Shareholder ire in BCE deal Posted: December 10, 2008, 2:40 PM by Jim Middlemiss Jim Middlemiss, Corporate, Legal News, BCE It's fourth and goal at the half-yard line for BCE in its efforts to keep the $52-billion leveraged buyout alive. Barring a miracle play, the deal is as dead as that Christmas goose in your freezer, according to Bay Street wags. "They're playing out the clock," says one noted M&A lawyer and going through the due diligence stage to protect themselves from legal attack. Virtually no one is giving BCE a chance that it will be able to salvage the $42.75-a-share offering.
After a saga that had more twists and turns than a Formula One race track, it's bizarre that the inability to attain a solvency opinion will bring this deal down, since court evidence suggests it was a clause inserted at BCE's persistence in order to placate bondholders and address their litigation concerns.
While BCE has hired PricewaterhouseCoopers to help it try and persuade KPMG that its solvency valuations are wrong, few believe that the accounting giant will bend at the last minute.
It's posturing, the same way the rumour last week that the Ontario Teachers' Pension Plan would take a minority stake in BCE was likely done to fend off criticisms that the parties weren't doing enough to make the deal happen. They're dancing around the $1.2-billion giant in the room — the break fee. BCE has spent hundreds of millions of shareholders' money to get to this stage and it wants remuneration for the upset that Teachers inflicted upon the BCE business.
Shareholders stand to take a bath — the shares are trading at $23. The recent developments have raised the ire of Matt Stewart. He was the retail investor who intervened in the BCE bondholder litigation on behalf of retail investors who supported the deal and opposed the bondholders' position.
Stewart, an MBA, says "I think at the end of the day it is an ironic result in light of all the haggling." He has written to BCE demanding disclosure around the KPMG preliminary solvency report, but has been rebuffed.
"If there was a mandatory requirement for a solvency clause, then I suppose nobody screwed up. If it was elective, then whoever inserted it [should be] accountable." He said what he doesn't understand is how the dealmakers could be so careful to write an iron-tight contract when it comes to the material adverse effect provision — the normal escape clause from a deal, which in this case is virtually impenetrable — yet leave it so open at the front end with the solvency clause.
He feels that whoever inserted that clause "failed to take into account the nature of the capital structure being proposed by the purchaser. They gave the purchaser a complete put option." He said that nine out of 10 LBOs would fail a solvency test based on assets-to-liabilities. The problem, he said, is that shareholders don't know the methodology KPMG has applied to determine solvency. "I think shareholders have a right to the report to see the methodology used and a right to see why the test failed. Just to be told by [BCE] that the test failed is incomplete disclosure We should have the right to see how it was calculated and why it failed."
In its response to him, BCE investor relations officials would not confirm whether the KPMG report will ever see the light of day.
The betting here is that the report will see the light of day, but likely not till the court writs fly. However, don't expect Stewart to be the one to carry such litigation. He's had enough. "I don't think I will seek counsel. If there's some kind of class action launched by somebody else, I will certainly take a look at it."