Bell deal may still be on hold

Nothing in law today stands in the way of the $35 billion leveraged buyout of BCE Inc. now that the Supreme Court of Canada has ruled the company didn’t harm Bell Canada bondholders in shaping its deal with a consortium lead by the Ontario Teachers Pension Plan.

The operative word is “today.”

There are doubts the privatization will be sealed by Teachers’ and BCE’s self-imposed June 30 deadline.

The banks funding the buyout, including Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland, and Toronto-Dominion Bank, are apparently trying to renegotiate terms of the deal because the markets are shakier than they were when it was negotiated a year ago.

The Teachers group wants to take BCE private so it can sort out the company’s problems away from daily shareholder pressure. Presumably it would then take a newly-refreshed BCE back to the stock market. The group will pay $42.75 for BCE’s stock it doesn’t already own, working out to $51.7 billion, including $16.9 billion of debt. Some $30 million of it will come in bank loans.

One Toronto newspaper report Friday quoted an unnamed person, supposedly close to the buyout, fearing it could take until Christmas to have the deal wrapped up. Should BCE and Teachers decide to sue the banks to enforce their arrangements, the courts may have to step in again.

However, on Monday morning another newspaper reported Teachers and the banks had met over the weekend, and predicted the deal will be sealed by early August.

BCE has “jumped through one hoop,” Amit Kaminer, an analyst at the telecommunications consultancy SeaBoard Group, said of the Supreme Court ruling. “What they have left is another hoop, the lenders.

“Then the challenge is Bell itself. First of all, they’ve lost valuable time in the market where they were dealing with legal issues,” he said, rather than costly restructuring decisions. “The company was effectively being run without an owner” for a year while the bidding war that Teachers eventually won went on, and then the bondholders went to court.

But, Kaminer said, the delay has allowed competitors such as Telus, Rogers Communications, MTS Allstream and others to slice into parts of Bell’s markets. “Sometimes you need to go to the board for a decision,” he said, which executives haven’t been able to do. “The task Bell is facing now is not whether to buy a new pencil, but how do we re-invent the company.”

The Supreme Court ruling “removes one bid impediment to the possibility the deal would go south,” said telecommunications consultant Eamon Hoey. “The next impediment is will the banks adhere to a deal they made a year ago when financial conditions were significantly better than today.”

He’s also not sure the bondholders are finished yet, saying they could still mount an attack on the structure of the deal before the federal Superintendent of Financial Institutions. “They have at least one more arrow in their quiver,” he insisted.

Under federal business law, the deal had to be approved by the Quebec Superior Court, which is when a number of bondholders mounted their attack, arguing that loading Bell with debt degraded their investments. A judge dismissed their arguments and approved the plan of arrangement, but last month the Quebec Court of Appeal reversed that decision by saying BCE had not shown that the plan was fair and reasonable given the circumstances.

However, in a brief statement Friday afternoon the Supreme Court said “the decision of the Court of Appeal is set aside and the trial judge’s approval of the plan of arrangement is affirmed.” Written reasons will be issued later.

Those reasons will do nothing to impair the deal on the grounds argued by the bondholders. Meanwhile, buyers of Bell’s telecommunications services are also watching closely. The troubled telco, under pressure for shareholders to take action for what they perceive as an under-performing stock, has put off a number of decisions about its future in the past year while the buyout has been assembled.

These decisions include which services it will abandon, which new technologies it will embrace and which, if any, divisions or subsidiaries it will sell so it can deal more nimbly with business and residential customers. There’s pressure to extend fibre optic lines to residences and adopt IPTV to fully embrace the challenge from cable companies that have moved into the residential and corporate telephone business.

Bell Mobility might also be mulling over switching its network from the less common CDMA standard to the more popular GSM. There are persistent rumors that Telus will soon go that route. For BCE to go ahead with both of these moves will involve hefty amounts of money, time and resources.

According to news reports, Teachers and BCE have a 100-day quick action plan. Not so fast, cautions Hoey.

“If a business person is looking for a meaner, leaner Bell, I think it’s going to take time for that to happen,” said Hoey. You’ve got an elephant that’s been spoiled and it’s going to take some time for the new leadership team under [present COO and incumbent CEO] George Cope to arrest the decline of the company and reinvigorate it. It’s a big job they’re undertaking.”

“The task ahead is complex,” agreed Kaminer, “and time is short.”

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