BCE and the Rule of Law

I was the shareholder intervenor for the BCE (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 (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 (BUD) and UST (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

Comments

[John Seaton:]

Matt Stewart demonstrates the wrong headed unresearched wishful thinking that got us all into the current market meltdown. He bases his thinking on wall street hyperbole and ignores main street reality. Remember Mr. Stewart holds BCE shares and is hoping to gain great rewards from this holding. I recommend Margaret Atwood's new book "Payback" to Mr. Stewart so he can review the likely outcome of greed having run wild.
I have written several times on this sight warning that Bell has so pissed off main street that it will take years until they can regain their market share. They have not improved. I have heard "I hate Bell" so many times that I as a family dependant on a "Teachers" pension fear what this buyout will do to our pension fund. Mr. Stewart says that the teachers fund will take the first hit if anything goes wrong so his BCE investment is OK. Just google (Bell problems) etc and see what angry Bell customers are writing. Jim Leech is on a power trip to do the biggest buyout ever playing with our money. He will get away with it if the lenders don't collapse because the teachers who own this fund are too NAIVE and TRUSTING to understand that they are being taken by buying Bell stock for $42 per share when it can be purchased on the open market for $26 per share.
I note that Mr. Stewart levels an attack against Dianne Francis who is one of the few who sees that the emperor has no clothes. Too bad that some are onto this game and spoiling Mr. Stewart's stock play.
Let me illustrate how incompetent Bell management is. They still have not dealt with a $400 balance from last summer that I refuse to pay (I have already paid $600) because their phone cards are no good in the US. These cards generate huge long distance bills. For $400 they exposed themselves to my scrutiny and research into possible problems with this deal. Wise Goliaths should be wary of Davids with sling shots.

2008 Oct 16 12:37 PM

[Matt Stewart:]

Mr. Seaton seems more angry about his phone card than anything else. Notwithstanding the obvious axe you have to grind, it would seem to me that the BCE deal - and whether or not you favour it - is ideological.

Either you believe in regulated free market capitalism (This deal went through all kinds of regulatory hurdles to get cleared) - or you don't...

As far as your retirement fund goes, rest assured Mr. Leech knows exactly what he is doing. BCE spins off tremendous quarterly cashflow. Over time, the leverage will be reduced. As a private company BCE will not have to pay a dividend so this cashflow will be used to pay tax-deductible interest expense. And at the end of the trade, Ontario's teachers will end-up with a highly valued equity account funded at a cost of borrowing that is unlikely to be seen again in yours or my lifetime.

You are griping about potentially owning one of Canada's finest utility assets in a private fund that benefits you exclusively on a go forward basis. Perhaps you should rethink your position.

As a final comment...I own shares in the hopes that I will make a profit.

Q. Isn't that the entire point of owning shares in a company? Isn't the premise behind investing that you set aside funds today so they will be worth more in the future.

Not exactly sure how that makes one greedy...but again - you seem a bit enraged by your phone bill.

Best advice for you sir would be to switch sides. If you are reliant on a Teachers pension - the best thing that could happen for you would be to have this deal close. As a reminder - you already owned 5% of BCE before this deal was struck...in for a penny - in for a pound.

2008 Oct 16 08:13 PM