BCE deal may fall through after ruling: Analysts

The proposed takeover of BCE Inc. by consortium led by a teachers’ pension fund may fall through, now that the Quebec Court of Appeal has sided with investors holding BCE bonds who opposed the deal.

“This thing could potentially derail the whole thing,” Ronald Gruia, Toronto-based principal analyst and senior consultant for information and communications technologies at Frost & Sullivan, said of the appeal court’s decision Wednesday. This decision overturned a decision by Quebec Superior Court March 7 that gave BCE and its would-be buyers to go ahead with the deal, or “plan of arrangement,” originally inked nearly a year ago.

Lawrence Surtees, vice-president and principal analyst for communications research at IDC Canada, agreed.

“It’s not strong language to say the deal is in a bit of trouble,” Surtees said. “The court ruling last night has got to be a very unpredictable and surprising thing for the leadership of Bell. They were expecting that it would have been a relatively routine thing for the appeal court to uphold the lower court. This is a huge surprise wrench in the spokes.”

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BCE officials refused to be interviewed for this story.

Had the plan of arrangement been signed, Ontario Teachers’ Pension Plan would have acquired 52 per cent of BCE, which owns Bell Canada, Aliant, Telesat Canada and part of CTV globemedia. Others members of the consortium include Providence Equity Partners and Madison Dearborn Partners. Under the plan, they would buy a combined total of 93 per cent of the shares of BCE Inc. for $51.7 billion, which would net stockholders $42.75 for each share, which was trading at $32.64 Wednesday.

But the consortium has had to ask for more than $30 billion in loans to buy BCE, meaning after the takeover closes, BCE’s total debt would increase significantly. As a result, bond rating service firms reduced their grade of existing BCE debentures, the values dropped (in some cases up to 23 per cent), so investors who held debentures issued as far back as 1976 formed an ad hoc committee that hired ThorntonGroutFinnigan LLP, a Toronto-based law firm, to ask the Quebec Superior Court to block the takeover plan.

“The plan of arrangement that BCE (proposed) was not fair to our clients,” said John Porter, a partner ThorntonGroutFinnigan. “It placed the burden of the transaction on the bondholders without any benefit accruing to them.”

The Quebec Superior Court ruled against the bond holders committee March 7 but the Quebec Court of Appeal overturned the lower court ruling Wednesday (effectively blocking the plan of arrangement) so now BCE has said it will seek leave to appeal from the Supreme Court of Canada, meaning its asking Canada’s highest court to hear its case.

The problem is, the original plan of arrangement expires June 30, and it’s unclear whether the Supreme Court of Canada would have time to rule on the Quebec Court of Appeal’s ruling, even if it did agree to hear the case.

Surtees noted if the deal cannot be closed by June 30, the banks who tentatively agreed a year ago to lend money to the buyers could insist on starting from scratch and try to get more restrictive loans at higher interest rates.

“That’s not done in a week or two,” Surtees said. “The urgency that Bell and the (Teachers Fund managers) feel is that deal has a June 30 deadline. The Supreme Court can wade through a leave to appeal application on an urgent basis but typically this kind of case is not considered pressing and urgent to it.”

He doubts the current legal dispute will have much effect on Bell Canada’s day to day operations.

“But what might be of concern is the strategic focus of the company,” Surtees added. “Whether other significant large strategy decisions are on hold pending completion of the deal …”

Gruia has similar concerns.

“It has ramifications across the entire corporations affecting all lines of business,” he said. “If you are (Bell Canada president) George Cope and you are trying to be able to put together a plan and execute on it you cannot until this thing clears up:”

And Porter does not believe BCE will be bought unless the Supreme Court of Canada overrules the Quebec Court of Appeal.

“The only way at this point that I can personally see the transaction going forward would be to have the Supreme Court of Canada hear the matter.”

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