- The Washington Times - Wednesday, November 26, 2008

TORONTO (AP) - The largest leveraged buyout in history is unlikely to close after the Canadian telecom company BCE Inc. said Wednesday an audit has found the proposed $35 billion deal to take the company private may not meet solvency requirements.

An investment group led by the Ontario Teachers Pension Plan Board and several U.S. partners had expected to complete its deal for BCE, the parent of Bell Canada, on Dec. 11. It would have been the biggest takeover in Canadian history.

A preliminary review by accounting firm KPMG found that BCE would not meet the solvency tests of the privatization agreement, partly due to the amount of debt involved in the transaction and current market conditions, BCE said. The company must meet the solvency requirements for the acquisition to be completed.

BCE spokesman Mark Langton said if KPMG doesn’t change its mind, the deal is unlikely to proceed because the auditor must clear it as a condition of closing.

“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,” BCE Chief Financial Officer Siim Vanaselja said in a statement.

BCE said it is working with KPMG and the proposed buyers to meet the closing requirements.

Shareholders overwhelmingly approved the buyout group’s offer of 42.75 Canadian dollars per share ($34.50) in September of 2007.

BCE management had agreed to the deal in June 2007, just before credit markets began to unravel in North America.

U.S.-listed shares of BCE plunged $10.65, or 34.1 percent, to $20.63 in Wednesday trading. The stock has ranged from $25 to $40.44 over the past year.

If the deal doesn’t proceed, the banks that agreed to finance it would be off the hook. Citigroup is directly on the hook for at least $11 billion of the $35 billion in loans backing the deal. The Royal Bank of Scotland, Toronto-Dominion Bank and Deutsche Bank were to provide the rest. The inability of the banks to finance the loans could have meant billions of losses for the banks.

Some analysts speculated the banks would try to get out of the deal. A spokeswoman for Citigroup declined comment.

Jeffrey Fan, an analyst with UBS, said in a report that underfunded pension liabilities at BCE might have been one of the reasons for KPMG’s decision.

Elliott Soifer, vice-president of Desjardins Securities International, said he doubts the deal can be salvaged by altering terms.

“Given the market conditions and the amount of debt, the size of the deal and the number of parties involved it’s going to be very difficult for them to come to some sort of agreement,” Soifer said.

Michael Hlinka, an independent financial analyst and business commentator with CBC radio, said the economic outlook has changed fundamentally since mid-2007. U.S.-listed shares of Telus, one of BCE’s competitor’s in Canada, have fallen below $28 from a high of over $61 in June 2007.

“When the deal was originally struck the valuations for all publicly traded companies was fundamentally different than what it is now,” Hlinka said. “I would be stunned if it goes ahead at this point. The market is voting with its feet right now about the likelihood of the deal. This was supposed to close in two weeks. The financiers are breathing a huge sigh of relief and I think they are in no hurry to come back and get this deal done.”

Hlinka said it would have taken “a miracle” for the banks to sell the debt in debt markets.

“Citigroup, for all intents and purposes, is a liability of the U.S. taxpayer. The Royal Bank of Scotland, for all intents and purposes, is a liability of the taxpayers of Great Britain. It’s so bizarre that its come to this but it has,” Hlinka said.

The Toronto-based Ontario Teachers’ Pension Plan _ with assets of $108 billion Canadian ($85 billion) in 2007 _ invests and administers the retirement funds for Ontario’s 353,000 active, inactive, and retired teachers. U.S.-based Providence Equity Partners and Madison Dearborn Partners LLC are also involved in the proposed buyout. Teachers’ spokeswoman Deborah Allan declined to comment.

BCE, which has more than 54,000 employees, had annual revenue of $17.8 billion Canadian ($14.1 billion) in 2007. It had 5.8 million wireless subscribers, 8.64 million phone lines, 1.94 million Internet subscribers and 1.82 million satellite television subscribers in 2006. It is Canada’s largest communications company.

New Chief Executive George Cope took over on July 11 despite the deal not closing yet. Cope has refocused the Montreal telecom operator as it faces more intense competition in its wireless and Internet data businesses.

Langton couldn’t say what a failed deal would mean for Cope and the new management.

Randal Rudniski, an analyst with Credit Suisse, said in a report that if the deal doesn’t close he expects BCE to reinstate its dividend and buy back stock.

The deal has been in some doubt for a year for a variety of reasons, including the credit crisis and because a court ruling temporally put it in jeopardy. Earlier this year, Canada’s Supreme Court overturned a lower court ruling that said the sale of BCE didn’t adequately consider bondholders’ interests.

Canadian regulators also ordered some of aspects of the deal to change. BCE, the buyers and the banks also re-negotiated the deal in July so that the dividend would be eliminated and the closing would be put off until December.

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