Nov
27
It was only Monday that BCE stock rocketed almost 10% on news that CitiGroup would be the recipient of US$20 billion in bailout funds from the U.S. Treasury.
As the lead lender on the deal to acquire BCE, the smart thinking was that the massive leveraged buyout of BCE spearheaded by Ontario Teachers’ Pension Plan was far more likely to go ahead as a result of the bailout, so investors piled in.
But such is life in these tempestuous times that those most recent BCE investors have been seriously burned by a little-discussed clause in the contract—the deal had to pass an accountant-administered solvency test, which BCE couldn’t hurdle—and that has now likely scuttled the deal.
It’s a remarkable turn of events for what has been called the largest private equity deal in history and come to define the 2005-06 LBO boom in a way the RJR Nabisco acquisition by private equity giant KKR did in the LBO boom of the late ’80s.
Over its some 20-month long journey the BCE acquisition has wound through a Canadian court challenge and one of the worst downturns in the post-war history of markets. That it might go down on an obscure clause few were talking about (and one that seemingly came out of nowhere) seems almost appropriate in these desperate times. Who knows what to think about anything these days?
The acquisition has not officially been deep-sixed, but it looks like the banks will use this as an excuse to walk away from it. So, what does it mean that this deal seems to be done? Well, the Canadian dollar seemed to take a hit on the news, and Canadian investors in this long-time “widows and orphans” stock have been hammered, piling some more bad news on what is now a massive heap of negative sentiment in markets. But on the bright side, should it fail the banks and pension funds financing the deal—organizations already hurting from the meltdown in financial services—can walk away from a deal they weren’t that interested in anymore. (TD stock was up on the news).
As well, the new CEO of BCE, George Cope, can go ahead and restructure the company as he sees fit, without all the paper shuffling with Teachers’. With lots of cash on the books, BCE may actually pay out some nice dividends now
that the deal has fallen through.
But what is most interesting is that speculation has already picked up about a possible merger with BCE. The story that just won’t die is meandering into a whole new chapter.
John Henderson, telecom analyst with Scotia Capital has just released a report on that possible merger and suggests such a deal would result in a “32% value creation” for both sides and $10 billion in merger synergies.
A merger would also help fund growing pension obligations and would lead to the creation of a “Canadian Champion.” And for all these reasons and others, Henderson assigns a “60%-70%” odds that the Competition Bureau will approve of Belus.
All-in, Henderson is setting a $30 target on BCE shares and $44 for Telus.
