BCE Breakdown Update

NEW YORK/TORONTO (Reuters) – The C$34.8 billion ($28.3 billion) leveraged buyout of BCE Inc (BCE.TO: Quote, Profile, Research, Stock Buzz)(BCE.N: Quote, Profile, Research, Stock Buzz), Canada’s biggest telecommunications company, ended in collapse on Thursday, setting the stage for a fight between the company and its buyers over the deal’s C$1.2 billion breakup fee.

The derailment was widely expected after BCE said late last month that its accountants, KPMG, had concluded that the company that would emerge from the buyout would fail a solvency test because of its huge debt load.

The purchase required a positive solvency ruling from KPMG as a condition for closing, which was slated for Thursday. KPMG did not deliver a positive opinion, leading the deal to fail.

The crumbling of the takeover, which would have been the world’s largest leveraged buyout, is the latest in a string of buyouts that have fallen amid the deep freeze in credit markets and the global economic slowdown.

BCE confirmed the buyout would not proceed and said it would demand a C$1.2 billion breakup fee from the buyers, a group of private-equity firms led by the Ontario Teachers’ Pension Plan. The buyers prematurely delivered their notice to terminate, Montreal-based BCE said.

The buyers, meanwhile, said it was “very clear” that neither party owes a termination fee to the other.

“It is most unfortunate that BCE is threatening litigation over the failure of a mutual closing condition that the company insisted be included in the original acquisition agreement,” the buyers said in a statement.

“Should BCE commence such baseless litigation, we are confident that it would not succeed.”

The conflicting views on the break fee set the stage for a fight that could either end up in court or result in a settlement, said Troy Crandall, an analyst at MacDougall, MacDougall & MacTier.


About 18 months ago, BCE struck an agreement to be bought by Teachers, along with U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity, at C$42.75 a share in cash, and be taken private.

However, the stock has traded around C$23 on the Toronto Stock Exchange of late, a sign of investor doubt about the buyout. KPMG’s opinion on solvency added to investor concerns that the deal would be delayed, repriced or ultimately abandoned because of tight capital markets.

The market widely expected the deal’s collapse, but BCE shares still fell on the Toronto Stock Exchange, shedding nearly 6 percent before rebounding to C$22.43 by early afternoon, for a loss of 59 Canadian cents or 2.6 percent.

BCE said Thursday that with the buyout dead, it will reinstate its suspended common share dividend and buy back an unspecified amount of stock. Both moves were expected by analysts. Before suspending dividends, BCE paid out an annualized C$1.46 a share.

“It was reassuring that management’s coming from the same point of view as analysts had expected, where it looks like they are committed to reinstating the dividend and they are committed to doing share buybacks,” Crandall said.

“I see that as promising.”

Barry Allan, founding partner of Marret Asset Management, said that, at minimum, he expects the dividend to come back to the pre-suspension level. This could also be accompanied by a special payout to investors, he added.

As for the share buyback, it is likely to be “somewhat more symbolic than meaningful,” said Allan, whose firm holds both BCE stock and bonds. “They certainly do have needs for a lot of the cash that they have.”


Wall Street banks have suffered billions of dollars in losses on financing leveraged buyouts deals reached during the private equity boom of 2006-07.

The banks that were underwriting the buyout were Citigroup (C.N: Quote, Profile, Research, Stock Buzz), Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) and Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz), which collectively agreed to provide financing of $34.35 billion.

In a statement on Thursday, they said that with the deal dead, their financing obligations were also terminated.

“The banks are not in a position to comment on any dispute between BCE and the purchaser,” they added.

Analysts had already speculated the end of the deal could be a relief for the buyers, who had agreed to the buyout in far better economic times.

However, the bankers who advised the company and the purchasers could lose out on some of their fees, which are typically paid on completion of a deal.

Advisers to BCE were to earn an estimated $68.27 million in target fees. Advisers to the consortium buying BCE were to earn $61.18 million in estimated fees.

By Megan Davies and Wojtek Dabrowski

($1=$1.23 Canadian) (Editing by Rob Wilson)