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    BCE’s LBO Fails, Sets Up Fight Over C$1.2 Billion Fee  

Crayton Harrison and Jason Kelly

    December 11, 2008  

Dec. 11 (Bloomberg) -- BCE Inc. is demanding a C$1.2 billion ($980 million) breakup fee after a group led by Ontario Teachers’ Pension Plan terminated its C$52 billion takeover, the biggest leveraged buyout to collapse.

BCE, Canada’s largest phone company, plans to repurchase shares and may reinstate its dividend after its stock fell to about C$16 billion less than the value of the offer it accepted in June 2007, it said today in a statement. The Teachers’ group abandoned their bid today after auditor KPMG said last month the transaction would leave the Montreal-based company insolvent.

The deal’s demise may force the two sides into court to fight over whether BCE, the parent of Bell Canada, is due the breakup payment. Failed buyout candidates including Huntsman Corp. have spent months in court trading lawsuits with their former suitors.

“Teachers’ would say this is obviously a condition that wasn’t filled,” Iain Grant, managing director of telecommunication consulting firm Seaboard Group in Montreal, said in an interview. “Bell, on the other hand, will make convincing arguments that they actually did a lot of work, it cost them lot of time and money and somebody should be made to pay.”

The takeover group said it doesn’t owe BCE a breakup payment because KPMG didn’t provide a clean bill of financial health, a condition required in the acquisition agreement. Ontario Teachers’ pursued BCE with U.S. private-equity firms Providence Equity Partners Inc., Madison Dearborn Partners LLC and the buyout unit of Merrill Lynch & Co.

Timing an Issue

BCE said it’s entitled to the termination fee because the buyers canceled the deal last night, before today’s deadline.

BCE’s shares have fallen by almost half since Teachers’ made its C$42.75-a-share bid. BCE dropped 99 cents, or 4.3 percent, to C$22.03 at 4 p.m. in Toronto. BCE didn’t specify the size of the buyback.

The stock fell 34 percent on Nov. 26 on concern that KPMG was unlikely to bless the deal because of the C$34 billion in bonds and loans needed to finance the purchase. The company hired PricewaterhouseCoopers LLP in an unsuccessful effort to persuade KPMG to change its opinion.

“It turned out to be more of a saga than a deal,” said Paul Schaye, managing partner of New York-based Chestnut Hill Partners, which helps private-equity firms find companies to buy.

More Dropped Deals

Failure of the BCE purchase brings the value of canceled LBOs since credit markets began seizing up to almost $100 billion. Financing for transactions evaporated after record subprime-mortgage defaults triggered a flight from debt investments including leveraged loans used to fund buyouts.

Buyouts that have fallen through include J.C. Flowers & Co.’s agreement to buy SLM Corp., the student lender known as Sallie Mae; casino operator Penn National Gaming Inc.’s deal with Fortress Investment Group LLC; and KKR’s plan to acquire Harman International Industries Inc.

The deal’s collapse is a boon to Citigroup Inc. and other lenders, helping them avoid selling loans into a market where debt used to fund LBOs is trading below face value. Citigroup, Deutsche Bank AG, Toronto-Dominion Bank and Royal Bank of Scotland Group Plc agreed to provide financing for the transaction. Based on current prices for leveraged loans, the banks faced a potential loss of at least C$10 billion had they been forced to fund the takeover.

Huntsman, Apollo

Some lenders are embroiled in other disputes over broken LBO. Hexion Specialty Chemicals Inc., a unit of New York-based buyout firm Apollo Management LP, has traded lawsuits since June with Huntsman, which it agreed to buy for $6.5 billion in 2007.

While a buyback and dividend are “prudent” because of the stock price drop, BCE also must consider using cash for investments, Grant said. Chief Executive Officer George Cope could opt to spend more on upgrading BCE’s phone networks and wireless business to keep rival Rogers Communications Inc. at bay.

BCE lost 72,000 home-phone lines last quarter as customers switched to wireless lines or to cable companies such as Rogers. BCE’s wireless unit, which makes up a quarter of sales, grew at less than half the rate of Rogers’s mobile unit.

“They have to get their strategy out to investors, because right now there are just so many questions,” said Troy Crandall, an analyst in Montreal with MacDougall, MacDougall & MacTier Inc., Canada’s oldest brokerage. “You have to balance growth versus shareholders’ immediate desire for the return of cash.”

Share Buyback

Without a buyout, BCE could use as much as 70 percent of its cash balance in a share buyback, with the rest funding investments in its networks, Crandall said. BCE had about C$2.66 billion in cash at the end of last quarter. The company may also reinstate and raise its dividend, which amounted to C$1.46 a share annually before the company discontinued it in June.

With the global economic crisis keeping credit markets tight, Cope, who became CEO in July, should use cash to reduce debt, said Kathleen Gaffney, co-manager of the Loomis Sayles Bond Fund in Boston, which holds BCE bonds.

Cope risks a higher rate of customer losses to cable companies such as Rogers and wireless service providers such as Telus Corp. if he doesn’t improve BCE’s customer service and beef up Internet speeds, said Brownlee Thomas, an analyst with Forrester Research Inc. in Montreal.

BCE must also decide whether to invest in fiber-optic lines for its home customers and whether it should provide Internet- based TV service, Crandall said.


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