The nervous silence breaks on BCE

BCE Takeover Part 36

According to an exclusive NYT story, the banks behind the OTPPB LBO of BCE are looking for new terms, including “higher interest rates, tighter loan restrictions and stronger protections for the banks, far exceeding the original terms”. And so it begins, the dance that has been coming for months. And on a day when the Canadian stock market is closed no less!

The first dark cloud appeared in February when we heard a very specific story that foresaw the bank syndicate playing the very same game they’ve actually pursued this past weekend (see prior post “Are sad days ahead for BCE shareholders?” February 14-08″).

By April, the absolute absence of leaks seemed deafening in and of itself. What with so many people involved in the BCE LBO, how was it that no one was talking about it? (see prior post “Are the lawyers turning BCE documents?” April 18-08. Then there was the crazy prices on the Montreal Exchange option chain “BCE put options tell a story” April 18-08).

The big surprise came in the form of the Mars bid for Wrigley’s, which saw US$11 billion of new debt capital show up from the blue. For a world where every debt deal was “underwater” the moment it closed, the fact that JP Morgan would commit new capital came as a surprise. And a tad positive for BCE’s LBO group, if only they could rope JP Morgan into their debt syndicate, that is (see “Maybe BCE / Ontario Teachers needs JP Morgan” April 30-08).

The Clear Channel price re-cut a week ago pushed BCE shares up $2 (see prior posts “Clear Channel settlement does not mean pollyanna at BCE” May 13-08), despite the obvious implication that the $42.75 bid would have to drop for the parallel to hold together. Plain dumb, that was.

Having sold out my BCE margin position weeks ago as the risk/reward profile looked wrong (but retained a small RRSP stake), I was hoping that one can have their cake and eat it too. Provided that the BCE Board plays their appointed role.

This NYT story has leaked so that shareholders will put pressure on BCE’s board of directors to re-cut the deal. Although OTPPB executed an agreement to pay $42.75, that isn’t going to happen now that the banks have played the role of the “bad guy”. Convenient or not, OTPPB will soon get the chance to renegotiate the deal — at the behest of their lending syndicate — and BCE’s Board will have to go along with a reduced price.

OTPPB’s great reputation will remain justifiably intact, as there will be no blood on their hands as a result of this banking two-step. And the Teachers of Ontario will get a bit of a better deal, with lower risk than the one announced last June. Win-win.

For BCE’s Board to “just say no” would be to almost guarantee that the deal will fall apart, sending BCE shares on a one-way trip to the sub $30 range. BCE’s Board won’t be able to justify their “fiduciary obligation” under that scenario.

Naturally, if BCE was put into play today, the debt market wouldn’t support $42.75 as the clearing price. As the largest proposed LBO in history, it was foolish to think that almost 11 months of credit mayhem could pass and BCE would rise above the fray. Untouched by what has happened the world over.

The deal will close; just not at $42.75 (see prior post “Media hat tip” May 13-08).

MRM
(disclosure – I own BCE)