BCE's LBO banks need a dose of common sense

BCE Takeover Part 45

News item: OMERS to cut hostile takeover bid for Teranet (TF.UN:TSX) by 6.8%. (Bloomberg)

There you have it. The Teranet Board couldn’t find a better offer than the original $11 bid by OMERS, so they turn tail and recommend what had been previously rejected. The Board and their advisors at CIBC World Markets and RBC Capital Markets recognized the reality of a weak buyers market, and did what they had to do: embrace the once “hostile” bidder.

What it – and a global stock rout – also presented was the perfect opportunity for OMERS to say “not so fast”. Did we say $11/share? It feels like $10.25 right now. Bad for our Decade of Daddy Mirror Fund™, but wise for the municipal employees and retirees of Ontario. Malcom White, representing CI Mutual Funds, had this to say to the DTM:

“It’s understandable that Borealis is asking for a minor price adjustment given the state of the markets. It’s a positive that Borealis is still willing to do the deal. We still plan to tender our shares to the offer,” Mr. White said.

Naturally, all eyes will look to North York to see if the good people at the Ontario Teachers Pension Plan Board (“Teachers”) will invoke something similar once the initial feedback comes back from their lenders regarding the saleability of some of the BCE bonds currently being offered to the worlds’ incredibly stretched commercial banks. CI Funds, for example, owns BCE in several of its mutual funds. You can imagine the same theme coming from portfolio manager Eric Bushell, for example, as 3% of his $3.5 billion CI Signature Select Canadian Fund is invested in BCE shares.

OMERS has provided Teachers cover, as they say, but will they walk down the same path? Don’t bet on it. Having predicted it once before (see prior post “The nervous silence breaks on BCE” May 19-08) and been wrong, I’m hestitant to do it again even if it makes so much sense.

For several quarters, the working theory has been that the formal lending agreement ties the BCE LBO lending quartet in knots, but it is all obstensibly tied to a $42.75/share offer for BCE. Try to change the ticket price of the LBO deal, so the story goes, and the banks get to walk as the contract is no longer valid.

It is more than a trifle odd, and utterly unfortunate, that to keep the largest LBO in history intact, Teachers may not be able to grind we BCE shareholders a penny. Even if we deserve it. Setting aside the the 34% drop in the TSX since the deal was consummated on June 30, 2007, they now have the benefit of cover from a sister pension fund in their own backyard.

How is it possibly in the interest of shareholders at CitiBank, Deutsche Bank, RBS and TD Bank to, in essence, force Teachers to overpay for BCE? Attention bankers! A lack of common sense is what got the world into this credit mess. But there’s still time to repent and be smart about BCE.

If the bankers are actually going to close on their “ironclad” committed lending facility, then let Teachers cut their price: Teranet’s 6.8% is a good place to start, but not nearly enough in this case. If you intend to bail on the deal, which is destined to close in 6 weeks, then pull the plug now.

To knowingly force Teachers to pay $42.75, just to keep you legally bound to the deal, increases the risk to your own shareholders, and ensures a larger mark-to-market haircut if you actually close. Let common sense prevail.

MRM
(disclosure – I own BCE)