Wednesday, November 26, 2008 5 comments ++[ CLICK TO COMMENT ]++

BCE deal collapses

It looks like the BCE deal has collapsed for an unexpected reason. The accounting firm KPMG claims that the BCE buyout does not meet solvency tests. Given the tight timing constraints (deal has to close by December 11th,) this probably seals the fate of the takeover.

Shares of telecommunications giant BCE Inc. plunged 40 per cent at the opening bell Wednesday after the company warned that its massive planned privatization is in jeopardy because it failed a preliminary solvency test conducted for its would-be purchasers, led by the Ontario Teachers' Pension Plan Board.

...

The rout followed a pre-opening announcement by the Montreal company that it has received a “preliminary view” from auditing firm KPMG that “based on current market conditions, its analysis to date and the amount of indebtedness involved,” it does not expect to be able to deliver an opinion on the closing date of Dec. 11 that BCE “would meet the solvency tests as defined in the definitive agreement.”

Unless this changes by that date, BCE warned, “the transaction is unlikely to proceed.”


Stock is off almost 40% and it remains to be seen what plan BCE will pursue. My plan was to hold this if it fails, rather than sell and take a loss as most professional arbitrageurs would, and I expect the stock to do limp along.

Andrew Willis of The Globe & Mail thinks that BCE's plan B will involve a big buyback and increasing the dividend:

But if the KPMG decision stands, and it likely will, Mr. Cope and his crew will quickly move to life without a buyout. The team, and the board, have prudently prepared for this day.

BCE is flush with cash after selling divisions such as Telesat and suspending quarterly dividends. A large portion of this money – anything up to $4-billion is easy to justify – can quickly be deployed on a share buyback. That can only boost the stock.

BCE can also reinstate its dividend, with a much higher payout rate than previously used. With investors desperate for income, this would be a popular move. One knock against the company under previous CEO Michael Sabia was a reluctance to boost the dividend – Mr. Sabia was cautious with cash after weathering a financial crisis. Mr. Cope can start winning back the market's affection by returning a healthy chunk of profit to BCE's owers.


I'm not sure if BCE will spend that much money buying back stock, especially given its weak position in the telecom market and potential future headwinds from a slowing economy. In any case, as Willis also points out, the real tough part comes afterwards. How will BCE compete in the tough telecom market?

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5 Response to BCE deal collapses

November 26, 2008 at 1:52 PM

one of the many reasons why I prefer to deal with mergers that are close to finishing. Anything before that contains too much risk.

sc
November 26, 2008 at 4:57 PM

I really thought you would have been more on top of this Siv. I expected it to close based on what I know of the financing and the buyer, so this caught me by the short and curlies.

November 26, 2008 at 5:26 PM

I was surprised but not necessarily because the deal fell through but because of the reason it failed. The accountants didn't think the company would be solvent after the deal, which is actually kind of shocking to me. I would have thought that the dealmakers would have built a foolproof deal given how much they are paid to do complete the deal but guess not.

I think there was always a chance of the deal failing due to financing so I was always concerned. I even thought of selling out recently with a small (8% or so) profit but chose against it. If Citigroup didn't get bailed out, the financing situation would have gone down to the wire.

It's dissapointing but that's the nature of risk arbitrage.

sc
November 27, 2008 at 9:20 PM

I'm just ribbing you. This is quite a bizarre call on the auditors side as the clause that hung the deal was that if they sell the assets they couldn't cover the liabilities. I'd say that is true of many, companies, and indeed many banks! My X-Files influenced brain half wonders if someone didn't payoff a couple audit partners to sway the opinion given the collapse since the deal was initiated.

November 28, 2008 at 10:04 AM

LOL Given how much the banks were on the hook for, paying off some accountants would be far cheaper. Your conspiracy theory may have some legs ;)

The weird thing is that the accounting opinion seems to have been put in place to placate the bondholders. The ironic thing is that the bondholders ended up suing the company anyway so whatever BCE did hurt the shareholders.

The way it ended is bizarre. But the way the deal was unfolding was bizarre almost from day one. Remember how it all started with Telus, the other bidder, suddenly dropping out of the bidding right before the deadline (they may have entered the bidding just to look at BCE's books so it's not clear.)

Overall, it does beg the question of the competence of BCE and its bankers. I just hope BCE didn't pay much to the dealmakers and their associates. I don't know how they could have put together a deal that implies the company would have been insolvent. For instance, imagine if the takeover did close. Does that mean BCE was possibly insolvent? What were the buyers thinking in that case? It's one thing for a distressed buyout, such as Chrysler, to fall apart due to tough times. But it's grossly incompetent for a buyout like BCE (if it had closed) to be insolvent.

It's certainly dissapointing to me and messes up my asset allocation plans. I was planning to re-deploy the capital into some junk bonds but now I have less money to invest.

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