BCE's excessive deal fee party
It took me awhile to get around to breaking the back of the August 7 BCE (BCE:TSX) proxy circular. It is a beautiful piece of work. Nice colour, clearly laid out, bound like a small book. After leafing through it I now know why it is a small book: the opinions of five financial advisors take up a lot of space. But are they all necessary? And are they worth the rumoured $100 million?
In the investment banking M&A world, there really are two types of fees: transaction / advisory fees and fairness opinion fees. At times firms will engage a dealer “just” to provide a fairness opinion. At other times, also known as a “full fee”, they provide a variety of services including the provision of a fairness opinion.
And then the question of who is engaging the investment bank comes up; often you might see “the company” engage a firm as its financial advisor, only to have that mandate morpf if a Special Committee of the Board of Directors is struck. Often, but not always, the role of the committee requires that they begin to steer the process, direct the financial advisor, and so forth. (There are many different iterations of these things, and I saw several in my eight years as an investment banker, but the above is a generic one).
As a BCE shareholder, I wasn’t surprised to hear in June that the board of directors found the $42.75 offer to be “fair from a financial point of view”. And, to ensure that no lawsuit could be successful, the board relied (in part) on an investment bank to provide that opinion. Normal stuff. But five opinions?
I see that my former colleagues at BMO were approached by BCE (I assume BCE means BCE’s management) in March 2007 regarding a potential assignment, and the formal engagement letter was signed on April 17, 2007. BMO (and affiliates) disclosed a 3% ownership interest in the outstanding preferred shares they were asked to analyze, and they also disclosed the chance that they might be a lender to the acquiror of BCE in connection with the transaction. BMO’s opinions cover both the common shares are the prefs.
Then there’s the CIBC World Markets opinion. They were engaged on June 12, 2007, 17 days before the definitive deal was signed with Teachers et al. CIBC disclosed a current lending relationship to BCE, and they identified that they might also ultimately provide loans to the BCE acquisition group to complete the transaction. CIBC’s opinions covered the shares and the prefs.
Goldman, Sachs & Co. did a wonderful job outlining the torrent of prior work that they had done, both for BCE as well as current and former subsidiaries. And then there’s the prior “and current” assignments for TD Bank, “an affiliate of the purchaser” of BCE. Not to mention TPC, Providence and Madison Dearborn. And, of course, Goldman had “co-invested with TPC, Providence and Madison Dearborn and Goldman [has] invested and may invest in the limited partnership units of TPC, Providence and Madison Dearborn.” Goldman only addressed the fairness of the offer to common shareholders.
Greenhill & Co. Canada was also called upon by the Strategic Oversight Committee to provide an opinion. It appears that they are the only advisory firm of the bunch that doesn’t get involved in lending. That’s where Brad Crompton and George Estey hang their hat, and it is a wonderful assignment for any independent firm. Greenhill was also only in the role of providing an opinion regarding the $42.75 for common shareholders.
Then there’s RBC Capital Markets; Chairman Tony Fell is on BCE’s board. BCE (management, one assumes) contacted RBC in March 2007 about a potential advisory assignment, and was formally engaged along with BMO on April 17, 2007. RBC also provided opinions on both the offer to common shareholders and the prefs.
If the rumours are correct, and this entire group will earn $100 million in fees once the deal closes, many questions remain unanswered. And despite spending almost 10 years in the investment banking industry (at both a bank-owned firm and an independent), I still can’t answer them for you:
1. When the Teachers approached BCE management about taking it private, the stock rallied to about $38. As Teachers was the ultimate buyer, the various investment banks did nothing to “find” that $42.75 bid. The buyer was already at the table. The dealers may have drummed up Cerberus, CPPIB and/or Telus. But it’s not like these firms wouldn’t know where to call if they were keen to get involved. What was the $100 million for?
2. Why all the firms? The board would have approved the engagement letters of BMO, RBC and Goldman, so the Strategic Oversight Committee can’t claim they had no role in that. But to feel the need to then hire CIBC and Greenhill? What were the original three firms not doing? If independence was crucial, which drove Greenhill’s engagement, why was Goldman even hired? Worse, if the Strategic Oversight Comittee felt that one or more firms were too tight with either management or the buyers, the Board members that were ultimately on the committee shouldn’t have approved the engagement back in April.
3. Why didn’t the Strategic Oversight Committee fee comfortable with the three advisors? Why did it need to add an additional pair?
4. If you’re an existing lender to BCE, or to Teachers, or both, how can I as a Director rely on the fairness opinion provided by your investment bank. Aren’t you conflicted?
5. If your firm has invested in the limited partnerships of Providence or Madison Dearborn, and will benefit from this transaction post-closing, how can I as a Director rely on the fairness opinion being provided by your investment bank. Aren’t you conflicted?
6. Why such a large fee package? I’m prepared to guess that BMO, RBC and Goldman received $25-$30 million each for their work. CIBC’s role might have garnered $10-$15 million, and Greenhill something a bit less than that. These fees are usually driven by “fee precedent tables”, and the BCE board woul dhave been shown a table that outlined all the fees paid for large enterprise value transactions, going back to the early 90s. Imasco’s going private. Inco, Falconbridge, the defence of Air Canada from Onex’s takeover bid, Hudson’s Bay going private, etc. The fact that other boards paid $20-$25 million is meant to make you feel less ill as a Director when you’re asked to approve this particular fee proposal.
The natural question arises: there are two/three of you on the advisory team, why don’t you split the one fee? The answer is always the same: we don’t, but we’ll think about giving you a 10% or 20% discount as we’re a co-advisor with X or Y.
I’ve always wondered what would happen if Board Committees just said: no. $10 million seems like a lot of money to manage a process that has already begun without your involvement. Particularly when there are three or five of you. The difference between a $10 million fee and a $25 million fee is astronomical, of course, to both sides. But no fee is usually worse than a $10 million fee.
In light of the fact that the Teachers buyout group is actually eating these fees, as BCE will pay them out of cash balances that would have otherwise been left behind for the new owner at closing, I’m hopeful that Claude Lamoreaux will make this topic one of his final parting “governance” statements prior to his retirement later this year.
(disclosure – I own BCE, BMO and Goldman)