BCE clears another hurdle to privatization

BCE Inc. has finally secured an agreement with a group of banks to provide funding for its takeover by a group of institutional investors lead by the Ontario Teachers’ Pension Plan.

Bell Canada’s parent company, which has been publicly traded for generations and traditionally favoured by individual investors, initially agreed to be taken private more than a year ago but the deal was initially fought by bond holders, whose efforts to thwart the deal were struck down by a Supreme Court of Canada ruling in favour of BCE June 20.

Then on Friday BCE announced its lenders, which include Citigroup Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland, and Toronto-Dominion Bank, “have delivered fully negotiated and executed credit documents for the purpose of funding the transaction …” for the Teachers’-led consortium to buy all shares of BCE.

The company expects the deal to close on or before Dec. 11, meaning the company would cease to be publicly-traded and would be owned by Teachers’ Private Capital (the Ontario teachers’ pension investment group, which is BCE’s largest shareholder), Providence Equity Partners Inc., Madison Dearborn Partners LLC, and Merrill Lynch Global Private Equity.

But perhaps more significantly, Bell Canada chief operating officer George Cope will replace Michael Sabia on July 11 as president CEO of parent Bell Canada Enterprises. Cope is a wireless veteran, having been president and CEO of Clearnet before it was bought by Telus Mobility. He was then president and CEO of that division.

Industry analysts immediately said that move should mean Bell will start to make vital, and expensive, restructuring and investment decisions it has been avoiding for some time.

“I would image that things are going to start happening sooner than Dec. 11,” said Amit Kaminer, an analyst with the SeaBaord Group telecommunications consultancy. Remember, he said, the reason Teachers is privatizing BCE is because it is impatient with the company’s pace of change. Presumably, after shaking up the company, it will bring BCE back to the stock market.

It’s been over a year since BCE Inc. management put the company up for auction and today’s inking of the deal with the banks. In that time competitors including Rogers Communications and Telus have eaten into Bell’s wireless and wireline market share, he said. “They need to catch up,” said Kaminer, but “the challenges ahead are numerous.”

They include shedding unprofitable products, deciding on whether to spend billions on bringing fibre to the home and businesses for IPTV and high speed Internet and converting the cellular network from CDMA to GSM. “I think the Bell postition in terms of products and marketing is weaker than their competitors in every dimension,” said Kaminer.

Eamon Hoey, a Toronto-based telecommunications consultant, also believes Cope will act quickly. “We should start to see some change rather rapidly,” Hoey said. “There’s no reason for him to wait … He’s had a year to do all the assessments and figure out what he needs to do, and, as of next week, he’ll have the baton.”

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Because the Teachers consortium agreed to buy the company for $42.75 per share, BCE would need more than $30 billion in loans to cover the cost of the deal, and analysts had speculated the lenders may have wanted more favourable terms than what was originally agreed to in June, 2007.

But BCE announced Friday it had “definitive financing” in place and the work is “largely done.”

The Supreme Court of Canada decision June 20 overturned a ruling by the Quebec Court of Appeal blocking the deal. That in turn resulted from a move by an hoc committee of existing BCE bondholders arguing a takeover would be unfair to them because the additional $30 billion in debt would harm the ratings of their bonds, thereby reducing their price on the open market. The ad hoc committee represented investors holding debentures originally purchased, in some cases, in 1976. Some debenture holders saw the market value of their securities drop by 23 per cent, and they argued the plan of arrangement originally inked in June, 2007 harmed them without providing any future benefit.

Although the Quebec Superior Court ruled in favour of Montreal-based BCE March 7, the bond holder committees successfully appealed that ruling to the Quebec Court of Appeal. After the appeal court overturned the lower court decision, BCE sought leave to appeal to the nation’s highest court, asking for an expedited hearing. The Supreme Court ruled in favour of BCE but has yet to issue its reasons for doing so.