BCE Court Case is a Pit Stop, Not a Destination

The Supreme Court of Canada yesterday said that it would hear BCE’s appeal of a lower court ruling that threatens to derail its C$34.8 billion buyout. Oral arguments will be made the morning of June 17, at which point the three-judge panel can issue a ruling or push for a fuller process. Conventional wisdom is that BCE will ultimately prevail, as evidenced by BCE shares rising more than 2% on news that the Supremes would take a listen.

I’m comfortable accepting that premise, but it leads us to a much thornier question: What next?

All of this court talk seems to have obscured the fact that Wall Street has no intention of funding this deal under the agreed-upon terms. As a partner at one of the participating private equity firms told me last week: “There is still a very real possibility that this will all blow up.”

The buyers and lenders were in the midst of negotiations when the lower court made its surprise ruling – which held that the proposed buyout treated BCE bondholders unfairly – but things have since ground to a virtual halt. The banks expect to lose money on this deal even if they get more favorable terms, so are keeping their fingers crossed that the deal blood will land on judicial robes instead of on Brooks Bros. blazers. If that fails, then they’ll fight.

What could prove interesting, however, is that their fight may be more with the BCE board than with the buyers. Specifically, BCE’s directors need to accept that they’re not getting C$42.75 per share. It may only take a short dip to C$41, but it’s going down or the deal isn’t getting done. That’s the word I hear from both the buyers and lenders, who also have some concerns about how BCE shareholders will react when they hear the final news (will they follow the bondholders’ lead, and rebel)?

It’s worth noting that Clear Channel conceded the price point quickly, but there are a few significant differences between the BCE and Clear Channel situations (leaving aside the current legal contretemps):

  1. Clear Channel could pursue a jury remedy against its lenders in Texas, which is known for highly-punitive awards. BCE doesn’t have that option (Quebec is a wild-card, but not that wild).
  2. The Clear Channel settlement was facilitated by third-party hedge funds that had agreed to purchase the deal’s “stub equity.” The BCE buyout doesn’t have big stub equity, so it lacks the corresponding facilitators.
  3. The Clear Channel buyers – particularly Thomas H. Lee Partners – put themselves in a bit of a pickle, by loudly proclaiming how much they wanted to get the deal done. We’ve heard a bit of that from lead sponsor Ontario Teachers’ Pension Plan, but not via regular appearances on CNBC (maybe on CBN, but I don’t get that here in Boston). The rest of the consortium — Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity – has been mostly silent. In other words, they’d have less egg on their face if they walked away.

For the record, I still think BCE gets done. But a Supreme Court ruling in the company’s favor begins more things than it ends.