BCE Inc. | BCE
Ontario Teachers' et al.

Deal value $34.4 billion

Spread 10/29/08 C$8.38, or 24%

There's always some tension in risk arbitrage between aggregating pending mergers into pools as if they had similar risk profiles, and conversely parsing deals into good, bad and ugly. Both of these approaches usually exist simultaneously in risk arb. But in these days of crisis and turmoil, the aggregation, or clumping, phenomenon has dominated.

For more than a year now, many risk arbs tossed leveraged buyouts into a pile of toxic deals not to be played. These deals were too dicey because buyers were walking and banks were balking on debt commitments. Avoiding them, however, meant skipping some pain while missing some gain.

Remember that back in September 2007, Bain Capital LLC closed its buyout of Guitar Center Inc. even as other LBOs faltered, such as the UBS-sponsored Finish Line Inc. deal for Genesco Inc. and others. In the middle were deals such as the Clear Channel Communications Inc.'s buyout by Bain and Thomas H. Lee Partners LP, which had been repriced but still offered a trade to arbs who believed the deals would get done.

In that minefield, the BCE Inc. buyout by Ontario Teachers' Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners LLC made it through unscathed. Or so it seemed. BCE was not repriced. It weathered a showdown with Canadian bondholders who claimed Canadian law afforded all stakeholders equal consideration, which meant they had protection against a credit downgrade, but lost that argument at the Supreme Court. The banks then negotiated an extension of the merger and financing agreements so they could put off funding until, at the outside, Dec. 11. (Proof, if it's necessary, that higher-ups at top banks and their institutional partners cannot see out two months.) Now BCE, which has recommitted financing from Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland Group plc and Toronto-Dominion Bank is again in question.

Arbs are concerned that one of the consequences of the buyout bust is that banks realize that debt on done or even repriced deals has not been easy to shed after a year. But BCE is also suffering a Huntsman Corp. effect. Last week, Credit Suisse Group and Deutsche Bank did not show up for the deal funding of Apollo Management LP portfolio company Hexion Specialty Chemicals Inc.'s buyout of Huntsman. The Huntsman merger agreement requires Hexion to sue the banks to get the deal done, and it did so Oct. 29 in New York Supreme Court. Hexion seeks an order of specific performance from the court that calls on the banks to fund the $15.4 billion of debt required by the merger and related refinancings. Hexion claims the banks do not have financing outs based on market conditions or their own view of the combined company's solvency, a key dispute.

The requirement of Hexion to sue over the debt commitment might as well have been a tip-off that the banks would push back on funding at least that far, since they have shown they will drag out having to take financing losses as long as legally possible.

Can the banks drag the BCE deal past Dec. 11? The clumping tendency was disproven last week, when Blackstone Group LP closed its LBO of home healthcare company Apria Healthcare Group Inc. for $1.1 billion. Partly because Blackstone recently walked from its purchase of Alliance Data Systems Inc., the buyout traded at a gross spread of $7, or 50%, the day before the close.

Does this mean that treating a strategic chemical deal, such as Rohm and Haas Co.'s acquisition by Dow Chemical Co., the same as a beer deal, namely, Anheuser-Busch Cos.' merger with InBev SA, makes sense, regardless of the credit crisis? Both seem to trade poorly or well depending on the overall markets, even though beer and chemicals do not necessary slavishly mirror those economic patterns. Anheuser's Bud and Rohm & Haas' Amberlyst don't mix.