Shares of BCE tumbled more than 34 per cent Wednesday as the $52-billion privatization of the company could be facing another major hurdle, one that could halt Canada's largest leveraged corporate takeover.
BCE said Wednesday that accounting firm KPMG has said it doesn't "expect to be in a position to deliver … an opinion that BCE would meet the solvency tests as defined in the definitive agreement," on the closing date of Dec. 11.
The news led to a sharp sell-off in the stock. After sagging as low as $23 — a new 52-week low — earlier in the day, BCE shares finished with a loss of $13.10 at $25.25 on the TSX.
KPMG has apparently told BCE that it would meet all solvency tests under its current capital structure, but a favourable solvency opinion on the restructured company after the takeover is a condition of the deal.
BCE said that if KPMG can't deliver that positive opinion on time, then the transaction is unlikely to proceed.
KPMG has the view that, based on current market conditions, its analysis to date and the amount of debt included in the takeover, it does not believe it can provide that opinion by the key date.
'Solid operating results': CEO
The parent company of Bell Canada said it takes exception to KPMG's opinion.
"BCE today enjoys solid investment grade credit ratings, has $2.8 billion of cash on hand, a low level of mid-term debt maturities, and continues to deliver solid operating results," said George Cope, the president and CEO of BCE and Bell.
"We are disappointed with KPMG's preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing. The company disagrees that the addition of the [leveraged buyout] debt would result in BCE not meeting the technical solvency definition," said Siim Vanaselja, BCE's chief financial officer.
BCE is being taken over by a consortium led by the Ontario Teachers' Pension Plan, along with other investors.
The massive deal has been the subject of speculation that it won't get completed because of the credit crunch.
Citigroup, which earlier this week received another massive bailout boost from the U.S. government, is backing about $13 billion of the $35 billion in loans supporting the takeover. Royal Bank of Scotland, Toronto-Dominion Bank and Deutsche Bank are also providing financing.
Some analysts are speculating that if the takeover deal fails and BCE remains as a publicly traded company, it could reinstate its dividend and use some of its cash to repurchase shares.