BCE shares plunge as court sides with bondholders

TORONTO (Reuters) - Shares of BCE Inc fell 13 percent on Thursday on fears that a Quebec court ruling could kill its C$34.8 billion ($35.2 billion) buyout by a group of investors led by the Ontario Teachers' Pension Plan.

In a ruling released late on Wednesday, the Quebec Court of Appeal backed debtholders who had complained that the transaction, the world's largest leveraged buyout, was unfair.
The court said BCE, Canada's biggest telecom company, failed to prove that a buyout could have been structured to provide a satisfactory price for the company's shares while avoiding an adverse effect on the debenture holders.

BCE shares plunged C$4.71 to C$32.41 on the Toronto Stock Exchange and were down $4.98 at $32.85 in New York.

News of the court ruling came days after reports that the banks financing BCE's buyout were trying to renegotiate terms, also raising uncertainty over whether the deal would close.

"In our view, the power in the negotiation between BCE/purchasers and the banks has just shifted significantly in favor of the banks," National Bank Financial analyst Greg MacDonald wrote in a note to clients.

"In addition, the bondholders will not be satisfied unless they are paid in full."

Wednesday's ruling sent the case back to the lower court that had rejected the bondholders' complaint in March. BCE said it and its would-be buyers would seek to appeal the decision to the Supreme Court of Canada as quickly as possible.

Mark Meland, a lawyer representing the bondholders, said the appeals court ruling essentially stops the deal from proceeding in its present form.

"The court of appeal has decided that the deal will not go through," he said. "Unless (the ruling) is overruled by a higher court, the plan of arrangement is terminated."

Meland said his clients are "ecstatic" about the result and plan to "vigorously contest any attempt by BCE to overturn the judgment."

He said the deal has led to a 20 percent decrease in the value of the bonds in question and saw their credit ratings cut significantly. At the same time, equity shareholders were receiving a premium for their stock.

BONDHOLDER NEGOTIATIONS POSSIBLE

Genuity Capital Markets analyst Dvai Ghose said BCE could try to negotiate with bondholders, given that the bonds in question carry C$2 billion in face value -- a relatively small portion of the overall deal.

"BCE could offer early redemption with penalties," he wrote in a research note. "We would not ignore this."

The Supreme Court has nothing on its agenda for the weeks of June 9 and June 16, so it could in theory deal with the issue on an expedited basis before a June 30 deadline to close the takeover.
Even before the ruling, BCE's stock had been well below the C$42.75 offer price as investors worried that the deal could be repriced, delayed or scrapped, particularly given tight credit markets.

Also on Thursday, Canada Pension Plan Investment Board Chief Executive David Denison said a deal BCE's size "could not happen in today's markets." The CPPIB had bid for BCE but ultimately lost out to the Teachers' offer.

MacDonald said the latest court ruling added yet another element of doubt.
"The market will consider the real possibility that the purchasers will walk from the deal after the June 30 outside date, after which they are no longer obligated to pay the break fee," he wrote.

The buyout proposal includes an C$800 million break fee that BCE would have to pay under certain circumstances if the deal falls through, and a reverse break fee of C$1 billion that the buyers would pay if they pull the plug.

POSSIBILITY OF TELUS BID LINGERS

There has been speculation that Telus Corp, Canada's No. 2 phone company, could return to mount an offer for BCE.

Telus was in talks to acquire BCE before the Teachers' group emerged as the winner, but walked away citing "inadequacies" in the bidding process.

However, many analysts believe a Telus bid would likely meet opposition from regulators, as it would lessen competition. Also, Telus shares are down some 28 percent from a year ago, making them a less attractive acquisition currency.

Teachers' partners in the BCE bid are U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity.