Maybe BCE / Ontario Teachers needs JP Morgan
BCE Takeover Part 32
JP Morgan is providing US$11 billion of debt to Mars so that it can consume Wrigley’s in one sitting. Wasn’t it just last week that private equity investors were being conditioned by their banks to believe that they couldn’t do mega loan packages as they’d have to write them down by 10-15% immediately after closing?
The story went something along the lines of: “I’d love to complete the loan for First Data/ADS/Clear Channel/BCE but if we close it’ll blow the quarter out of the water, and whatever profit we thought we’d make on the deal will be lost 30x over.”
Once again, JP Morgan (JPM:NYSE) flies in the face of group think and puts up a new massive loan package. The Mars deal isn’t the fulfillment of a 2007 commitment, but an entirely new deal. Which begs a question. If JP Morgan is following the logic of Citibank, RBS and Deutsche, won’t JP Morgan’s Mr. Dimon have to write down his Mars facility by US$1 billion or more once the Wrigley’s deal closes (with the help of Warren Buffet)?
It can’t be so simple as the rumoured lack of syndication by JP Morgan of the Mars debt. Surely the primary loan market isn’t immune from what’s going on in the secondary world. If corporate loans are trading between 85 and 92 cents on the dollar, how can JP Morgan’s auditors pretend that the Mars debt is worth par once it’s on the books?
But, let’s say that it is. Doesn’t that blow a hole in the theory that Citibank, TD Bank, RBOS, Deutsche, et al will ultimately avoid funding their portions of the BCE going-private debt facility solely to dodge a huge writedown of that LBO loan at closing?
Or worse, is the accounting overlay more to do with now-too-tight pricing in the original loan commitment.
The silence around the largest LBO deal in history (other than the innocuous CRTC delay) sent me for the exits about twelve days ago at $37.96 (see prior post “BCE put options tell a story” April 18-08), but the JP Morgan / Mars announcement might warrant a second thought should BCE trade below $35; a point where the upside and downside starts to look more attractive than the $38 level. Make $4,75 if it closes, loses $10 if it doesn’t.
That Citibank is raising US$3 billion, to go along with RBOS’s multibillion dollar rights offering, isn’t a bad sign either. But all OTPPB, Providence and Madison Dearborn really need is a minor a dose of Dimon.
Where does this $10 to the downside figure you keep referring to come from?
As an average joe blow it looks to me like BCE is a cash printing press.
The downside estimate is based upon equity research analyst publications that guesstimtaed that BCE would trade down to $26-$28 if the Teachers LBO falls apart.
As an average Joe, you can do your own analysis, however.
The calc is something like:
– where was BCE trading prior to the KKR going-private rumours?
– subtract an estimate of whatever impact the federal government’s decision to open up some of the wireless spectrum could have on Bell’s mobile business (look at how Rogers B shares have traded since that decision as a proxy, recognizing that the market is down during that timeframe as well); hint: Rogers is down more than 10%
– subtract an estimate for the impact of the selloff in the S&P 500 since the rumours came to the surface
– add back an estimate of what Telus might do vis-a-vis a merger with BCE should the LBO fall away, and the impact that speculation could have on BCE shares
Voila. You arrive at a number that’s not any lower than $25, but sure isn’t $30 should the LBO collapse in June.