Teachers gives a lesson

There is not much left to say about the BCE takeover process, but what’s left to say is to compliment the folks in North York. Over the past few months we’ve tried to provide some insights about Canada’s largest buyout in history, without getting outside our area of expertise.

At the end of the day, Teachers won for 2 simple reasons, near as I can tell, maybe 3:

1. They were prepared to cut almost 100% of the cheque required to meet the 54% Canadian content equity figure (foreigners can’t own more than 46.7% of BCE by federal law). With the heft and confidence you need to play in the $50 billion buyout game, the Teachers’ bid didn’t seem to be as complicated as CPPIB’s for example, with PSP, the Caisse and Onex (at least up until recently) all banding together to form that same 54% CDN content number. While they might have syndicated part later (OMERS, for example, was waiting to see who the winner was), Teachers didn’t need anyone’s help to close. That’s a very powerful element when the BCE board was sizing up the pros and cons of various offers.

2. Of the buyout deal proposals, Teachers could pay the most without overpaying (only Telus could trump them). Although we may never know if Teachers intended to become BCE’s largest shareholder for the ultimate purpose of launching a takeover bid, the fact that they owned over 4% at prices below ~$28 a share was a great place to start. Moreover, during the period following the surfacing of the KKR rumour and actually signing the BCE standstill, Teachers appeared to be adding to their original BCE position via open market purchases. All perfectly legal, yet rarely done in M+A land.

They knew a simple fact. If I buy all I can at $39, I make money no matter what. If CPPIB wins with a $43 bid, I’ve made money. If I buy it for $42.75, I’ve saved money as I need to acquire fewer shares than otherwise at the $42.75 offer price. If no deal happens, which seemed impossible after a point in April, the sheers size of their sub $28 purchases meant that their ACB was still satisfactory (and the annual dividend helps reduce that average cost base every quarter until the buyout or takeover ultimately happens).

Each PE group has the same access to debt on similar terms, each has access to the same asset sales post close, and each can choose to retain BCE’s CEO or move him aside for COO George Cope or an outside specialist.

And, in theory, each runs the same financial models, generating the same IRRs under the same economic scenarios.

3. The 3rd point is iffy, but intriguing enough to raise. The only other thing Teachers might have had in their favour that others didn’t was a burning desire to win the process that they, themselves, had started. After all, who wouldn’t be cross if another firm benefited from your good idea? But I doubt that anyone offers 25 cents more than a deal is truly worth, just to show Michael Sabia who the real boss is (the shareholders).

What you can be sure of is that none of the PE firms had more time to think about a BCE deal than Teachers, although KKR had broached the subject with BCE mgmt last year to no avail. But Teachers had been quietly beating the drum for a long time, and given the unnecessarily short timelines involved in the due diligence process, the time they’ve had to think about all the pieces to a $50 billion buyout would have been crucial in the end.

In the end, the firm with the highest likelihood to close – with the fewest partners – and the ability to pay the most – wins. No amount of interference can overcome those factors. Teachers knew what they wanted and weren’t going to let a hired custodian get in their way.

Justice prevails.

MRM
(Disclosure – I own BCE)