding, raising monopoly questions. Other concerns, however, the would-be buyer attempted to assuage by highlighting the advantages of an all-stock merger that would have yielded tax advantages for BCE shareholders, and pointing out that the merger would have kept BCE all-Canadian owned. That news came 10 days after Canadian private equity firm Onex Corp. joined a bid group led by the Canada Pension Plan Investment Board, which also included New York private equity firm Kohlberg Kravis Roberts & Co. and Montreal-based pension fund Caisse de Dépôt et Placement du Québec, which at the time was thought capable of giving the team an edge over competition with a more concentrated Canadian base. On June 5, Ontario Teachers' and Providence joined the bidding fray, just weeks after BCE opened takeover talks with Cerberus Capital Management LP, which kicked it all off. BIDDING BREAKDOWN The price tag -- which trumps both TXU Corp. and Equity Office Property Trust's takeovers -- was much more than one pension fund, or a consortium of Canadian funds, could have afford or considered without violating diversification requirements to pension funds. Canadian funds don't have the bandwidth to take on such a deal themselves and lack heavy-hitting domestic PE funds so prevalent in the neighboring U.S. Teaming up was all but inevitable. Also eager to get into the game with the Cerberus-led team was Hong Kong financier Richard Li, who was said June 1 to be in talks through his private investment group Pacific Century Group. While discussions were at an early stage at the month's beginning, the firm said talks would have likely led to a minority stake. The son of Hong Kong tycoon Li Ka-Shing, Li is a Canadian citizen and therefore could have helped the consortium around the national legal hurdles. Further strengthening the group's cause, the Hospitals of Ontario Pension Plan had also jumped on board with the Cerberus consortium a week earlier. On the KKR front, Henry Kravis backed away from questions regarding the prospective buyout during the Canadian Venture Capital Association's annual conference May 29, 2007 only to say that if its group were to win BCE, KKR would take a minority investor and team with Canadian companies.
VYING FOR CONTROL Under current regulations, Canadians must control 80% of both the entity's board and voting shares, once a deal closes. Further, 66% of a telecommunication or media company's parent company must be Canadian. Historically, these multiple restrictions have discouraged prospective international suitors, as The Deal's Ron Orol pointed out.
The buyout is certainly to be of note
beyond just its record breaking price tag, marked by careful
construction and possibly signaling a return of U.S. investors to the
Canadian telecom market. -- Carolyn Murphy
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Marc lst, 2008: I have been a BCE shareholder since 1975 and would have a good capital gains, I am definitely opposed to this deal. There is another Canadian group wishes to buy BCE and will pay a higher dividend than currently.
In any event, I do not believe the deal will go forward. Citigroup shareholders would be livid if they gambled what little capital they now have. Merrill Lynch is in the same position. They could pay with ABCP but not hard cash.