Stock in BCE Inc. tumbled in very heavy trading Thursday after a court ruling threw into question the biggest takeover in Canadian history.
BCE shares opened at $31.99, down $5.13 from Wednesday's close. They clawed their way back slightly to $32.64 — a 12 per cent drop — before a glitch at the TSX forced a mid-afternoon trading halt.
That's more than $10 below the $42.75 a share buyout price that was agreed to almost 11 months ago — a clear sign that the markets now believe the chances of the deal going ahead as currently structured are very small.
Late Wednesday, the Quebec Court of Appeal surprised observers by overturning a lower court decision and siding with Bell bondholders who'd complained that the takeover treated them unfairly.
"BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debenture holders while at that same time it accords a substantial premium to the shareholders," a five-judge panel ruled unanimously.
The bondholders had argued that the leveraged buyout would saddle the company with so much new debt that the value of their bonds had already dropped.
BCE downgraded
Following the ruling, several brokerage firms quickly lowered their target prices for BCE stock to as little as $33 a share. Several firms downgraded their recommendations on the stock. UBS cut BCE to a "sell."
BCE said it would try to get the Supreme Court of Canada to allow the deal to proceed. But it acknowledged that the timing of the deal's closing now depends on whether the top court agrees to hear the case and when a decision would be given. BCE had said previously it was hoping to finalize the takeover by the end of June.
The Ontario Teachers' Pension Plan — the fund leading the takeover — said it remains "committed" to the deal.
"We are reviewing the ruling and evaluating our options with respect to the bondholder claims," spokeswoman Deborah Allan said in e-mailed comments to CBC News.
When the transaction was first announced last June, the buyout of Canada's biggest telecom company attracted worldwide attention. It was one of the largest leveraged buyouts ever, worth $51.7 billion, including debt.
Then the credit crunch hit in August. Its lingering effects led to a tightening of credit markets around the world and raised questions about whether the deal might unravel or get repriced.
Just this week, there were reports that some of the banks that had agreed to fund the deal were looking to change the terms of the financing.
Market watchers said with their win, the bondholders are now firmly in the driver's seat.
"If they're willing to settle, it's conceivable that something can be cobbled together [without going to the Supreme Court]," said Ron Mayers, vice-chairman of Desjardins Securities.
But analysts say the big drop in BCE shares Thursday shows that investors don't have much faith that a deal can be salvaged.
"People have taken the view right now that this deal is not going to go through," Scotia McLeod investment advisor Andrew Pyle told CBC News.
"The odds of getting this though now have diminished significantly."
