BCE Buyout Being Read Its Last Rites

NEW YORK (Reuters) – The biggest leveraged buyout boom in history was close to being read its last rites on Wednesday as the largest such deal was on the verge of collapse.

The likely death of the C$34.8 billion (US$28.3 billion) leveraged buyout of BCE Inc. was seen by outsiders as a relief for banks and buyers that arranged the transaction when credit was easy and the economy looked strong.

The deal stood near collapse Wednesday after accountants ruled the company that would emerge would fail a solvency test because of its huge debt load.

“It’s the last of the big buyouts on which the banks are going to realize significant losses if they fund,” said Joel Greenberg, partner and co-chair of law firm Kaye Scholer LLP’s corporate and finance department.

Wall Street banks have suffered billions of dollars in losses on financing leveraged buyouts deals reached during the private equity boom of 2006-2007.

Moreover, the private equity industry has had its reputation sullied by a slew of leveraged buyout deals that collapsed. The list includes audio equipment maker Harman International Industries Inc (HAR.N: Quote, Profile, Research, Stock Buzz), equipment renter United Rentals Inc (URI.N: Quote, Profile, Research, Stock Buzz) student lender Sallie Mae, formally known as SLM Corp (SLM.N: Quote, Profile, Research, Stock Buzz) and Penn National Gaming Inc (PENN.O: Quote, Profile, Research, Stock Buzz).

Another one remains unsteady — the buyout of Huntsman Corp (HUN.N: Quote, Profile, Research, Stock Buzz) by a unit of private equity firm Apollo Management. That deal has stalled in the courts as Apollo has been unable to wriggle out of its commitment.

BCE was breathtakingly large — about the size of the gross domestic product of Kenya — and agreed upon just before the bubble broke in June 2007.

The relief was palpable in the markets on Wednesday. Shares of Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) — which was on the hook to finance a large part of the deal, according to a source familiar with the situation — soared 16 percent.

Citigroup was one of the four banks that agreed to provide total financing of $34.35 billion, including a $11.3 billion bridge loan facility, according to data from Dealogic.

For the banks, the result would be the “‘easy out’ that they dreamed of, but never thought they’d get,” said the global head of investment banking at a U.S. bank, who declined to be named because he was not authorized to speak with the media.

BCE is a large part of the overhang in the leveraged loan market. There are $72.9 billion in leveraged loans that still need to be sold, according to Reuters LPC. BCE accounts for $23.05 billion.

The average bid on the most actively traded leveraged loans has sunk to around 67 cents on the dollar, according to Reuters LPC. At the beginning of the year it was around 95 cents.

The collapse of the deal also won’t be devastating news for the private equity buyers, said one senior mergers and acquisitions lawyer who declined to be named.

“Private equity buyers are thanking their lucky stars for every deal they didn’t do in the 2006 cycle, but it’s hard to look at any as happy souls,” the lawyer said. “If you got out, it is just one less transaction.”

The lawyer argued that there’s an asymmetric risk taken between the buyers and the companies being bought in a leveraged buyout deal. The private equity firms typically risk paying a fee of about 3 percent of the deal value if it collapses.

“By contrast, the jilted company faces huge downside risk to its business and reputation,” if a deal falls apart, the lawyer said.

Perhaps the only people who may have won on this deal are the arbitrage traders who bet on various outcomes — if they chose the right one.

“There are very few people enjoying these economic times,” said Jack Bodner, partner at law firm Covington & Burling.

By Megan Davies
(Additional reporting by Jessica Hall in Philadelphia; editing by Jeffrey Benkoe)