BCE and the Rule of Law

Oct.13.08 | About: BCE Inc. (BCE)

I was the shareholder intervenor for the BCE (NYSE:BCE) vs. Bondholder's case. Seems like an eternity ago doesn't it that the Supreme Court ruled that the BCE debenture holders were crying wolf?

I like Mark McQueen. He was a fraternity brother of mine at Western and he - like me - remains long BCE as an arb trade. I'm not sure if he is long anew or underwater from a higher cost base, but it doesn't really matter - does it?

The question for shareholders remains the same as it did when the high court ruled that the deal was just. Namely: will the rule of law prevail?

BCE, Ontario Teachers, et al have a binding contract in place for the pension fund to take BCE private, funded by the consortium of banks mentioned in Mr. McQueen's article.

Now that RBS (NYSE:RBS) has been recapitalized, it is apparent that there is ample solvency in place for the banks in question to gear-up their balance sheets once again and deliver the goods - namely $8 billion in debt per bank.

As far as breaking the contract goes - ask the Apollo PE firm how that went when they tried to renege on their funding of the Huntsman takeover.

In my view, the key takeaways for the BCE deal remain the following:

  1. The quality of the underlying asset is outstanding. With ample free cashflow generation and a stable of tangible assets as collateral, there is no doubt that any loan will be "money good" over time, particularly when you consider that Teachers and the PE firms' equity investment will take the first hit in any event of default. 
  2. If credit spreads fail to tighten, there should be nothing preventing the banks involved from warehousing the debt on balance sheet until spreads tighten-up. The kind of mark to market loss in question isn't going to sink the ships of these recapitalized institutions.
  3. The fear-mongering coming from Ms. Diane Francis of the National Post is simply biased rhetoric from a partisan who has been dead set against the BCE deal from the outset. Ms. Francis seems to think that shareholders shouldn't have the right to vend their company to the highest bidder unless they follow some sort of leftist manifesto where every stakeholder in the company gets a cookie and a glass of milk. Ms. Francis is using here editorial presence as a bully pulpit trying to help derail the deal in any way she can. Her latest salvo is the introduction of some kind of government "Moratorium"...look for her at the ballot box this week wearing an orange, NDP sweater.

If you are reading, Mr. Harper, stay true to your conservative values and let the free market sort this deal out.

Obviously, there is some probability in the current environment that Teachers will be left at the altar by their financing consortium. But that kind of deal risk has also been priced into Anheuser-Busch (NYSE:BUD) and UST (NYSEARCA:UST), as well. BCE isn't the only nervous bride out there.

My conviction, however, rests with the rule of law, business ethics, and the remaining fact that BCE remains a desirable asset for the purchaser as the cashflows will match their payout requirements for Ontario's retired schoolteachers and clear the PE firms hurdle rates.

In the interim, for longs like Mr. McQueen and myself, it remains an interesting sport to watch.

Disclosure: Author holds a long position in BCE