Is There a Way to Save the BCE Deal?

A decision from the Quebec Court of Appeal that BCE Inc.’s (BCE) bondholders were treated unfairly could not only derail the company’s C$52-billion privatization deal, but could change the face of future M&A in Canada.

RBC Capital Markets analyst Jonathan Allen told clients:

Boards would no longer have a duty to just maximize shareholder value. Now boards must be willing to accept lower takeover prices and show that all minority stakeholders are considered.

Given the importance of the case to M&A and corporate governance policy in Canada, he thinks there is a good chance the Supreme Court appeal sought by BCE and its buyers will be heard. However, the timing is very uncertain and could take until the fall.

Nonetheless, Mr. Allen said a deal could be salvaged if BCE settles with bondholders through a tender offer for the affected bonds that puts them at a price comparable to where they were trading in early 2007 before speculation surrounding the deal begin. This would cost roughly C$1.3-billion and the money could be raised by lowering the equity price to C$41.11 from the previously negotiated takeover offer of C$42.75 per share, he said, but this would require another shareholder vote.

BCE closed at C$37.12 on Wednesday and Mr. Allen’s net asset value for the shares is C$30, which he thinks could provide medium-term support. But if the deal is in fact broken, the analyst think they could fall into the high C$20 range.

He also raised the possibility of BCE and its buyers calling all of the C$5.1-billion par-value of affected bonds. However, this would produce a C$2.1-billion call premium, which he said is:

an amount that is both prohibitive and unrealistic for the buyers to agree to – especially considering the Court’s ruling that the BCE Board should consider (i.e. mitigate) bondholder losses – not provide them with a significant windfall.