So the news Thursday that the BCE (BCE) deal had hit a major snag was a surprise since the debt holder suit had been dismissed in much of the discussion of the deal as a non-factor. A Quebec appeals court sided with debt holders who claimed that the deal was unfair to those holding debt issued by BCE. In a strange twist, which most Americans would find bizarre, the opinion reasoned that the buyout is unlawful because in Canada, unlike the U.S., board members must serve the interests of all stakeholders not just the shareholders. It appears that Quebec’s highest Court has advised that company directors owe a duty to the stakeholders, and those include the lenders to the business.
The decision has been appealed to the Supreme Court of Canada but the Court could easily refuse to hear the case. The Quebec appeals Court’s decision could certainly delay or kill BCE’s June 30 deadline for closing the $52.7bn enterprise value deal. BCE filed late on Thursday urging the Supreme Court to rule before the June 30 deadline. Here are some choice quotes from BCE’s groveling request:
This is a matter of extreme urgency in which the fate of the largest transaction of its kind in Canadian history hangs in the balance," BCE told the court.
Otherwise, it said, "the transaction will be jeopardized, or perhaps destroyed, simply as a result of the passage of time associated with resolving this litigation, and BCE and its hundreds of thousands of shareholders may well suffer catastrophic losses in the billions of dollars."
The sponsors and Ontario Teachers have issued statements saying they still stand by the deal and want it to get done. Providence released a statement from the buyers saying, "We are reviewing the ruling and evaluating our options with respect to the bondholder claims…We remain committed to this transaction."
BCE was the only deal to pass the $50bn EV threshold and is still the largest buyout on record. The deal was agreed to last June, just days before credit markets began to unravel in North America. However, it still doesn’t pass up the size of KKR’s (KKR) purchase of RJR Nabisco when adjusted for inflation. Furthermore, KKR’s purchase changed the buyout game forever and BCE just slightly increased the size of the elephant that could be taken down with an LBO gun.
KKR’s RJR Nabisco deal defined the 1980s buyout game. The period of LBO exuberance we have just gone through which is now ending in haggling over committed financings, huge losses on bank balance sheets from bridge loans that can only be sold at huge discounts, and broken deals may be defined by a deal that did not get done. Certainly the photograph of Providence Chief Executive Jonathan Nelson on the cover of the current issue of Fortune magazine next to the headline, "The Biggest Deal Ever: An inside look at how Jonathan Nelson put together a $51 billion telco buyout" will be a great memento of this last boom if the deal dies.
If the ruling wasn’t bad enough the NYT reported on Monday that the banks led by Citi (C), (DB), and (RBS) wanted to renegotiate the committed financing deal. Their has been no resolution of this disagreement and the Canadian Courts may resolve this issue to the benefit of the banks who will now not have to finance this thing at a huge loss.
Honestly, the Prince would just like to see this one die. BCE is shining example of the overreaching that occurred in this last LBO boom. The sponsors probably overpaid in competition with other groups of buyers. They bought a company that is so large it would be difficult to get returns from improving operations. So basically the buyers are trying to play this as a cyclical play and hope for multiple expansion or better revenues. They could also just be banking on the returns that will come from leveraging up such a large company. With only 4 to 5 years to hold BCE then find a buyer (that seems like quite a task but The Prince will focus on the buyout problem at hand) there is no way the banks can make meaningful changes in the operations of an established telco. The Prince hopes that someone at MDP or Providence is looking at this thing and realizing that they overpaid for BCE and the worldwide economy is slowing. It would be imprudent for the sponsors not to re-examine the assumptions they made to evaluate the probable IRRs on BCE.
If the Deal dies it would be Christmas in Wall Street for the firms that are on the line for the committed financing. Maybe a few less leveraged finance employees will get the ax as a result of BCE falling apart. The deal is probably also best for sponsors in general since it takes a big chunk of leveraged loans out of the forward calendar. BCE dying would probably speed the recovery in the leveraged acquisition markets which would be good for all sponsors. The Prince has not gotten into what the collapse of this deal will do to M&A in Canada or the effect that the precedent that may be set by the Court will do to Canadian governance. Yet, if the Court was going to set this kind of precedent I don’t think it necessarily had to do it with BCE. Of course BCE’s current debtholders will win big if the buyout gets blocked. The shareholders and merger arbitrage players that are long BCE will take a bath but maybe this will cause shareholders to discount the chances of lucrative buyouts going through in the future. Investors may need to readjust their certainty expectations when it comes to deals. Given how BCE is trading in light of the Court’s ruling the pain for shareholders may be bad enough that some of them will learn a lesson. So BCE, The Prince is sorry and he still wants to be friends, but it is probably best to break-up.