Thursday, May 29, 2008

Understanding the BCE Mess

It seems that the BCE takeover bid may force the Supreme Court of Canada to make a decision that will set an important precedent for future acquisitions of companies. It took an interesting set of events to get us where we are now.

To understand what is going on, you need to know the various players and their motivations. As they say, “you can’t tell the players without a program.”

Shareholders. These people own BCE, and the majority of them would be thrilled to receive the $42.75 per share of BCE stock promised in the buyout.

Buyers. This is the consortium of players led by the Ontario Teachers’ Pension plan that wants to buy BCE for $42.75 per share. Presumably, they think BCE will be a good investment over time. However, they don’t have enough money to buy all of BCE. So, they need to borrow billions of dollars. This is why it’s called a leveraged buyout. After the takeover, BCE would be saddled with much more debt than it has now.

Bankers. These are the companies lending money to the buyers to complete the deal. They must have liked the deal when they first agreed to it, but everything has changed since then. The subprime meltdown in the US has completely changed conditions for lending and borrowing money. The bankers now hate the BCE deal and want it to die or change drastically.

Bondholders. These are people who had lent money to BCE before the buyout announcement. When the bondholders bought BCE bonds, they paid a price consistent with BCE’s ability to pay the money back plus the promised interest. However, after the buyout, BCE would be saddled with much more debt and the likelihood of not paying the money back would be much higher. This makes the bonds worth less. The bondholders have seen the value of their bonds drop significantly, and they are very upset.

If it weren’t for the bankers wanting the deal to die, all the players might have come together to make a deal to compensate the bondholders for at least some of their losses. But, the bankers have no motivation to do this right now. They are better off to either stick rigidly to the original plan in the hopes that it fails, or demand big changes to make the deal more palatable.

This unique set of circumstances is what has led to the bondholder court case. The bondholders have won the latest round of court battles in Quebec. The case is now being appealed to the Supreme Court of Canada.

If the Supreme Court rules on this case, it will set an important precedent for how bondholders must be treated in future buyouts.


  1. Thanks for writing this up for the layman. Makes it much easier to understand.

  2. Some interesting commentary on BCE from fixed income guru Harry Koza in today's Globe as well -

  3. Glenn: That's an interesting, clearly-written article. Assuming that Koza characterizes the situation fairly, it would seem that BCE needs to argue one of the following two points:

    1) The proposed takeover is not consolidation or amalgamation.

    2) The proposed takeover is not "prejudicial to the interests of the debenture holders."

    Number 1 seems silly, and number 2 comes down to how you define "interests". The new BCE would maintain the same payment obligation to the bondholders. The only thing that would change is the probability that BCE would be able to meet these obligations.