BCE Deal: Will Telus Re-Emerge?

The surprise decision in favour of BCE Inc. (BCE) bondholders from the Quebec Court of Appeal puts the C$52-billion privatization deal in jeopardy and forced analysts to slash their price targets and downgrade shares of the telecom giant. But the development also raised the possibility that Telus Corp. (TU) could re-enter the fray. It dropped out of the running at the last minute before a deadline for interested groups to submit their offers to BCE in June 2007.

Jeffrey Fan at UBS Securities cut BCE from a “buy” to a “sell” and lowered his price target from C$42.75 to C$33. This new target is based on a 20% chance the deal closes at C$42.75 as planned, but only if the Supreme Court appeal is sufficiently accelerated and leaving any other potential hurdles aside. He puts the probability of the stock falling back to its fundamental value of C$31 at 80%.

As far as Telus’ potential involvement, Mr. Fan said this is far from certain given its recent share price decline, but thinks the company will likely revisit the option nonetheless. Telus’ stock has fallen more than 25% since hitting a 52-week high of C$66.45 in June 2007. It closed at C$47.92 on Wednesday.

The analyst also noted the potential dilution for existing Telus shareholders, weaker debt financing conditions and regulatory challenges posed by the competition bureau, which are unchanged from the last time it approached BCE.

He said:

As a result, we think TELUS would likely offer a materially lower acquisition price relative to the one management had in mind last June.

Mr. Fan also said that while BCE will try to expedite the appeal process by seeking guidance from the Supreme Court, investors also need to be aware that the lenders’ commitment to the deal expires in November 2008, according to the Abridged Debt Commitment Letter.

As far as the bondholders, UBS believes they would rather see the deal fall through and recover their investments, rather than settling outside of court.

Mr. Fan noted that since final approval from the CRTC and Industry Canada have yet to be received, the deal’s sponsors may still have an out without having to pay a break fee if they believe it ultimately will not close.