BCE Leveraged Buyout May Fall Apart Over Insolvency

BCE Leveraged Buyout May Fall Apart Over Insolvency

Nov. 26 (Bloomberg) -- BCE Inc., the Canadian phone carrier going private in a leveraged buyout, signaled the C$52 billion ($42 billion) takeover may unravel because the debt might be too much for the company to pay off as the economy sinks.

The stock fell 34 percent, erasing C$10.6 billion in market value, after auditor KPMG said Bell Canada parent BCE wouldn’t meet solvency standards set in the acquisition agreement with a group led by Ontario Teachers’ Pension Plan. The deal won’t close Dec. 11 unless KPMG changes its opinion, BCE said today.

The failure of the transaction, the second-biggest leveraged buyout, would leave BCE a public company, forcing Chief Executive Officer George Cope to answer to shareholders as he seeks to revive sales growth. The stock was already trading 20 percent below the offer price on concern that the seizure of credit markets and a global recession would lead the buyers or their bankers to back out.

“In the short term it spells agony to individual shareholders,” said Michael Smedley, who helps manage about $1.2 billion at Morgan Meighen & Associates in Toronto, which owns BCE shares. “In the long term, the company can progress under its current capable management.”

BCE dropped C$13.10 to C$25.25 in Toronto Stock Exchange trading. Ontario Teachers and its partners have offered C$42.75.

Citigroup Funding

The deal’s collapse would be a boon to Citigroup Inc. and other lenders, helping them avoid selling 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 about $34 billion in funding for the transaction.

Separately, BHP Billiton Ltd. dropped its yearlong pursuit of mining company Rio Tinto Group yesterday. The $66 billion deal, which would have been the biggest hostile takeover, fell victim to falling commodities prices and the credit market squeeze, BHP Chief Executive Officer Marius Kloppers said.

The average high-yield, high-risk loan is trading at about 66.6 cents on the dollar, just shy of the record, according to Standard & Poor’s LCD. Prices have plummeted almost 9 cents since Nov. 6 and 28.3 cents this year as investors in the debt have been forced to liquidate funds.

“That’s got to be very welcome news,” said Sean Ryan, an analyst at Sterne, Agee & Leach Inc. in New York. “It would be a good day for Citigroup if they got out of a dangerous commitment that large. They could use a few more.”

Sales Stagnate

If completed, the debt-funded buyout would trail only KKR & Co.’s $43.2 billion takeover of TXU Corp. last year. BCE’s predecessors traded as early as 1905, making it one of Canada’s oldest public companies.

Sales have stagnated for four straight quarters, contributing to falling profit. BCE is firing workers and selling property to compensate for declining landline customers, losing 72,000 in the last quarter.

KPMG’s analysis must determine that the “fair saleable value” of BCE’s assets exceed the liabilities, according to the BCE merger agreement. The 37 percent decline in the Standard & Poor’s 500 Index in the past year can only have made KPMG’s job more difficult, said David Bart of RSM McGladrey Inc., a Bloomington, Minnesota based accounting and consulting firm.

Toronto-Dominion

KPMG determined that BCE would be solvent under its current capital structure, according to a statement today. Last year, Ontario Teachers agreed to buy BCE along with Providence Equity Partners Inc. and Madison Dearborn Partners LLC. Teachers’, also BCE’s largest shareholder, said today that it “will continue to fulfill its obligations under the terms of the agreement.”

Toronto-Dominion plans to keep working toward the Dec. 11 closing date, said spokesman Simon Townsend. Representatives at Citigroup and Deutsche Bank declined to comment, while representatives at Royal Bank of Scotland didn’t immediately respond to a request for comment.

At least $55 billion of buyouts have fallen apart since last year after the collapse of the U.S. subprime-mortgage market drove up borrowing costs. They include deals for SLM Corp., the student lender known as Sallie Mae, and Penn National Gaming Inc.

“The chances of any deal getting done are very low now,” said Sachin Shah, a merger arbitrage analyst with ICAP Corporates LLC in Jersey City, New Jersey.

Companies selling themselves to leveraged buyout firms typically ask for a solvency opinion to avoid the risk of lawsuits from creditors in case the firm goes bankrupt later, said Richard Ponski, who’s been giving solvency opinions for 25 years at Cambridge Partners & Associates in Palatine, Illinois.

Hedge Fund Bets

Hedge-fund managers snapped up BCE shares in the third quarter in an effort to profit if the LBO was completed at its original price, according to filings with the U.S. Securities and Exchange Commission.

John Paulson’s New York-based Paulson & Co. bought 5.5 million shares valued at $192 million as of Sept. 30, while David Shaw’s D.E. Shaw & Co., also based in New York, held $180 million of the stock. Other buyers included SAC Capital Advisors LLC and Highbridge Capital Management LLC.

Some acquirers have tried to use insolvency opinions to back out of deals. Hexion Specialty Chemicals Inc., a unit of New York-based buyout firm Apollo Management LP, has traded lawsuits since June with Huntsman Corp., which it agreed to buy for $6.5 billion in 2007.

Legal Fights

Hexion sued Huntsman on June 18 in Delaware Chancery Court in Wilmington, arguing the combined company would be insolvent and that its lenders were leery of financing the deal.

Huntsman, based in Salt Lake City, separately sued Apollo and partners Leon Black and Joshua Harris for more than $3 billion in Texas state court, claiming they wrongfully interfered with an earlier bid for the chemicals maker.

Delaware Chancery Court Judge Stephen Lamb on Sept. 29 agreed with Huntsman that a slump in chemical markets didn’t give Hexion the grounds to terminate the deal and ordered the company to honor the accord.

Credit Suisse Group AG and Deutsche Bank AG, lenders on the buyout, then notified the companies on Oct. 27 that they wouldn’t fund the deal. Hexion sued two days later in New York state court.

A trial is scheduled to begin Jan. 8 in the New York case.

BLOOMBERG