Calling it off

When BCE Inc. held its shareholders meeting last week, four directors, including chairman Richard Currie, did not stand for re-election. Their decision followed the Dec. 11 collapse of the Canadian telecom's C$51.7 billion ($41.8 billion) buyout by Ontario Teachers' Pension Plan, Providence Equity Partners Inc. and Madison Dearborn Partners LLC.

Currie said the failure of the BCE buyout was disappointing to shareholders, but that Bell Canada's balance sheet and cash flow positioned it well. BCE began buying back 5% of its shares. But the BCE board did fumble its buyout when it allowed sponsors and lenders what amounted to a call option on the Montreal company.

The deal began as an auction in 2007. Teachers' and Providence had an edge over Kohlberg Kravis Roberts & Co. because of Canadian rules on telecom ownership limits. And the pair prevailed over Telus Corp. because of competition issues.

Before an intended second quarter close, Bell Canada bondholders and the BCE board faced off over the fairness of the buyout, given the premium paid to equity holders versus the hit bondholders might absorb from increased leverage. A lower court ruled against the bondholders but was overturned. The issue turned on an interpretation of a Canadian bankruptcy case that the appellate court could apply to the question of how boards should weigh interests other than shareholders in a buyout. That ruling would have made the deal illegal, but the Canadian Supreme Court overturned it in June.

That hurdle cleared, the deal was set to close as long as lenders, already troubled in June 2008, showed up at the funding. The sponsors were putting up $7.76 billion in equity and had a commitment letter from Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland Group plc and Toronto-Dominion Bank for $34 billion of debt. The merger was not conditioned on financing.

Talks began during a 20-day debt marketing period that resulted in early July with an agreement to postpone funding to no later than Dec. 11 without reducing the C$42.75 per share deal price. The resolution suggested that lenders thought credit markets might improve by fall and they could fund the deal without taking as big a hit. It also represented a shift from the recently repriced buyout of Clear Channel Communications Inc. In that deal, banks balked at funding and conflict between sponsors, lenders and Clear Channel ended with a price reduction. In BCE, there was concern that banks would want out of their commitment and sponsors might let them go.

The BCE merger agreement was thought to have better seller protection than the Clear Channel contract, which got done because sponsors fought for it. BCE's bank talks allowed lenders five months to fund the deal but required them to execute definite credit documents in July and boosted the reverse break fee from $1 billion to $1.2 billion.

Then the credit crunch tightened after Lehman Brothers Holdings Inc. fell and the assault on merger contracts intensified. Just as the BCE and Clear Channel deals seemed to be reborn, the buyout of Huntsman Corp. by Hexion Specialty Chemicals Inc. crumbled. The Huntsman contract allowed it to seek specific performance. But wrangling over the deal lasted beyond the November termination of the debt commitment letter and the banks convinced a New York court to allow their rejection of an opinion that the combined companies would be solvent.

In December the solvency card was played again with BCE. Unlike Clear Channel, the deal no longer had sponsor support, and banks wanted out. Although the deal had a definitive credit agreement, KPMG LLP had to provide a solvency opinion much like the one it provided in July. That opinion has not been made public, but KPMG said it could no longer be met. The sponsors terminated the agreement claiming no fee was due. BCE sued in Quebec demanding a termination fee.

That suit awaits scheduling. This month BCE raised its reinstated dividend by 5% and said it could finance operations and meet pension and debt obligations for two years with over $3 billion in cash and strong cash flow. BCE shares, worth C$42.75 in the June 2007 buyout, traded recently at C$25.80.

In the end, BCE holds two distinctions: It was once the biggest buyout ever and it was another deal that showed just how creative breaking up can be.