RIP BCE Buyout

I must admit, I'm somewhat sad to see the BCE buyout officially fall apart.  Witnessing the litigation circus that this deal morphed into has been extraordinarily amusing.  Why the private equity group, led by the Ontario Teachers' Pension Plan of all people, was so dead-set on completing a monster deal struck at the peak of the private equity boom remains a bit of a mystery.  Perhaps the Ontario Teachers have no business investing in private equity if they are so lousy at assessing such a stark change in the investment environment?  Or perhaps, they're smarter than we think?   

In a surprising twist, the deal was killed by a solvency, or rather lack-of-solvency opinion issued by the firm's auditor KPMG.  What do you do when your auditor tells you the firm will be insolvent if the deal goes through?  You try to find another auditor to express an alternate opinion!  BCE engaged Pricewaterhouse Coopers, which delivered a positive solvency opinion.  Because it is really reassuring to know that at least one out of two auditors think the firm will be solvent.  You definitely want to base a multi-billion deal on that.  In any event, the true irony is that BCE originally inserted the solvency-certificate condition in the merger agreement as a condition of closing to protect itself from  lawsuits by existing BCE bondholders, who were pissed about the company's proposed new debt-laden capital structure.  The negative opinion killed the deal, and all involved are certainly rejoicing, with the exception of BCE and its shareholders, who would love a $34-a share take-out, with the stock currently languishing at $18.

With the auditing industry famous for putting its stamp of approval on stellar outfits such as Enron, Worldcom, Bear Stearns, Lehman Brothers and a host of other companies that were basically insolvent and went bankrupt with nary an auditor raising a flag, I've got to ask the following controversial question:  Who bribed the auditors into killing the deal?  I'm not going to point any fingers because my conspiracy theories are purely a figment of my overactive imagination, but I have a few ideas... 

 

BCE Buyout Back On! For Real.

In the on-again off-again world of stalled buyouts stuck in credit crisis purgatory, the BCE buyout has emerged relatively intact.  Somehow, despite litigation that threatened to derail the deal, the company has struck a compromise with its private equity buyers and lenders to reach a deal.  The purchase is due to close by December 11, essentially giving the lenders an extra three months to sell the debt used to finance the LBO.  BCE has agreed to suspend the $900 million dividend, effectively lowering the private equity buyers' costs.  This is much needed good news for the beleaguered buyout industry which is now littered with the corpses of busted deals and LBO debt trading at a significant discount to face value.  BCE stock is up smartly on the news, with investors assuming that this is a done deal.  But is it really?  Although the breakup fee was raised to C$1.2 billion, if equity markets continue to take a dive, the fee may start to look cheap relative to a completion of the deal.  Furthermore, the lenders still have to sell $34 billion in bonds and loans to finance the deal.  Although the banks have an extra three months to pull off this herculean feat, one has to wonder if any investors out there are clamoring for buyout debt in the current environment.  If the sale of the debt begins to look unlikely, the lenders may try to find another way out if legally possible.  Those sneaky lenders will do whatever it takes to avoid ending up saddled with even more assets they can't sell.  Somehow, I suspect this is not the last chapter in the BCE buyout saga.

BCE Buyout Back on the Table. Maybe.

Last Friday, Canada's top court over-turned a prior lower Canadian court's ruling that had halted the once record-breaking BCE buyout.  The BCE buyout is now free to move forward without any legal hindrances.  Hindrances of another variety, however, remain.  The lower Canadian court's ruling was a huge surprise, and came as a big relief to the lenders who were balking at terms on the financing packages that they had agreed to during the height of the private equity boom.  Saved by an unexpected legal ruling, the lenders breathed a big sigh of relief and returned to the task at hand:  Figuring out how to get rid of all the other leveraged loans already languishing on their books.  Now that the buyout is back on the table, the tense negotiations have resumed.  The lenders are asking the private equity investors to kick in more equity and accept more onerous terms on the financing.  I do enjoy the mainstream press' constant use of the term "onerous" in reference to the lender's new requests for tighter covenants.  The more likely scenario is that the original terms of the financing package were laughably lax and were cobbled together in about five minutes by bankers looking to cram through another leveraged buyout.  Those bankers have more than likely been laid off for not doing enough due diligence on billions of dollars worth of leveraged loans that are now trading below par and sitting on their former employers balance sheets.  If you are a new reader of Mock The Market and you require further mockery of the BCE saga beyond the scope of this story, please refer to my prior posts on the subject: BCE Buyout on the Rocks and BCE Buyout on the Rocks - Part II.  Rest assured, however, that this is not the last opportunity I will have to mock the BCE debacle.

BCE Buyout on the Rocks - Part II

The BCE buyout is looking less likely, as a Canadian court ruled yesterday in favor of the bondholders who challenged the LBO, claiming that BCE hadn't taken their interests into account. This is shocking news indeed, and this time I really mean it. The fact that the deal probably wasn't going to be completed at the old price is old news. You can read about my initial skepticism in Part I of BCE Buyout on the Rocks. But the fact that the deal was blocked by a court ruling in favor of the old bondholders and not the new lenders is what makes the news notable. Coincidentally, the court ruling was delivered on the same day that the private equity sponsors were busy fighting with the lenders in New York, who were demanding better terms on the financing package. This was Canada's gift to Wall Street. If anyone is out on the town in New York tonight, look for bankers from C, DB, and RBS. Tell them you're Canadian, and they'll probably buy you round after round of Cristal and you can feel like P. Diddy for one night.

BCE Buyout on the Rocks

According to Reuters, the $34.8 billion buyout of BCE, Canada's largest telecom company has stalled. Supposedly, the buyout group (Ontario Teachers Pension Plan, Madison Dearborn, Merrill Lynch, Provdence Equity Partners and Toronto Dominion Bank) still wants to do the deal, but the banks who offered financing are wavering. The banks who had originally agreed to finance the deal have proposed new terms for the debt. Apparently, the new set of terms contained higher interest rates and other "onerous" conditions. Additional details were not immediately available. In a situation like this, open to so much interpretation and mockery, it is entirely appropriate for K10 to offer an imaginary conversation detailing what the lenders may have said to each other in a secret meeting arranged to squash this deal. The lenders were the usual suspects: Citigroup (C), Deutsche Bank (DB), and Royal Bank of Scotland (RBS).

C banker: Ahem. Does anyone actually still want to do this deal?

Silence, followed by hysterical laughter.

C banker: Ok. So, let's suggest some terms that nobody can possibly agree to. First, we have to hike the interest rates.

DB banker: Libor + 3,000 sound good?

RBS banker: Make it 10,000

C banker: Done. Now we have to get rid of this ludicrous PIK toggle feature we originally agreed to.

RBS banker: Brilliant! We'll make up some sort of formula where they actually have to pay us interest biannually.

C banker: Um. I think that's the way bonds used to work before 2006.

RBS banker: Right, right. Of course. I was joking.

C banker: I think we should also ask for free telecom service from BCE for life.

RBS banker: I like that. Very original

DB banker: These terms might be too lenient. They may still want to do the deal at a lower price. We can't risk it!

C banker: True. That would be terrible. We need a sure-fire deal killer. Something sinister. Something....

DB banker: Onerous.

RBS: Yes. That's the right word.

C banker: I have it! We'll add some covenants!

DB banker: Brilliant! They'll never go for that!

RBS: Um...What are covenants?