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What will happen to BCE?

Posted by admin on June 13, 2008 in Investment Information

Last week, I addressed tangentially the BCE situation; for those who don’t know, BCE is the largest private equity privatization in history but there are two big roadblocks to privatization; (i) the Quebec Court of Appeal found the privatization (which is really a take-over by private equity and Ontario Teacher’s Pension Plan) did not fairly consider the interests of bond-holders and, thus, the business decision to accept the offer must be over-turned as not taking into account the fairness of both shareholders and bondholders; and (ii) the lenders refused to fund on the deal terms and share price negotiated ($42.75) before the credit markets went into crisis.

For complete disclosure, I don’t own any BCE shares, do not know any insiders, lawyers involved in the case, bankers on the deal etc. etc. I am completely speculating at this point. Don’t run out and buy or sell shares because I waxing poetic on a Friday. You guessed it, do your own due diligence before buying anything.

What do I think will happen?

The Court Case

The Supreme Court of Canada hears the appeal to the Quebec Court of Appeal decision on June 17. I believe the decision will be over-turned and BCE will be allowed to proceed with the transaction. I have read the Quebec Court of Appeal decision and it generally grants to bond-holders protection which they, by precedent, have not been given outside an insolvency context (the case relied upon as authority was an insolvency case where a different set of laws apply).

The bondholders’ argument has been that they don’t receive anything from the privatization. By contract, a bondholders right is to receive interest payment at certain intervals. Why would bondholders suddenly be granted new rights and to share in the upside of the shareholders? You can’t please both shareholders and bondholders in some cases and this is one of them.

The more troublesome issue is the Quebec Court of Appeal over-turned BCE’s business judgment in making the decision. The “business judgment rule” states that Courts will grant businesses deference in their decision-making powers if the exercise of that judgment was in the best interests of the corporation. It is traditionally very difficult for the Courts to over-ride the business judgment rule unless the corporation is engaging in conduct which is not industry standard.

The framework of the privatization, whether you agree with its merits or not, was not substantially different than any other private equity deal gone before it so what exactly did the BCE directors do differently than any other company? Strip it of its dollar figure and the parties involved and isn’t this just like every other transaction of its kind. Why is the Court over-ruling business judgment in this context? If the decision is upheld, do we suddenly open the possibility of an activist business judiciary?

There are too many problematic implications of the Quebec Court of Appeal decision to let stand. But what do I know? I thought the Quebec Court of Appeal would let the privatization occur.

What about a settlement before June 17? Not sure there is enough money to do it.

The Financing

Prediction? Parties, and their lawyers, have a “bun fight” for a while. They reprice the deal to somewhere in the mid to high $30′s ($36.50 anyone?) and push back the privatization date.

The banks haven’t said they won’t lend to the parties (although saying it publicly would be an admission of a breach of contract)- just not on the original terms, meaning they want a reduction in price. It also buys them time to raise more money internally, bring other banks aboard to spread the risk and tighten up legal terms to their favor. I am one of those people that believes the banks are trying to buy time so BCE will cave on some terms, clean up their books internally and ride out the liquidity issues in the market. The fees on this deal are too good to walk away completely.

Banks swing wildly between the deal-makers calling the shots and the credit-committee/risk management calling the shots. The latter are in control now but banks are banks. The fees are too juicy to walk away from but not at the level of risk involved. Now, if the risk (i.e. the loan amount) was reduced and they still charged their fees then credit committee would be happy. I expect a l-o-n-g and slow negotiations which pushes back the privatization date to a point in time the banks think money will be freed up somewhat and its safe to lend again (spring 2009?).

There’s my bold prediction. Its worth what you paid to read for reading this blog.
Anyone else want to make predictions?