An opportunity for opportunism at Teachers
BCE Takeover Part 44
One of the reasons why OTPPB (“Teachers”) won the BCE LBO auction in the Spring of 2007 was due to the toehold they held going into the bidding. With 50,802,638 common shares (6.3% of the outstanding) in hand, Teachers could pay more than other bidders for BCE – without actually paying more – given the lower cost of that initial stake. History is presenting Teachers with the opportunity to repeat.
Painfully, BCE (BCE:TSX, NYSE) is currently trading at $34.50, a healthy $8.25 below the proposed $42.75 buyout price. Teachers has the chance to save hundreds of millions of dollars over the next few days by repeating the strategy once again. And who wouldn’t pick up $100 million off the street if you stumbled across it?
The proposal that went to BCE shareholders included a standard paragraph could easily justify Teachers stepping into the market and sopping up some of the millions of shares that trade each day at these allegedly depressed price levels:
The Purchaser Parties and BCE have agreed to use their reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the transactions contemplated by the Definitive Agreement as soon as practicable.
Under the rules of a Plan of Arrangement (at least to a layman), Teachers can buy, say, 5 million shares of BCE today in the open market. The stock has traded more volume than that most days of late, as hedge funds and institutional money managers manage their portfolio exposures and speculate on the health of the banks that agreed to lead the debt financing (see prior post “RBS nationalized – good or bad for BCE LBO?” October 12-08) back in headier times. If Teachers had signed a Standstill with the BCE Board on June 30, 2007, that can be easily waived. At this point, it is in the BCE Board’s interest to telegraph to shareholders that the largest LBO in history will be closing prior to December 10, 2008 — the contractual deadline.
For those who think Teachers would be trading with some unique or insider knowledge, get over it. What unique, material non-public knowledge do they have?
BCE’s go-it-alone financial prospects have been well analyzed by research analysts, and the information is readily available to the public. As far as Teachers CEO Jim Leech is concerned, he “expects the banks to live up to their commitments”, as he has said many times in many public fora. If he knew that they weren’t going to close, this information would have already been disclosed to the market and he wouldn’t likely be adding to his position. BCE CEO George Cope is already down the road on his “100 Day Plan”, and whatever Teachers might know about his progress is immaterial to the daily trading patterns of the share price. Since they don’t yet have a board seat, Teachers isn’t constricted by “blackout” periods, and unlike the world of Takeover bids, there is no practical ceiling on how a bidder buys stock in anticipation of closing your own acquisition of a public company via a Plan of Arrangement.
Which brings us to the “optics” of the matter. On the one hand, Teachers may be reticent to appear to be profiting from the market meltdown, but that is their fiduciary obligation, after all. The whole concept of a going-private bid is to make more money on the private investment than could ever have been made on a public one. The retired and working Teachers of Ontario need their pension fund managers to make as much money as they can as quickly as they can, so any chance they have to buy a share for $32.50 rather than $42.75 is energy well spent.
With 6.3% of BCE already on hand, disclosure rules might require Teachers to announce when they cross the 10% threshold. With 805 million shares outstanding, the easiest thing to do is to ask a trading desk to assemble a block of 5, 10 or 15 million shares over several days (referred to as “holding them in the can”), and cross it all at once to the ultimate buyer in North York. Then, and only then, would Teachers have actually “acquired” any additional shares. Which means they could sop up 15 million more shares without having to tell the world, a move that would naturally be expected to increase the price of BCE’s shares going forward. At least until the next global market or banking headline.
$120 million would have been saved at that point, and there would be more to buy in the market at the new, say $34 or $36, trading level. It is in the BCE Board’s interest for this to happen, if only to freeze the trading of their longest standing retail shareholders. With the stock trading 20% below the price that is expected to be paid in less than eight weeks, one can appreciate why retail investors might be considering taking their money and running given the state of the world. Many already have.
If the banks ended up walking, Teachers won’t be chastized for coming back with a lower, say, $38 offer. Any stock they buy at these levels is still tactically smart, unless there are circumstances where they don’t want to be shareholders going forward. Something we’d all like to know.
The obvious argument against this strategy is “$120 million is a rounding error in the context of a $52 billion buyout.” Find me a private equity firm who will say that in public. Any savings are important right now.
If this deal is to close on the stated timeline, why should speculators with staying power earn the $8 lift? And for Teachers, think of it as a pre-Hallowe’en sale. Just like the Disney costumes that go up in price as you get closer to the actual event date.
(disclosure – I own BCE)