BCE Leveraged Buyout: Playing the Odds

On the eve of BCE Inc.' s  (BCE) challenge before the Supreme Court of Canada, Neeraj Monga and Dharmesh Samji, two analysts with Veritas Investment Research, have taken a fundamental look at the company. And, they don't like what they see.

They said that without a successful result from the Supreme Court, BCE's equity value will stabilize around C$29 a share, and have placed a sell on the stock with the comment that "we wouldn't bet our money on BCE."

In their 16-page report, the two analysts presented three scenarios for how the proposed C$52-billion leveraged buyout may end, and their odds for each:

• A 49% chance of winning. The analysts chose 49% because that's the percentage of all cases which were successful on appeal to the SCC over the past ten years. Under that scenario, BCE's expected value is C$34.32.
• A 40% chance of success. That percentage was chosen because over the period from Jan. 1, 1997 to May 28, 2008, it represented the chance of winning an appeal judgment based on commercial and tort law cases. Under this scenario, BCE's expected value is C$33.64.
• A 20% chance of negotiating a settlement agreement with the bondholders. That scenario generated an expected value of C$34.31 a share.

The analysts also have a dim view on whether shareholders should expect to receive the current offer of C$42.75 a share, saying the probability of getting full price "even under the most optimistic of scenarios is bleak," they wrote. The two argue that if BCE is successful in its litigation against the bondholders, "then a realistic expectation, given the Clear Channel (CCU) settlement, should be a 10% re-price or approximately C$38.50 per share."

Under a negotiated scenario, the two analysts believe that shareholders will receive a price in the range of C$35.35 - C$37.49.