Forget the break fee, BCE Board should take $36 instead
BCE Takeover Part 46
With so many investment banks advising on each side of the BCE LBO, each of whom stood to gain tens of millions of dollars in fees should the largest going-private in the world eventually close, why did none of them figure out that BCE wouldn’t be “solvent” under the proposed capital structure? Perhaps that wasn’t their job, after all. Once you win the mandate, even the continents’ greatest domestic and international i-bankers don’t always tell their clients what they fear isn’t welcome news: such as, “your proposal is $3 billion short in the equity box”. Sorry to break it to you, but your forecast IRR isn’t attainable. At least not if the business is to be technically solvent at closing.
That being said, if BCE’s Board of Directors is truly focused on the little guy, it is premature for them to be pursuing the $1 billion breakfee from the OTPPB-led equity syndicate. The better course of action would be to recut the deal, just as OMERS and Teranet did a few days ago. If KPMG didn’t think the business was stable at a $42.75 going-private price (at least not without an additional tranche of equity), there must be some price at which the proposed equity level would work.
Think about $36, for example. A $5.4 billion reduction in the proposed LBO price (and requisite debt level) might not require OTPPB et al to contribute more equity to the deal, and it is substantially less debt for the four lead banks to put up than they had originally agreed to. Less leverage going in makes the post-deal capital structure easier to syndicate to other banks around the world. The IRR won’t be dramatically different for the merchant bankers, or at least the risk profile of the deal will be reduced with a meaningful drop in leverage.
The BCE Board might not think $36 will cut it, but ask yourself this: if none of this had ever happened, and someone came along and offered a 50% premium to the current $24 ish quote, would it get rejected in this market? I doubt it. Just ask the Teranet shareholders who gladly took $10.25 off a pre-bid $8 quote; a far weaker premium than 50%.
As for the bank syndicate, I know the story is simple. They were contractually obligated to do the deal at $42.75, but not on any other basis. Fair enough, but if banks are prepared to back the Teck/Fording deal with ~$9B of debt, why not this one? At least if it can be done on terms that reflect the current economic environment, and not the one we all knew in June of 2007.
Alas, it may well be that deal fatigue has set in. But let’s give it one last shot. After more than 18 months of trying, and something like $244 million of fees already in the pockets of various advisors, it seems a shame to let it all fritter away. There’s a deal here. Folks just have to want it.
(disclosure – I own BCE)