BCE takeover deal scuttled

Bell Canada’s parent company said Thursday it will not be privatized because the group that was supposed to buy Bell Canada Enterprises Inc. has backed out.

Today the acquisition and privatization of BCEwas supposed to close, but one of the conditions of the deal has not been met.

In order for the consortium led by the Ontario Teachers Pension Plan to take ownership of the telecom holding firm, auditor KPMG would have had to declare by Thursday that the company would “meet solvency tests.”

At press time, this had not happened, and BCE said Monday the acquisition “is unlikely to proceed” in the absence of an opinion by KPMG the company would meet the solvency tests.

Then on Thursday Ontario Teachers Pension Plan said the deal “would be terminated” because “KPMG has concluded that a required test for the solvency opinion was not met.”

BCE said it received Wednesday night a notice from the consortium “purporting to terminate” the agreement. In a press release, BCE said it “disputes that the Purchaser was entitled to terminate the (acquisition agreement), as such notice was delivered prematurely, prior to the outside date for closing of the transaction, and therefore invalid.”


BCE claims it is owed a $1.2 billion breakup fee but Teachers said: “the Purchaser terminated the agreement in accordance with its terms. Under these circumstances neither party owes a termination fee to the other.”

BCE has been the parent company of Bell Canada since 1983, and the company also owns Eastern Canadian carrier Aliant and an interest in Toronto-based CTVglobemedia Inc.BCE sold IT service firm CGI Group in 2005. Two years ago, it sold satellite provider Telesat and four months after that it started a “strategic oversight committee” to look into privatization.

In June, 2007, Teachers – along with Providence Equity Partners Inc., Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity – announced their intent to purchase all outstanding shares of BCE for about $50 billion.

Three months later, 97 per cent of BCE shareholders approved the deal, but passing the solvency test was a condition to closing the deal because it’s a leveraged buyout. BCE already has $10 billion in debt and the buyers would have had to borrow $30 billion.

Last summer, four banks – Toronto-Dominion, Deutsche Bank, Citigroup and Royal Bank of Scotland – agreed to loan the consortium $30 billion.

Since then, former Telus Mobility president George Cope has replaced Michael Sabia as chief executive officer of BCE, and one of his first decisions was to eliminate 2,500 management jobs. Even if the acquisition does not go through, one Canadian analyst said the carrier has already made some changes Teachers wanted.

“It did provide Bell with a real opportunity to clean out management team and focussing on the customer rather than talking about doing it,” Toronto telecom analyst Eamon Hoey said last month. “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.”

Hoey, senior partner at Toronto-based telecom consultancy Hoey Associates, made his comments in an interview with Network World after BCE announced KPMG would be unable to deliver its required solvency certification.

At the time, he said the changes Cope has made are for the better.

“I think this will make for a much healthier company,” he said. “The critics including me, criticized Bell for a number of years about its intransigence its failure to focus on customers, its failure to develop its opportunities particularly in the wireless area. We’ve seen George Cope in the driver’s seat for a bit now and I think customers are reporting we’re seeing improvement.”

BCE said Monday it has hired PricewaterhouseCoopers LLP to perform “valuation work” related to the deal, but that does not change the condition that required KPMG to deliver its solvency report by today.

A major stumbling block, apparently, was BCE’s defined benefit pension plans.

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 deal has been fraught with stumbling blocks, including a class action suit filed by bond holders.

The Supreme Court of Canada last June dismissed a suit launched by an ad hoc committee representing investors holding BCE debentures issued as far back as 1976. The bond holders argued the deal was unfair to them because the value of their investments were plummeting (in some cases up to 23 per cent). After the deal was announced, bond rating agencies lowered their ratings on existing bonds because BCE’s debt would more than triple if the leveraged buyout went through.

The Quebec Superior Court ruled in against the bond holders, who successfully appealed. But BCE then appealed to the Supreme Court of Canada, which ruled in the company’s favour. At the time, SeaBoard Group analyst Amit Kaminer said BCE’s “position in terms of products and marketing is weaker than their competitors in every dimension.”

Since then, it has joined forces with Telus Corp. to better compete with Rogers Wireless by starting to overlay its wireless network with High Speed Packet Access.

Telus was actually interested in buying BCE in 2007, but pulled out shortly before the Ontario Teachers Pension Plan announced its bid. Other potential buyers at the time included Canada Pension Plan Investment Board, Onex Corp. and Caisse de depot et placement du Quebec.

Bell Canada was incorporated by federal charter in 1880. In 1895, it spun off its mechanical department as a subsidiary, then dubbed Northern Electric Manufacturing Co. later renamed Northern Telecom and then Nortel Networks Corp.

BCE sold off its stake in Nortel in 2000, and lately the equipment maker has been plagued by losses and layoffs.

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Jim Love, Chief Content Officer, IT World Canada

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