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A new chapter

The death of the BCE deal marks the end of one cycle but signals hope for another, writes Suzanne Weinstock.

The collapse of the BCE deal, one of the most ambitious LBOs ever attempted, is a fitting end to the mega-buyouts that characterised 2006 and 2007 vintages.

At C$52 billion, the transaction was the largest ever agreed and also the last to dissolve since the credit markets began tightening in roughly July of 2007 making massive LBOs unworkable.

Suzanne
Weinstock

After 18 months of overcoming legal and financing hurdles, the deal was ultimately taken down by the increasingly troubled financial markets which last month led KPMG to determine that the company would emerge insolvent from the buyout by Ontario Teachers’ Pension Plan, Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity. The audit firm blamed “current market conditions” and the C$34 billion of debt in the deal.

On the 11 December scheduled close date, the private equity consortium finally admitted defeat and cancelled the sale process. Only the resolution of the C$1.2 billion break-up fee remains to be settled.

No agreed buyouts approaching the size of the BCE deal remain in limbo making 11 December the symbolic end of the unprecedented mega-deal boom.

Despite the deal’s significance within the buyout boom, perhaps its most long-lasting impact will be on Canadian law. Until June 2008, the transaction was bogged down in a legal dispute over bondholder rights that made its way all the way to Canada’s Supreme Court.

The court ultimately ruled against the bondholders who were upset, among other things, by the devaluation of BCE bonds, which they attributed to the pending LBO, and felt the take-private should be structured as a reorganisation, thus giving them voting rights. The court overturned a lower court ruling that would have rewritten Canadian law by requiring that the interests of bondholders be taken in account as opposed to maximizing shareholder value during a change of control transaction.

Also of note is the fact that, despite a dearth of lenders willing to shell out financing at present, Citigroup, Deutsche Bank and the Royal Bank of Scotland had been willing to proceed with the supersized transaction. Renegotiated last summer, the C$42.75 per share agreement remained in place but BCE agreed to freeze dividend payments between July and the planned December close date, which amounted to about a C$2 a share price cut.

That billions in financing could have in fact been made available gives confidence that big buyouts may not be stalled indefinitely. Although leverage will likely never come as easily as it once did – or at least any time soon – and deals may never again become quite so large, perhaps sizeable buyouts will not be entirely a thing of the past.