BCE Buyers Cancel LBO Agreement, May Face Fee Fight

BCE Buyers Cancel LBO Agreement, May Face Fee Fight

Dec. 11 (Bloomberg) -- The C$52 billion ($41 billion) takeover of BCE Inc. was terminated by Ontario Teachers’ Pension Plan and a group of U.S. private-equity firms, setting up a potential fight over breakup fees.

The acquisition, set to close today, was called off because auditor KPMG LLC determined it would leave Canada’s largest phone company insolvent, the buyers said in a statement. The transaction, which would have been the second-largest leveraged buyout after the sale of TXU Corp., required KPMG to give the company a clean bill of financial health to close.

“Under these circumstances neither party owes a termination fee to the other,” the buyers, who also include Madison Dearborn Partners LLC, Providence Equity Partners Inc. and Merrill Lynch & Co. said in today’s statement.

BCE may disagree. The Montreal-based company may claim it is owed a C$1.2 billion breakup fee if the deal collapses, Mark Langton, a company spokesman, said yesterday before Ontario Teachers’ and its partners pulled out. BCE’s lawyers are preparing for all contingencies, he said.

“I’d say the truck has gas in it, but hasn’t started up yet,” Langton said. He declined to comment today on the buyers’ termination of the deal.

Ontario Teachers’ and the buyout firms agreed in June 2007 to pay C$42.75 a share to take BCE private. The stock closed at C$23.02 yesterday in Toronto, 46 percent less than the offer price, a C$16 billion difference in market value for BCE shareholders.

Solvency Issue

The stock fell 34 percent on Nov. 26 on news that KPMG likely wouldn’t bless the deal because of the C$34 billion of bonds and loans needed to finance the purchase. The company hired PricewaterhouseCoopers LLP to help persuade KPMG to change its opinion.

“It turned out to be more 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.

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 fell 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.

Bankers Relief

The deal’s collapse may 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 financing for the transaction.

Based on current prices for leveraged loans and high-yield bonds typically used to finance LBOs, a collapse of the transaction would allow the banks to avert at least C$10 billion in losses on the loans.

Teachers and the buyout firms agreed to buy BCE as the record LBO boom that spanned 2006 and the first part of 2007 was nearing its end. A year later, under pressure from the banks skittish about selling the debt they committed to fund, BCE and the buyers agreed to a reworked deal.

LBO Era’s End

The close of the transaction was pushed back until December, giving the banks more time to find investors to buy the debt. BCE also agreed not to pay its common shareholder dividend, effectively cutting the price of the purchase by about C$900 million.

BCE’s 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.

The BCE deal was the last vestige of a record $1.42 trillion of LBOs in 2006 and 2007. Announced private-equity deals this year have fallen more than 70 percent as financing remains elusive.

Wall Street banks, the main source of debt funding for private-equity deals, have pulled back on commitments as global losses by lenders reached almost $1 trillion since the credit crunch set in. Financiers including Lehman Brothers Holdings Inc., Bear Stearns Cos. and Merrill Lynch & Co. were among the firms that went out of business or were swallowed up at discount prices, eliminating some funding avenues.

“BCE is the last gasp of an era,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “It was conceived at the height of the private equity wave, which has crashed.”

Other acquirers have used insolvency opinions to get 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.

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