Thursday, May 22, 2008 1 comments ++[ CLICK TO COMMENT ]++

Court Rules Against BCE Deal

In a highly surprising move, the Quebec court ruled against the BCE deal arguing that bondholder interests weren't taken into account:

BCE Inc. shares plunged Thursday morning following a shocking Quebec court ruling Wednesday that threatens the company's planned $35-billion sale to a group led by the Ontario Teachers' Pension Plan. But several analysts suggested the company may be able to reach a financial settlement with balky bondholders who oppose the deal – for somewhere between $500-million and $1.3-billion.

As well, the head of the Canada Pension Plan Investment Board expressed concern about the precedent-setting court-ruling and its implications for Canadian capital markets.

I didn't expect the court to rule against the deal, after the lower court ruled in favour of the deal. I think it sets a bad precedent when bondholders without any conditions in their bonds can block shareholder actions. I suspect the ruling will be overturned at the Supreme Court (it it goes there) but it'll be too late and miss the deal deadline (so BCE may not pursue further).

One of the bondholders that sued BCE appeared to leave little hope the takeover could be salvaged after the court ruling Wednesday. "It's hard to imagine how it could be resurrected — the deal appears dead," said Hanif Mamdani, head of corporate bonds at Vancouver-based Phillips, Hager & North Investment Management Ltd.

However, analyst Jonathan Allen at RBC Capital Markets suggested in a note to clients Thursday that BCE might still be able to bring the bondholders on side at a cost of roughly $1.3-billion, financed by slightly reducing the $42.75-a-share offer.

“BCE could settle with bondholders through a tender offer at a price that puts bondholders back to a pre-transaction price ... potentially raising the proceeds through a lower equity price (roughly $1.64/share or a final price of $41.11),” said Mr. Allen, who calculates the face value of the affected BCE bonds at $5.1-billion.

That price would still be better than Wednesday's closing price of $37.12 and well above Mr. Allen's estimate of BCE's net asset value of $30 a share.

He noted, however, that lowering the offer price would require a new shareholder vote, which would likely take about 60 days, pushing potential closing beyond the current June 30 deadline.

The stock is down sharply, to pre-takeover levels. During my initial analysis of this M&A, my guess was a price of $31 if the deal failed and that turned out to be a good guess. As the analyst suggests above, BCE will have to re-negotiate a lower deal or call the whole thing off. Since only around $5 billion of bonds seem to be blocking the deal, BCE can easily buy out the bonds (however, someone should still challenge this in court because it is a terrible precedent IMO).

As far as I'm concerned, the deal is dead. The time frame is too short to do anything and given the liquidity problems at the banks, they will try to avoid re-negotiating the loans. This ruling probably saves the banks since successful completion of the deal likely meant billions in mark-to-market losses for the bankers. This is a failed risk arbitrage but I'll hold as I outlined before taking a position.

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1 Response to Court Rules Against BCE Deal

May 22, 2008 at 11:28 PM

I see BCE has asked for the Supreme Court of Canada to expedite its ruling. But I also read that the Canadian S.C. normally takes a long time in making rulings (not that that's a bad thing in most cases).

In the meantime, BCE pays a good dividend. So that might make the deal falling through less painful.

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