Hoey Associates

BCE Inc. may not meet one of the conditions of its acquisition, originally scheduled to close Dec. 11.

On Wednesday the company announced its auditor, KPMG, gave the telecom giant a “preliminary view” that it “does not expect to be in a position to deliver … Dec. 11 .. an opinion that BCE would meet the solvency tests” required as a condition of the deal.

The companies planning to buy BCE — Ontario Teachers’ Pension Plan, Providence Equity Partners Inc., Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity – will need to spend about $50 billion to purchase all outstanding shares of firm, in a deal initially announced in June, 2007.

Four banks – Toronto-Dominion, Deutsche Bank, Citigroup and Royal Bank of Scotland – agreed last June to provide US$30 billion in loans so the consortium could purchase each BCE share for $42.75.

As of Wednesday morning, none of the banks or potential buyers have announced plans to back out of the agreement.

“I’m not convinced that this deal cannot go forward. There’s still strong interest in getting the deal done, ” said Eamon Hoey, senior partner at Toronto-based telecom consultancy Hoey Associates.

It did provide Bell with a real opportunity to clean out management team and focussing on the customer rather than talking about doing itEamon Hoey>Text

But he added KPMG would have to evaluate the company’s ability to pay off existing debt, plus service its defined-benefit pensions.

“The way these pension funds work is you have to maintain a certain amount of capital in order to service the debt in the future,” Hoey said. “The way you operate these pension funds is you make investments in other stocks, you may buy some bonds from the Government of Canada.

“Well, if the market (drops by a significant amount) then your valuation for the bonds and stocks that you have bought to service that future debt, of course go down as well. Then you have an obligation to top it up. The Superintendent of Financial Services, who oversees all of this would come tapping on BCE’s desk and say, ‘Excuse me guys you have to top this up.’”

In its third-quarter financial report, the company stated it “may be required” to increase contributions to its defined benefit pension plans, “depending on future returns on pension plan assets, long-term interest rates and changes in pension regulations, which may have a negative effect on our liquidity and results of operations.”

The company also has nearly $10 billion in long-term debt.

KPMG refused to comment.

“Because of our professional obligation to maintain confidentiality concerning the affairs of our clients, KPMG cannot make any public comment on this situation,” a spokesperson for the auditor said in an e-mail to Network World Canada.

Hoey said whether or not the deal goes through, the appointment of former Telus Mobility head George Cope as BCE’s CEO had a noticeable effect.

“It did provide Bell with a real opportunity to clean out management team and focussing on the customer rather than talking about doing it,” Hoey said. “Some customers I talk to say they’re getting a lot more attention from Bell these days and far better service than they have in the past, so that’s good news.”

In the past two months, the S&P/TSX composite index has dropped from about 13,000 to 8,395. Durin the same period, the Dow Jones Industrial Average plummeted from 4,000 to 3,018 while the S&P 500 dipped from 1,255 to 752.

In a report released Tuesday, Economic Outlook No. 84, the Organization for Economic Cooperation and Development predicted the gross domestic product of its 30 member nations (which include Canada, the U.S., Britain, Germany and Japan) would decrease by 1.4 per cent during the fourth quarter of 2008 and 0.4 per cent in 2009. The OECD forecasts two consecutive quarters of contraction during the first half of 2009, followed by growth.

“When KPGM looked at it within the current environment, this mega burn down that we have going on, they had to point out there’s an obligation there,” Hoey said. “It’s not a discussion about opportunities, it’s a discussion about risk.”

But as it stands, Bell is in good hands, he added.

“There is indications that this company is turning itself around and it is focusing on the customer,” Hoey said. “For example, one customer said, ‘Well, you know what? This may not be a big decision but all of the conferencing business we had with someone else and we’ve given it back to Bell. And we’re getting much better service than we did five years ago when we took it away from them.”

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