RBC Thinks Teachers-led Bid for Bell Likely To Go Through

This summer’s turbulence in the debt market has some investors fearing the proposed privatization of Bell Canada Inc. (BCE) led by Ontario Teachers' Pension Plan might fall to bits. The deal has to clear a number of regulatory hurdles, and investors worry the deal could fall apart between now and the closing, which Bell said is expected in the first quarter of 2008.

Jonathan Allen, an analyst at RBC Capital Markets, said investors should fear not.

“The $42.1-billion BCE transaction is all cash and not conditional on financing,” Mr. Allen said in a research note Monday.

With five to seven months until closing, there is a strong likelihood credit markets will stabilize. With a $1-billion break fee and reputations on the line, we believe the risk of OTPP canceling the deal is low at the moment.

If the private equity consortium fails to make good on its bid, it has to pay Bell C$1-billion.

Mr. Allen said investors could post a return of 6.4% by investing in Bell right now: the stock is trading at C$40.95 Tuesday at noon, below the C$42.75 offer price. Added to that, the company will pay dividends until it is privatized, meaning investors would pocket two dividends for a total of C73¢ a share if the deal closes in the first quarter.

“With stable operations and cash flow, we believe the Bell privatization has less operational/closing risk than other ongoing [leveraged buyout] transactions,” Mr. Allen said.

On Monday, another analyst weighed in on how to play the takeover game, but came up with a different suggestion.