Last Legal Stand in the BCE Privatization Deal

It is being called the “last legal stand” in the privatization of BCE Inc. (BCE). A class action lawsuit recently filed on behalf of common shareholders in a Saskatchewan court against the telecom giant seeks C$588-million in damages for the two dividends forfeited in the second and third quarter, and also aims to hold up the closing of the buyout until the claim is dealt with. The deal is set to close on or before Dec. 11.

According to the local registrar in Regina, BCE has demanded that the plaintiff’s lawyer make a formal request for injunction on Nov. 6, which a judge will hear on Nov. 13, National Bank Financial’s Greg MacDonald told clients.

While BCE has said it considers the suit without merit, the analyst noted that the reason companies are not sued for cancelling their common share dividends is because they are “subject to board approval.” This is the language used in BCE’s definitive agreement.

If the judge does not grant the injunction, Mr. MacDonald noted that the plaintiff must apply for certification of the class action suit, which will lead to a drawn-out process. “Obviously this is a positive for the stock and the deal since the deal can close,” he said.

However, if the injunction is granted, the judge is indicating that there is enough evidence to hear the case, and more injunction requests and hearings would follow.

The analyst said:

Obviously, an injunction would be a negative for the stock because it means a likely delay in deal close and would increase the risk of a deal collapse.

However, he thinks BCE’s action supports the company’s view of the merits of this suit and maintained an “outperform” rating and a C$42.75 price target on the stock, the same level as the buyout offer.

Comments

[weiwentg:]

BCE is starting to look like a possibly lucrative arbitrage play. The banks involved seem to have been saying all the right things, and now the suit above was dismissed. The only risks I can remaining are:

For non-Canadian arbitrageurs, there's currency risk. The USD was 1 for 1 to the CAD earlier, but today (11/21), it's CAD$1.29 to the USD. That means that the CAD$42.75 buyout offer is now worth $33 or so. Of course, BCE is trading about $26.50 on the NYSE. Even if the CAD somehow depreciates to $1.50 to the USD, US investors would still get US$28.50.

I'm a bit more worried that the deal might be delayed or renegotiated lower. Starting about 16 minutes into this interview, Mark McQueen of Wellington Financial in Canada believes that the banks will want to renegotiate and that a lower share price will be better for everyone involved (except BCE arbitrageurs). The interview was conducted at the end of October. The banks have been saying all the right things and TD reiterated its commitment in early Nov.

2008 Nov 21 01:47 PM