The stunning decision by Quebec's Court of Appeal to block the biggest takeover in Canadian history has left many BCE shareholders wondering if the deal will go ahead, be delayed, face some major reconstructive surgery, or collapse altogether.
Here's a quick review of what's at stake and some of the key questions the court ruling has raised:
What are the details of the deal as originally announced?
A consortium led by the Ontario Teachers' Pension Plan announced on June 30, 2007, that it had struck a deal to acquire BCE Inc. Other partners in the buyout group include U.S. private equity firms Providence Equity Partners Inc., Madison Dearborn Partners, and Merrill Lynch Global Private Equity.
The head offices of BCE Inc. in downtown Montreal are seen here. On May 21, the Quebec Court of Appeal ruled to uphold a bondholder appeal against the biggest takeover in Canadian history. (Ryan Remiorz/Canadian Press) The all-cash transaction would give BCE shareholders $42.75 a share in cash for each of their shares. That valued the deal at $51.7 billion, including debt.
What's behind this latest snag?
While most BCE shareholders loved the premium they would get from the takeover — they approved it by a 97 per cent margin last September — the bondholders did not. And they are a powerful group made up of some major investment managers, pension funds, and insurance companies — including TD Asset Management, CIBC Asset Management, Sun Life Financial, the Manitoba Civil Service Superannuation Board, the Alberta Finance Department and Aegon Capital Management Inc./Transamerica.
These holders of Bell debentures went to court, arguing that the deal treated them unfairly because their interests weren't being protected. The transaction, as a leveraged buyout, would load $34 billion in new debt onto the company, thus hurting the market for their bonds, they said.
The Quebec Superior Court of Justice rejected the bondholders' argument in March, saying the bondholders were all sophisticated investors who should have known that a leveraged takeover of BCE might hurt their positions.
But the Quebec Court of Appeal overturned that ruling on May 21. The Appeal Court said "BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debenture holders." In other words, the court said BCE was wrong to just consider the benefits to shareholders but not the impact on Bell and its bondholders.
What happens now?
BCE said it will try to take the case to the Supreme Court of Canada, but the high court first has to agree to hear the case. BCE had planned to close the transaction by the end of June, but acknowledges now that that will depend on whether the Supreme Court agrees to hear its appeal and whether it agrees to hear it quickly. BCE has asked for an "expedited" hearing.
As for the biggest member of the investors group, the Ontario Teachers' Pension Plan says it "remains committed to the transaction." In an e-mail to CBCNews.ca, the pension plan said, "We are reviewing the ruling and evaluating our options with respect to the bondholder claims."
But after 11 months of waiting, some investors are wondering if the buyer syndicate might get frustrated by all the delays and uncertainties and walk away from it.
Analyst Greg MacDonald, who covers BCE for National Bank Financial, sees that as one of three "feasible" scenarios:
The BCE deal has been the object of serious rumour-mongering and uncertainty in the financial markets for many months because it requires so much debt financing. Borrowing billions of dollars wasn't a problem when the deal was struck last June. But the credit crunch that began roiling markets just two months later made some investors wonder if the banks would try to renegotiate.
BCE facts
Owns:
2007 net income: $4.1 billion
Employees: 54,000
Shareholders: 600,000
That possibility has long kept BCE's stock price well below its $42.75 takeover price.
This isn't just idle worrying. As many as a dozen leveraged buyout deals have collapsed or been reworked since the credit crunch flared, as credit financing became much more difficult.
As recently as mid-May, the takeover of Clear Channel Communications in the U.S. was repriced eight per cent lower after the banks financing it balked at the initial financing terms. Several of those banks — Citibank, Deutsche Bank and Royal Bank of Scotland — are also funding the BCE takeover.
The New York Times reported May 18 that the banks were actively trying to rework the BCE deal, seeking "higher interest rates, tighter loan restrictions and stronger protections for the banks," it said.
Should you sell your BCE shares?
BCE shares are now trading at levels that many analysts say are closer to the fundamental value of BCE as a stand-alone company — in other words, as if no takeover deal was in place.
Brokerage firms that had previously said the deal would likely go through at the original $42.75-a-share price scrambled to revise their outlooks after the Quebec Appeal Court ruling.
UBS Securities downgraded the stock to a "sell"; National Bank Financial downgraded it to "underperform." Many other brokerages lowered their target prices to a range of $33 to $38 a share. One analyst, Joseph MacKay at Desjardins Securities, said the shares might dip below $30, making them a "buy" in his view.
A decision on whether to sell shares — or to jump in and buy now — depends on answers to key questions that may take some time to answer.
Will the Supreme Court agree to hear the case? If so, will it overturn the Appeal Court ruling? If the original deal survives those hurdles, will the banks win their battle to rework the terms? If so, will shareholders need to vote again?
Will BCE reach some kind of arrangement with bondholders? Will the buyout consortium get fed up and walk away? Will rival telecom company Telus try to launch its own takeover bid for BCE if the Teachers' deal collapses?
In the meantime, the market is clearly saying the chances of the biggest buyout in Canadian history being consummated as originally arranged are now very slim indeed.
The BCE takeover
Here's a quick review of what's at stake and some of the key questions the court ruling has raised:
What are the details of the deal as originally announced?
A consortium led by the Ontario Teachers' Pension Plan announced on June 30, 2007, that it had struck a deal to acquire BCE Inc. Other partners in the buyout group include U.S. private equity firms Providence Equity Partners Inc., Madison Dearborn Partners, and Merrill Lynch Global Private Equity.
The head offices of BCE Inc. in downtown Montreal are seen here. On May 21, the Quebec Court of Appeal ruled to uphold a bondholder appeal against the biggest takeover in Canadian history. (Ryan Remiorz/Canadian Press) The all-cash transaction would give BCE shareholders $42.75 a share in cash for each of their shares. That valued the deal at $51.7 billion, including debt.What's behind this latest snag?
While most BCE shareholders loved the premium they would get from the takeover — they approved it by a 97 per cent margin last September — the bondholders did not. And they are a powerful group made up of some major investment managers, pension funds, and insurance companies — including TD Asset Management, CIBC Asset Management, Sun Life Financial, the Manitoba Civil Service Superannuation Board, the Alberta Finance Department and Aegon Capital Management Inc./Transamerica.
These holders of Bell debentures went to court, arguing that the deal treated them unfairly because their interests weren't being protected. The transaction, as a leveraged buyout, would load $34 billion in new debt onto the company, thus hurting the market for their bonds, they said.
The Quebec Superior Court of Justice rejected the bondholders' argument in March, saying the bondholders were all sophisticated investors who should have known that a leveraged takeover of BCE might hurt their positions.
But the Quebec Court of Appeal overturned that ruling on May 21. The Appeal Court said "BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debenture holders." In other words, the court said BCE was wrong to just consider the benefits to shareholders but not the impact on Bell and its bondholders.
What happens now?
BCE said it will try to take the case to the Supreme Court of Canada, but the high court first has to agree to hear the case. BCE had planned to close the transaction by the end of June, but acknowledges now that that will depend on whether the Supreme Court agrees to hear its appeal and whether it agrees to hear it quickly. BCE has asked for an "expedited" hearing.
As for the biggest member of the investors group, the Ontario Teachers' Pension Plan says it "remains committed to the transaction." In an e-mail to CBCNews.ca, the pension plan said, "We are reviewing the ruling and evaluating our options with respect to the bondholder claims."
But after 11 months of waiting, some investors are wondering if the buyer syndicate might get frustrated by all the delays and uncertainties and walk away from it.
Analyst Greg MacDonald, who covers BCE for National Bank Financial, sees that as one of three "feasible" scenarios:
- The buyers try to salvage the deal by appealing to the Supreme Court, "which would likely take eight months or more to reach a verdict."
- The purchasers persuade BCE’s board to accept a "dramatic" price reduction.
- The purchasers decide to walk away from the deal after June 30, "after which they are no longer obligated to pay the break fee."
The BCE deal has been the object of serious rumour-mongering and uncertainty in the financial markets for many months because it requires so much debt financing. Borrowing billions of dollars wasn't a problem when the deal was struck last June. But the credit crunch that began roiling markets just two months later made some investors wonder if the banks would try to renegotiate.
BCE facts
Owns:
- 100% of Bell Canada
- 100% of Northwestel
- 50% of Virgin Mobile Canada
- 44% of Bell Aliant
- 15% of CTVglobemedia
2007 net income: $4.1 billion
Employees: 54,000
Shareholders: 600,000
That possibility has long kept BCE's stock price well below its $42.75 takeover price.
This isn't just idle worrying. As many as a dozen leveraged buyout deals have collapsed or been reworked since the credit crunch flared, as credit financing became much more difficult.
As recently as mid-May, the takeover of Clear Channel Communications in the U.S. was repriced eight per cent lower after the banks financing it balked at the initial financing terms. Several of those banks — Citibank, Deutsche Bank and Royal Bank of Scotland — are also funding the BCE takeover.
The New York Times reported May 18 that the banks were actively trying to rework the BCE deal, seeking "higher interest rates, tighter loan restrictions and stronger protections for the banks," it said.
Should you sell your BCE shares?
BCE shares are now trading at levels that many analysts say are closer to the fundamental value of BCE as a stand-alone company — in other words, as if no takeover deal was in place.
Brokerage firms that had previously said the deal would likely go through at the original $42.75-a-share price scrambled to revise their outlooks after the Quebec Appeal Court ruling.
UBS Securities downgraded the stock to a "sell"; National Bank Financial downgraded it to "underperform." Many other brokerages lowered their target prices to a range of $33 to $38 a share. One analyst, Joseph MacKay at Desjardins Securities, said the shares might dip below $30, making them a "buy" in his view.
A decision on whether to sell shares — or to jump in and buy now — depends on answers to key questions that may take some time to answer.
Will the Supreme Court agree to hear the case? If so, will it overturn the Appeal Court ruling? If the original deal survives those hurdles, will the banks win their battle to rework the terms? If so, will shareholders need to vote again?
Will BCE reach some kind of arrangement with bondholders? Will the buyout consortium get fed up and walk away? Will rival telecom company Telus try to launch its own takeover bid for BCE if the Teachers' deal collapses?
In the meantime, the market is clearly saying the chances of the biggest buyout in Canadian history being consummated as originally arranged are now very slim indeed.
The BCE takeover