The decision by the Supreme Court of Canada to allow the takeover of BCE Inc. cleared a huge hurdle for the biggest deal in Canadian history and the largest leveraged buyout on record.
BCE Inc. and its bondholders met at the Supreme Court of Canada on June 17, where the bondholders — which include TD Asset Management, CIBC and Manulife Financial Corp. — argued they were not being treated fairly in the $52-billion takeover by a group of investors led by the Ontario Teachers' Pension Plan.
Here's a quick review of what was at stake:
What are the details of the deal as originally announced?
A consortium led by the Ontario Teachers' Pension Plan announced on June 30, 2007, that it had struck a deal to acquire BCE Inc. Other partners in the buyout group include U.S. private equity firms Providence Equity Partners Inc., Madison Dearborn Partners, and Merrill Lynch Global Private Equity.
The all-cash transaction would give BCE shareholders $42.75 a share in cash for each of their shares. That valued the deal at $51.7 billion, including debt.
What was behind the Supreme Court case?
While most BCE shareholders loved the premium they would get from the takeover — they approved it by a 97 per cent margin last September — the bondholders did not. And they are a powerful group made up of some major investment managers, pension funds, and insurance companies — including TD Asset Management, CIBC Asset Management, Sun Life Financial, the Manitoba Civil Service Superannuation Board, the Alberta Finance Department and Aegon Capital Management Inc./Transamerica.
These holders of Bell debentures went to court, arguing that the deal treated them unfairly because their interests weren't being protected. The transaction, as a leveraged buyout, would load $34 billion in new debt onto the company, thus hurting the market for their bonds, they said.
The Quebec Superior Court of Justice rejected the bondholders' argument in March, saying the bondholders were all sophisticated investors who should have known that a leveraged takeover of BCE might hurt their positions.
But the Quebec Court of Appeal overturned that ruling on May 21. The appeal court said "BCE never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debenture holders." In other words, the court said BCE was wrong to just consider the benefits to shareholders but not the impact on Bell and its bondholders.
BCE Inc. and its bondholders met at the Supreme Court of Canada on June 17 to square off over the largest leveraged buyout in the world. BCE had planned to close the transaction by the end of June, but that was contingent on the outcome of the Supreme Court appeal.
Was the bondholders' case the last hurdle?
The BCE deal had been the object of serious rumour-mongering and uncertainty in the financial markets for months because it requires so much debt financing. Borrowing billions of dollars wasn't a problem when the deal was struck last June. But the credit crunch that began roiling markets just two months later made some investors wonder if the banks would try to renegotiate.
That possibility long kept BCE's stock price well below its $42.75 takeover price.
This wasn't just idle worrying. As many as a dozen leveraged buyout deals have collapsed or been reworked since the credit crunch flared, as credit financing became much more difficult.
As recently as mid-May, the takeover of Clear Channel Communications in the U.S. was repriced eight per cent lower after the banks financing it balked at the initial financing terms. Several of those banks — Citibank, Deutsche Bank and Royal Bank of Scotland — are also funding the BCE takeover.
The New York Times reported May 18 that the banks were actively trying to rework the BCE deal, seeking "higher interest rates, tighter loan restrictions and stronger protections for the banks," it said.
BCE shares had been trading at levels that many analysts say are closer to the fundamental value of BCE as a stand-alone company — in other words, as if no takeover deal was in place.
Brokerage firms that had previously said the deal would likely go through at the original $42.75-a-share price scrambled to revise their outlooks after the Quebec appeal court ruling.
When BCE and its buyout consortium announced a final deal on July 4, shares of BCE shot up closer to the offer price. The stock still traded under $40, however, possibly due to a condition in the deal that BCE won't pay any common share dividends before the takeover closes in December.