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BCE privatization receives Court approval

Posted by admin on June 23, 2008 in Investment Information

As I predicted last week, BCE, history’s largest private-equity privatization to date, received judicial approval to proceed with the privatization as planned on Friday afternoon; the Supreme Court of Canada over-turned a Quebec Court of Appeal ruling that the privatization could not proceed based on belief the ruling was not fair to the bond-holders (in essence, the amount of debt issued as part of the privatization would make the face-value of the bonds be worth less even though the interest payments would continue to be met). The Supreme Court of Canada reserved its reasonings to be issued at a later date (the practicality being that such reasoning would be quite long and the market needed clarity right away and the Court should be on a summer hearing schedule).

A few things to note about the decision and the fall-out:

• At one point during the hearing, the Supreme Court of Canada asked lawyers for BCE whether they ever considered bond-holders rights when structuring the deal and they, to paraphrase the response, said not at all; BCE was only bound to treat the bondholders in accordance with the terms of the bond issue (i.e. interest payments need to be made at certain times). There was no attempt by BCE to sugar coat the answer. The decision seems to affirm the trend that shareholders trump bondholders in these types of situations and bondholders are really along for the ride as long as interest payments continue to be made on time.
• the decision was unanimous: 7-0 in favor of BCE which appears to put a nail in the bondholders coffin.
• BCE bondholders may have done more harm than good going forward. As I previously discussed, new bond issues are very issuer friendly. There are a lot of “BCE clauses” in them now to avoid giving the bondholders an opportunity to hijack the wishes of the board of directors. Bondholder rights are increasingly becoming more and more limited.

As for the next hurdle- the banks financing the deal refusing to fund on the original deal terms-a lot of columnists seized on this statement by the banks financing the privatization (Citigroup, Deutsche Bank, Royal Bank of Scotland and TD) as indication that the deal would get done: “The banks expect the transaction will close in accordance with the Definitive Agreement between BCE and the sponsors. We continue to negotiate the financing documents in good faith with the sponsors and stand behind our original commitment to the transaction.”

This statement means nothing to me other than a CYA exercise. I am going to put my lawyer’s hat on here. The banks are the only hurdle remaining in the privatization process and the clock is running. You have to put out a press release saying you intend to close the deal. If you don’t, you just committed breach of contract or anticipatory breach of contract and just left your a** hanging legally.  Also read the press release carefully, it states it will negotiate in good faith and on the original funding commitment- NOT the original deal terms (a commitment to fund is conceptually different than funding on certain terms). “Negotiate in good faith” is a legal buzz word covering yourself. There is some lazy analysis occurring in the media relying on this press release as a indication things are going to get done.

I also believe the June 30 deadline is completely artificial. Yes, parties can walk away after that date but everyone has too much committed now: BCE has its reputation on the line, the Teachers Pension Fund and Private Equity firms have spent too much time and money to walk away (not to mention this 100 day plan the Teacher’s have put together indicating they are already envisioning running BCE) and the banks cannot take another reputational hit on the markets or overly antagonize some of the parties (see below). If they miss the June 30 deadline, the parties can enter into a Standstill Agreement (a type of legal agreement freezing everyone’s legal rights to pursue action) and extend the negotiations. Don’t buy June 30th as dooms day.

There is also one factor on one has talked about. The Ontario Teacher’s Pension Plan is one of the largest in the world and very active globally. All banks want their business financing their deals. You don’t think at some point during the negotiations, either the banks or the Pension Plan will swap future favors to get the deal done? It is how the world of business works. The question is whether the BCE financing is used as a bargaining chip negatively or positively for the shareholders. If you use the Clear Channel Communications privatization as a comparison, BCE will go private but shareholders will get less than originally negotiated so don’t bank on a $42.50/share buy-out.

Two final comments:

1. If the negotiations really begin to drag, expect BCE to continue to halt dividend payments. It needs the extra money for flexibility (it could be used to pay down debt and alleviate some concerns of the banks).
2.  Even if you don’t own BCE stock, the decision reinforces that bondholders have relatively little power and raises questions of the utility of purchasing bonds altogether. Tomorrow, I’ll talk about slow-growth dividend stocks as an investment product in lieu of buying bonds.