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Banks, buyers square off over BCE deal
Tuesday, May 20, 2008
NEW YORK, TORONTO -- The proposed $35-billion takeover of BCE Inc. turned into a high-stakes game of brinksmanship over the weekend, after a group of banks ratcheted up pressure on the company's buyers to restructure the terms of their record lending agreement. So far, however, none of the banks has threatened to walk away from the table and potentially derail the deal, said sources close to the matter.
The lenders, who have grown nervous by the extent of their financial commitments in this uncertain credit environment, adopted more aggressive negotiating tactics on Friday, and began pushing the buyers to reduce the purchase price and agree to more favourable interest rates on the loans, according to people familiar with the matter.
With only weeks to go before the deal is slated to close, the friction between the banks, led by Citigroup Inc., and the acquirers, led by the Ontario Teachers' Pension Plan, has fuelled concerns that the record buyout could fall apart.
Indeed, reports the takeover could be in jeopardy sent BCE's stock price tumbling $2.19 (U.S.) yesterday, or 5.64 per cent, to close at $36.62 on the New York Stock Exchange. That's well below the offer price of $42.75 (Canadian).
However, despite the tense discussions, sources said none of the banks has indicated it plans to walk away from the deal.
"It was clear that tough negotiations were going to be the order of the day," said one person close to the talks. "But ... the banks were presenting tough conditions - not an outright refusal."
Both sides are attempting to gain an extra measure of leverage in the lead-up to the planned closing deadline of June 30.
By balking at the terms, the banks hope to gain some last-minute concessions from the buying group.
However, sources said the Ontario pension fund and its partners believe they have a sound agreement in place, and they would have a strong legal standing if any of the banks abdicated their obligations.
"I cannot comment on discussions with the banks or the company, but we expect everyone will honour their commitments," said Jim Leech, chief executive officer of Teachers.
The buyout group also includes buyout firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity as well as Toronto-Dominion Bank.
BCE spokesman Bill Fox would not comment on reports about renewed talks between the company's buyers and their lenders.
"We have an agreement," Mr. Fox said. "And we have been working since the deal was signed on all aspects of getting the transaction closed, on the basis of the terms set out in the agreement."
He pointed to BCE's announcement yesterday that it has received written confirmation from the Canadian Radio-television and Telecommunications Commission that it has met the regulator's conditions for the deal to proceed "with two minor exceptions."
BCE said in the announcement it still expects the deal to close by the end of June. Mr. Fox said the announcement demonstrates another step toward the completion of the deal. Despite the company's assurances, however, speculation has continued for months that the deal may be repriced, and BCE shares have traded below the bid price, closing Friday at $38.82 in Toronto Stock Exchange trading.
Investors have nervously watched other deals run into difficulty in recent months as lenders have backed away from financing commitments after finding themselves hit hard by credit market turmoil.
Recently, for example, investors saw banks involved in a deal to buy U.S. radio broadcaster Clear Channel Communications fight to renegotiate terms of the deal. Three of the banks involved in the Clear Channel dispute are also lenders for the BCE deal.
Clear Channel was resolved after both sides agreed to lower the purchase price to $36 (U.S.) a share from the $39.20 originally offered last year by Bain Capital LLC and Thomas H. Lee Partners LP.
Troy Crandall, an analyst at MacDougall MacDougall & MacTier Inc., said he believes most investors would accept a lower price for their BCE shares rather than see the deal collapse entirely.
"If anything had to be redone or re-jigged on the BCE deal, our thoughts last week were that it probably wouldn't be worse than what Clear Channel renegotiated," Mr. Crandall said yesterday, referring to the 8.2-per-cent reduction in the Clear Channel takeover price.
However, National Bank Financial analyst Greg MacDonald said yesterday he doesn't believe the takeover price will be cut, as with Clear Channel, because the buyers have less leeway and shareholders aren't likely to approve a renegotiated price. He said Telus Corp.'s interest in BCE last year is one reason why investors are unlikely to agree to a lower bid.
Mr. MacDonald reckons there is little downside for the banks and that they are pursuing "an identical negotiating strategy" to the Clear Channel bid.
If the deal was to fall apart, analysts reckon that the shares would fall to between $32 and $35.
While BCE has said the sale will close June 30, that may not be the final deadline for the buying group to secure its financing. The credit agreement between the buyers and their lenders allows room for negotiations to continue past that date, requiring financing to close by November, a source said yesterday. BCE also has an agreement with the buying group that says the financing should be in place by June 30, but allows the financing date to be extended.
In addition to Citibank, the banks backing the deal include Deutsche Bank and Royal Bank of Scotland. Officials from the banks, as well as from other partners in the buying group, either refused comment yesterday or could not be reached for comment.
Clear Channel deal terms
Some of the banks financing the BCE deal were also involved in the Clear Channel buyout in the United States that ended up in court. Last week, the parties involved in the Clear Channel transaction agreed to settle the lawsuits so that the deal could go forward. The new terms include a lower buyout price, along with 'slightly' higher interest rates for the bank loans.
Takeover per-share price: $39.20 (U.S.)
Total buyout price:
Takeover per-share price: $36
Total buyout price:
Source: Clear Channel, media
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