Class Action comes next on BCE

BCE Takeover Part 38

According to a news report, BCE’s management and Board of Directors rebuffed an opportunity to settle their dispute with BCE bondholders. In hindsight, this ~$200 million decision certainly looks foolish as BCE’s $51 billion LBO now lies in the intensive care ward.

It doesn’t even fall into the category of “penny-wise and pound foolish” given the quantum of pounds at stake.

In the lending world, we often come across people who thrive on negotiation. Although I don’t enjoy watching it play out, far too many people are prepared to take things to the brink. According to the Globe’s weekend story, the BCE Board could have made the problem go away for between $0.19 and $0.25 per BCE share.

Now that the Quebec Appeal Court has sided with the Bond lenders (see prior post “Quebec Court reminds that shareholders aren’t the only stakeholders” May 22-08), the days of an inexpensive greenmail payment are history.

This weekend, several large institutional BCE shareholders have decided to increase their pressure on BCE’s Board. With BCE shares trading more than $9 below the proposed $42.75 takeover price, now’s the time to pull out the stops if you own a few million shares. According to one portfolio manager, the new effort involves a payment of between $1 and $1.50 per BCE share, or about $800 million.

Under this new strategy, the $42.75 price would remain the same, but common shareholders would pay bondholders directly, so as to keep the financing contracts in place. Sound tricky? I thought the same thing at first. But if the difference is the deal happening or not, you can understand why the proposals are flying.

The bondholders don’t yet have a clear cut victory so long as the Supreme Court hasn’t ruled on the matter. If the appeal of the Quebec Appeal ruling gets a hearing, BCE’s Bondholders know their victory dance may well be short lived.

It will not be lost on them that now’s the time to grab their pound (or two) of flesh. They don’t want the LBO to close, so in some ways there’s no incentive to settle. At least not now. But if they were prepared to settle it two or three weeks ago, then that backdrop hasn’t changed.

The price to settle has gone up, but that rationale to settle hasn’t changed if you are a conservative insurance company, for example. The long term BCE bonds have already taken a mark-to-market hit. Locking in a gain via a cash payment is a victory for many institutions.

As for the lawyers that gave BCE the firm legal opinions that the Bondholders didn’t have a pot to wizz in, they, the BCE board and the D&O insurers can get ready for more than one Class Action lawsuit. The legal advice may have been sound, but the price of this “deal insurance” was truly a rounding error in the scheme of things. Once you’re paying $100 million in advisory fees (see prior post “BCE’s excessive deal fee party” September 17-07), paying another $200 million to the lenders to ensure the deal closes seemed to be a smart move to me.

MRM
(disclosure – I own BCE)