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Deal looks safer but by no means a gimme
Wednesday, May 14, 2008
With each passing day, it seems more likely that the BCE buyout will close as planned in June.
But with the market finally coming to this view - witness the BCE stock price spike and the Caisse de dépôt et placement du Québec's massive 5.3-million-share bet on BCE - let's be contrarian for a moment.
Let's look at what might still derail this $35-billion train, just as it pulls into the station.
To start with, let's be clear: The four banks funding this deal would be thrilled if it didn't close. There would also be celebrations at private equity funds backing the lead investor, the Ontario Teachers' Pension Plan, if it fell apart.
On Monday, potential buyers refiled paperwork needed to get this deal done with the CRTC. Approval should come within weeks, if not days. A CRTC thumbs-up clears the last regulatory uncertainty.
So the contrarian, or cynical, view is that the CRTC flags additional concerns with the bid and, in doing so, kills it - there's a June 30 drop-dead date on the deal. Odds of this happening are extremely slim.
There's also a Quebec Court of Appeal decision pending on a lawsuit brought by BCE's bondholders, who want to block the deal. Legal experts say that appeal has no chance. But if by some miracle the court sides with the debt holders, the buyout is in trouble.
Finally, there's a chance that the whole deal reaches the closing ceremony, where cheques need to be deposited, and one of the buyers simply doesn't show up. A bank or private equity fund may choose to simply renege, incur a $1-billion reverse break fee, and take its chances on lawsuits and damage to reputation.
This is the one scenario that doubters can actually see playing out. We've been down this path in the U.S. and banks and private equity funds have survived weaselling out of deals.
Let's look at the idea of damage to reputation first. Cerberus Capital Management walked out on an agreement to buy United Rentals, using an exit agreed to when it inked the purchase. Angry words were exchanged, but Cerberus is still considered a leading buyout firms, able to raise money and strike new deals.
When it comes to lawsuits against the buyers, very smart lawyers have worked hard to ensure Teachers and its partners aren't on the hook for anything more than $1-billion. The BCE buyout is being done through a shell company, called 6796508 Canada Inc. This shell has no assets, past a guarantee to pay the break fee.
In public, everyone tied up in this transaction says they are working hard to close it. But you still hear rumblings that the fertile mind of BCE chairman Richard Currie is working on ideas of what to do if, for some reason, the buyers don't show up. And there continued to be speculation that the banks will push to re-cut the terms of their loans, as they appear to have done at Clear Channel Communications.
So, does the world's biggest leveraged buyout actually close next month? All the signs say it will. BCE stock closed yesterday at $39.10, up 2.6 per cent - the highest level seen since the Clear Channel deal ran into trouble in January. But it is by no means a risk-free play.
There are still hurdles to be cleared before investors can cash in on that $42.75 takeover offer. The next six weeks promise to be an eventful time in an already eventful period at BCE.
Phillips takes a walk
CIBC World Markets deputy chairman Richard Phillips is the latest veteran of the Street to decide his past looks better than his future, and opt to take a break from life at a dealer.
Mr. Phillips, head of global equities for the past year, stepped down this week after 19 years at the investment bank. He began his career as an associate in the research department, and has worked or managed every part of CIBC World Markets equity and equity derivatives units.
His plan is to take the summer to reflect on his next job.
This sort of introspection is increasingly common during what's shaping up to be a nasty market downturn.
Let's be blunt: Very few investment bankers are going to score a big bonus this year. Those who were considering alternative careers have a perfect opportunity to step away.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
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