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August 2, 2007
The deal to take BCE Inc. (Bell Canada) (NYSE/Toronto: BCE) private has a few hurdles left to clear -- among them are financing concerns and the possibility that Telus Corp. (NYSE: TU; Toronto: T) might come back for another bid.
BCE agreed to be bought out on June 30 by a group of investors led by the Ontario Teachers Pension Plan and U.S. private equity firms Providence Equity Partners and Madison Dearborn Partners . (See BCE Agrees to Buyout and Bell Canada Goes Private.) The deal has been approved by BCE, but shareholders still need to vote on it.
Before shareholders vote, all the relevant regulatory approvals must be obtained and the financing of the deal must be put in place. And the financing part could be troublesome.
The Bell Canada acquisition is one of the largest leveraged buyouts in history. As such, the acquiring company finances the purchase on mostly borrowed capital. So the investment banks involved help raise the capital, usually by selling debt and other securities. This money, the bridge financing, has been relatively easy to obtain in recent years as the markets have seen a boom in M&A activity, with much of it highly leveraged.
Lately, though, the markets have been less generous and some creditors are nuts about fronting the cash for big deals. That won't kill the Bell Canada deal, but it might make it more difficult to pull off.
"There certainly is risk. The spread on all the transactions for this deal have increased," said one financial analyst who did not wish to be named. The spread refers to the difference between the acquisition price and market price of the company stock. When it becomes public knowledge that a company is being acquired, its stock price is typically immediately bid up to the acquisition price.
If the investors are very confident that the deal will close, the stock usually trades very close to the acquisition price –- usually within a dollar. But the riskier the deal, the wider the spread, and in Bell Canada's case, that spread has now widened to $2.45 from $0.29.
"We have a very high degree of confidence," said BCE CEO Michael Sabia in response to analyst concerns over the financing on the company's earnings call Wednesday morning. "I don't want to go too far here in terms of taking folks through the arrangements that the teacher's group has put in place, but I would say that one of the factors in making the choice was the quality of the financing package."
Another thing to watch is Telus. The company hasn't ruled out making another run at BCE and that could shake things up.
"We said back in June that we'd keep our options open and until a decision is made we'll be in a no comment mode," says Telus spokesman Jim Johannsson.
A bid from Telus would have to be even higher than the current 40 percent premium the Ontario Teacher's Pension Plan is paying, but it's a marriage that makes more strategic sense.
UBS AG analyst Jeffery Fan says the chance that Telus will launch such a bid for BCE is less than 25 percent, according to a research note published this week. The note points out that Telus would face regulatory hurdles from the Competition Bureau since the marriage of the two companies could form a near monopoly.
But this is telecom. Aren't we supposed to like monopolies?— Raymond McConville, Reporter, Light Reading
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