BCEs Record Buyout in Jeopardy After Court Ruling

"A most unexpected result. In effect the Quebec Court says that contractual exclusions do not override reasonable expectations. But how can an expectation contrary to a freely accepted contract term be reasonable? jcm"

By Chris Fournier

May 22 (Bloomberg) -- BCE Inc.s record C$52 billion ($52.9 billion) leveraged buyout is in jeopardy after bondholders won a surprise court ruling yesterday.

The decision by Quebecs Court of Appeal allows investors to challenge the LBO of Canadas biggest phone company because Toronto-based BCE didnt take their interests into account when it agreed to the takeover. The bondholders, among them CIBC Global Asset Management Inc., say the acquisition would load BCE with debt, increasing the risk of a default, and hurt their investments of C$1.7 billion.

Unless overruled on appeal, the ruling could lead to thee biggest-ever collapse of a leveraged buyout. It comes amid reports the banks arranging funding for the LBO are trying to renegotiate the terms of the financing. BCE dropped 4.4 percent this week in Toronto trading on speculation the deal may founder.

``The decision effectively terminates the proposed transaction, said Mark Meland, a lawyer at Montreal-based Fishman Flanz Meland Paquin, which is representing the bondholder group. ``Unless the decision is overruled, the plan of arrangement is now defeated.

A failure would top the list of 62 LBOs worth a combined $174 billion announced last year that have since been abandoned, according to data compiled by Bloomberg. Banks and buyout firms have sought to scrap or renegotiate LBOs of companies, including SLM Corp., the Reston, Virginia-based student-loan provider, and Clear Channel Communications Inc. since the credit crunch began last July.

Stock Discount

BCE agreed in June 2007 to be acquired by Toronto-based Ontario Teachers Pension Plan, along with Rhode Island-based Providence Equity Partners Inc. and Madison Dearborn Partners LLC of Chicago. The buyout unit of New York-based Merrill Lynch & Co. later joined the group. The deal was scheduled to be completed next month.

The effort by BCE to obtain the best value for shareholders ``cannot be considered in isolation from other factors, the chief justice wrote yesterday.

BCE dropped 28 cents to C$37.12 in Toronto Stock Exchange trading, 13 percent less than the C$42.75-a-share offer that investors accepted last year. The stock closed as high as C$41.74 on July 6, 2007.

A Quebec Superior Court judge had dismissed the bondholders claim in March, saying the acquisition terms were ``fair and reasonable. Yesterdays decision returns the case to that court for the determination of costs.

Plan for Appeal

The latest ruling ``rewrites Canadian law relating to the duty of Canadian boards of directors to maximize value for shareholders, said Martine Turcotte, BCEs chief legal officer, in a statement. BCE and its buyers plan to appeal the decision to Canadas supreme court.

BCEs C$150 million of 10 percent bonds due in 2054 have tumbled about 38 cents to 129.3 cents on the dollar since March 2007, when reports of a buyout emerged. The yield has risen to 7.7 percent from 5.8 percent, Bloomberg data show.

James Morton
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