BCE Buyout in Jeopardy as Auditor Balks

BCE, the parent of Bell Canada, said independent valuation firm KPMG has notified the company and its purchasers that it won't be able to deliver them a solvency opinion -- an express condition to closing the merger. The deal was scheduled to close on Dec. 11.

The Montreal-based company says it disagrees with KPMG's conclusion and will review the methodology used by the valuation firm. Because the conclusion is preliminary, KPMG could conceivably reach a different conclusion by the deal's closing date.

"BCE today enjoys solid investment grade credit ratings, has $2.8 billion of cash on hand, a low level of midterm debt maturities and continues to deliver solid operating results," said BCE Chief Executive George Cope. "The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition."

The stock fell 26% to $23.20 in recent premarket trading.

Struck in June 2007 at the buyout boom's apex, the BCE transaction capped a year-long flurry of deals during which nine of the 10 largest leveraged buyouts were struck. Led by Providence Equity Partners and Ontario Teachers' Pension Plan, the deal would place Canada's largest telecom company into private hands.

Since the credit crisis struck during the summer of 2007, a bevy of buyouts have either been revised or collapsed, including those for equipment operator United Rentals Inc. (URI), student lender Sallie Mae and gambling company Penn National Gaming Inc. (PENN). Others ended up in litigation, such as Clear Channel Communications, which ultimately went private on renegotiated terms; and chemical company Huntsman Corp. (HUN), which is still tied up in a nasty legal battle largely over issues of solvency.

This is just the latest snafu in BCE, a deal that has already had to surmount numerous hurdles. Aspects of the company's corporate governance had to be changed as a condition of the deal's approval by Canada's broadcasting and telecom regulator. Existing BCE bondholders also filed a lawsuit to block the deal and took the case all the way up to the Supreme Court of Canada, which ultimately sided with the company.

Then, in July, BCE, the buyers and the banks renegotiated the deal that effectively reduced the purchase price and put off the deal's closing date until December. As part of this new deal, Bell Canada suspended its dividend until the end of year-end, a move that has led to a shareholder lawsuit against the company filed in Canada.

It is unusual for a merger agreement to require a solvency certificate as a condition of closing. Banks typically require a solvency certificate as a condition to financing a transaction, but BCE had put this condition in place because it wanted to protect itself from complaints by existing BCE bondholders about the company's new, debt-heavy capital structure.

Likely salivating over the prospect of a collapsed deal are the financing banks, led by Citigroup, Deutsche Bank, the Royal Bank of Scotland and Toronto Dominion. The lenders, which have agreed to provide roughly $34 billion in debt to fund the LBO, stand to suffer billions of dollars in losses if they back the transaction. That's because they would have to try to resell the bonds and loans into a debt market trading near record lows. or else hold them on their balance sheets. If the deal closed, Citigroup, which was bailed out by the federal government this week, would be on the hook for $11 billion in financing.

Less clear are the sentiments of the buyers' group, which also includes Merrill Lynch's private-equity unit and Madison Dearborn Partners. Although the buyers have maintained publicly that they want to complete the transaction and have called investors capital to fund it, the world has changed drastically not only since they originally struck the deal in June 2007, but also since they renegotiated it this past July.

Over the past week, as Citigroup's stock cratered, BCE investors grew nervous over the likelihood of the deal closing, and the stock had traded about 25% below the $34.90-per-share takeover price. But news of the government bailout of Citigroup boosted shares of BCE, which closed Tuesday in 4 p.m. New York Stock Exchange trading at $31.28, a roughly 10% discount to the deal price.

-- Peter Lattman, The Wall Street Journal