BCE Plunges Most in 25 Years as Buyout in Jeopardy (Update4)

By Chris Fournier

May 22 (Bloomberg) — BCE Inc. plunged the most in 25 years in Toronto trading as investors bet the Canadian phone company’s record C$52 billion ($52.9 billion) leveraged buyout will collapse or be renegotiated at a lower price.

BCE fell 12 percent after bondholders won an unexpected court ruling yesterday, letting them challenge the buyout because BCE didn’t take their interests into account. BCE agreed to a C$42.75-a-share offer from a group led by the Ontario Teachers’ Pension Plan in June.

BCE would top the list of 62 LBOs worth a combined $174 billion announced last year that have been abandoned as borrowing costs more than tripled, according to data compiled by Bloomberg. BCE had expected to complete the buyout by next month.

“The probability of the deal closing at C$42.75 a share on June 30 is almost zero,” said Craig MacAdam, who helps manage about $3 billion as a portfolio manager at Aurion Capital in Toronto. “But there’s still room to maneuver. The deal is not completely dead yet. All the stakeholders will have to get back to the table and renegotiate.”

The bondholders, among them CIBC Global Asset Management Inc., say the acquisition would load Canada’s biggest phone company with debt, increasing the risk of a default. Teachers’ had planned to raise about C$34 billion in debt for the deal, according to regulatory filings.

Shareholders voted in September to accept the bid, whose equity value is more than C$34 billion and which includes C$16.9 billion in debt, preferred shares and minority interests. Montreal-based BCE and the buyers plan to appeal the decision by Quebec’s Court of Appeal to Canada’s Supreme Court.

`Now Defeated’

BCE dropped C$4.50 to C$32.62 by 4 p.m. in Toronto Stock Exchange trading. The decline was the biggest since 1983, when the company started listing as BCE instead of Bell Canada.

Credit-default swaps tied to BCE’s bonds, a gauge of the company’s creditworthiness, dropped the most on record as investors speculated the debt-financed buyout will collapse.

The contracts declined 280 basis points to 315 basis points, the lowest in eight months, according to London-based CMA Datavision. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Buyout firms have scrapped or renegotiated deals for SLM Corp., Clear Channel Communications Inc. and other companies since last year as banks scaled back credit after suffering record subprime mortgage losses.


Teachers’ partners in the BCE deal include Rhode Island- based Providence Equity Partners Inc. and Madison Dearborn Partners LLC of Chicago. The buyout unit of New York-based Merrill Lynch & Co. joined later.

“The decision effectively terminates the proposed transaction,” said Mark Meland, a lawyer at Montreal-based Fishman Flanz Meland Paquin, which is representing the bondholder group. “Unless the decision is overruled, the plan of arrangement is now defeated.”

“Our team is hunkered down reviewing the ruling and evaluating our options,” Teachers’ spokeswoman Deborah Allan said in a telephone interview. “We remain committed to this transaction.” Allan declined to comment on whether the investor group could walk away from the deal because of the ruling.

Representatives at Providence, Madison Dearborn and BCE didn’t immediately return phone calls seeking comment.


Toronto-Dominion Bank, one of the four principal lenders in the buyout, hasn’t changed its position and remains “supportive of the transaction,” spokeswoman Julia Koene said today in an e- mailed statement. Toronto-Dominion is Canada’s third-largest bank by assets.

UBS AG’s Jeffrey Fan today cut his rating on the stock to “sell” from “buy.” Fan said the stock probably will fall to a “fundamental value” of C$31, and set his new target price at C$33. Another possibility is that smaller rival Telus Corp. makes a bid, a combination that would face other hurdles, he said.

The effort by BCE to obtain the best value for shareholders “cannot be considered in isolation from other factors,” the chief justice of the appeals court wrote yesterday. The court’s decision came in a unanimous vote by the five judges.

A Quebec Superior Court judge had dismissed the bondholders’ claim in March, saying the acquisition terms were “fair and reasonable.” Yesterday’s decision returns the case to that court for the determination of costs.

The latest ruling “rewrites Canadian law relating to the duty of Canadian boards of directors to maximize value for shareholders,” Martine Turcotte, BCE’s chief legal officer, said in a statement.

BCE and the purchasers will apply for permission from the Supreme Court to appeal the decision. The court each year hears a limited number of appeals which it selects on the basis of “public importance,” according to its Web site. Most panels consist of seven to nine judges.

The court probably will hear the appeal, though even an expedited process may take 60 to 90 days, RBC Capital Markets analyst Jonathan Allen said.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
Last Updated: May 22, 2008 16:16 EDT