BCE Inc.'s LBO Banks: Where's the Common Sense?

News item: OMERS to cut hostile takeover bid for Teranet (TNTIF.PK) by 6.8%. (Bloomberg)

There you have it. The Teranet Board couldn’t find a better offer than the original C$11 bid by OMERS, so they turned around and recommended what had previously been 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 C$11/share? It feels like C$10.25 right now. This is bad for our Decade of Daddy Mirror Fund™, but wise for the municipal employees and retirees of Ontario. Malcolm 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.

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 salability of some of the BCE Inc. (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 C$3.5 billion CI Signature Select Canadian Fund are 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 hesitant 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 ostensibly, it is all tied to a C$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 Try to change the ticket price of the LBO deal, so the story goes, and the banks get to walk, as the contract is no longer valid.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 us BCE shareholders a penny - even if we deserve it. Setting aside 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 could it possibly be in the interest of shareholders at Citibank (C), Deutsche Bank (DB), Royal Bank of Scotland (RBS) and Toronto-Dominion Bank (TD), essentially to 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 six weeks, then pull the plug now.

To knowingly force "Teachers" to pay C$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.

Disclosure: I own BCE.

Comments

[contradan:]

You're article is based on the premise that Teachers' could legally cut their offer and BCE would accept. Why would BCE shareholders accept a lowered offer? The banks already tried to get out of it and were defeated in the Canadian Supreme Court. All BCE investors have foregone two quarterly dividends and allowed Teachers' appointed BCE CEO to run amock through the company. In addition, American investors have seen their presumed payout decline 25% as the Canadian $ has fallen vs. the American $. And now BCE beat estimates. As a long BCE investor, I would vote against a lowered offer and take my chances in court ... again.

2008 Oct 29 01:11 PM

[BARAKA:]

A DEAL IS A DEAL IS A DEAL. WHAT IF THE MKT PRICE HAD GONE TO $49? AI

2008 Oct 29 04:34 PM

[Dirkyp:]

OMERs was not contractually bound to complete the Teranet deal - they could have changed the offer to whatever they wanted.

Teachers on the otherhand cannot legally amend its offer - the only way they can do so is to pay the $1B + break fee - realistically if they did that (which perhaps they should) the banks would scatter and the deal would be off. Plain and simple. All that would happen is that Teachers would be out $1B which would not be politically palitable for the folks at Teachers (try explaining to your board and your school teachers that you just wasted $1B).

The deal is unconditional. The banks are on the hook and the only way out is to beg the government to legislate them out of it (the Brits for RBS and Federal gov't for Citi).

A much more plausible and realistic scenario is for everyone to share the break fee - perhaps just the banks to get themselves off the hook. If they have $16 Billion in loans and have mark to market accounting they could easily have an instant loss of over $1B (the break fee) so why not just front the break fee to Teachers and everyone walk away? Much easier for Citi to right off a few hundred million these days along with the other Billions.

Very simple - deal goes through as is or someone pays $1 Billion.

Keep in mind that BCE is still public so if they get wind that the deal is in trouble they are obliged to disclose it right away or they'll get sued.

Hubris of biblical proportion trying to pull this one off.

Personally I think Bell is a train wreck of a company and Telus and Rogers will eat their lunch, especially with BCE's soon to be crippling debt load - not to mention when that debt has to be refinanced it will probably be at much higher rates.

For shame.

2008 Oct 29 04:48 PM