BCE Deal Officially Busted

NEW YORK (Reuters) – The C$34.8 billion ($27.8 billion) buyout of Canada’s biggest telecoms company BCE Inc (BCE.TO: Quote, Profile, Research, Stock Buzz) (BCE.N: Quote, Profile, Research, Stock Buzz) collapsed on Thursday after the buyers said a key condition to the deal was not met.

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

BCE struck the C$42.75 a share cash deal to be bought by the Ontario Teachers’ Pension Plan, along with U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity nearly 18 months ago.

One of the conditions to closing the deal was receipt of a solvency opinion from a recognized valuation firm.

In a statement, the buyers said they terminated the agreement because KPMG had concluded that “a required test for the solvency opinion was not met”.

They said that under these circumstances “neither party owes a termination fee to the other”.

Under the agreement, the buyers are to pay a C$1.2 billion termination fee under certain conditions.

There has been speculation that there could be a battle over the break-up fee. One trader said on Wednesday that he thought it could end up in court.

BCE was not immediately available for comment.

The deal’s collapse means that the banks that agreed to finance the deal will be relieved of their obligations.

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

The banks underwriting the buyout are 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.

BCE has also been 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 recent figures from Reuters LPC. BCE accounts for $23.05 billion.

Outsiders have speculated a collapse could be a relief for the buyers, who agreed the deal in far better economic times. One investor in a fund that would have had exposure to BCE, who spoke on condition of anomymity, said on Wednesday that it was their preference for the deal not to go through at this point.

It is the latest in a slew of leveraged buyout deals that has fallen apart. 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, the buyout of Huntsman Corp (HUN.N: Quote, Profile, Research, Stock Buzz) by a unit of private equity firm Apollo Management, is uncertain.


On Monday it looked like the BCE buyout might have been revived when a source said BCE asked PricewaterhouseCoopers (PwC) to provide a second solvency opinion, but BCE later said PwC had not been hired to provide a solvency opinion.

Another recent attempt to find a solution was made by some of the purchasers, who floated the idea of a minority stake investment deal, a source familiar with the situation previously said. That was shelved after lack of interest from the banks contacted to finance it.

Under the terms of the original deal, Teachers Private Capital would have held a 52 percent stake in BCE, Providence 32 percent, Madison Dearborn 9 percent, and other Canadian investors 7 percent.

The bankers who advised the company and the purchasers could lose some of their fees. Typically, such fees are paid on completion of a deal.

Advisers to BCE — Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), BMO Capital Markets, RBC Capital Markets, Greenhill & Co and CIBC World Markets — were to earn an estimated $68.27 million in target adviser fees, according to data from Thomson Reuters and research firm Freeman & Co.

Advisers to the consortium buying BCE — Citi, Deutsche Bank, RBS, TD Securities and Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) — were to earn $61.18 million in estimated fees.

(Reporting by Megan Davies, editing by Will Waterman) ($1=1.26 Canadian)