BCE 3-month TSX chart

A legal fight looms between BCE Inc. and its would-be purchasers over the issue of a $1.2 billion breakup fee after the $52-billion proposed privatization of Canada's largest telecommunications company was officially declared dead on Thursday.

The $42.75-a-share cash offering for Bell Canada's parent corporation by a group led by the Ontario Teachers' Pension Plan suffered a fatal blow late in November when auditor KPMG determined that the company-to-be wouldn't pass a solvency test required as a condition of closing the deal.

"Because KPMG has concluded that a required test for the solvency opinion was not met, this mutual condition to completion of the acquisition could not be, and was not, satisfied," said a statement from BCE Acquisition Group Inc.

The Ontario Teachers' Pension Plan and several U.S. private equity partners led the consortium of potential buyers in what would have been one of the biggest corporate takeovers ever in Canada.

BCE shares were off 56 cents at $22.46 in afternoon trading on the TSX. The stock's one-year high of $40.25 was set back on Sept. 2, while it hit its one year low of $21.31 on Dec. 2.

The stock price spiked on Monday amid reports the company had received a second opinion on its financial health contradicting KPMG's earlier analysis. BCE hired PricewaterhouseCoopers to help it try to persuade KPMG that its solvency valuations were wrong. But shares fell back the next day.

BCE and its suitors appeared headed for a showdown over payment of the $1.2-billion breakup fee.

Under the circumstances that the deal collapsed, neither party owes a termination fee to the other, the Teachers group said.

However, BCE issued a statement that it will be demanding payment of the big termination fee.

"All closing conditions have been satisfied by BCE, other than the solvency opinion, a condition to closing that was to be satisfied by its nature at the effective time," BCE said in a news release. "Under such circumstances, the agreement provides that the breakup fee will be owed to BCE by the purchaser."

The Teachers' group shot back, saying it "is most unfortunate that BCE is threatening litigation over the failure of a mutual closing condition that the company insisted be included in the original acquisition agreement."

"Should BCE commence such baseless litigation, we are confident that it would not succeed," the group said.

BCE also said Thursday it will move to reinstate its common share dividend beginning with it fourth-quarter dividend payable on January 15. The company said it will also return capital to shareholders through a share buy-back plan.

With files from the Canadian Press