BCE Inc.’s takeover by the Ontario Teachers’ Pension Plan may collapse after auditor KPMG said the C$52 billion ($42 billion) deal, the second-biggest leveraged buyout, would leave the Canadian phone company insolvent.
The stock fell as much as 40 percent after BCE said the acquisition won’t close Dec. 11 as scheduled if KPMG doesn’t change its opinion. If completed, the purchase would trail only KKR & Co.’s $43.2 billion takeover of TXU Corp. last year.
At least $55 billion of buyouts have fallen apart since last year after the collapse of the U.S. subprime-mortgage market drove up borrowing costs. They include deals for SLM Corp., the student lender known as Sallie Mae, and Penn National Gaming Inc.
“The chances of any deal getting done are very low now,” said Sachin Shah, a merger arbitrage analyst with ICAP Corporates LLC in Jersey City, New Jersey. “Having BCE’s auditor call the deal insolvent is what’s surprising here. The market had been expecting that the banks would balk.”
BCE dropped C$13.35 to C$25 in Toronto Stock Exchange trading. Earlier thestock fell as low as C$22.90, or 46 percent less than the C$42.75 offered by Ontario Teachers and its partners.
BCE’s predecessors traded as early as 1905, making it one of the country’s oldest public companies. The phone company’s sales have stagnated for four straight quarters, hurt by land-line losses and increasing competition for wireless subscribers.
BCE’s Lenders
Last year, Ontario Teachers agreed to buy BCE along with Providence Equity Partners Inc. and Madison Dearborn Partners LLC. Canada’s highest court approved the buyout in June, dispatching a legal challenge by bondholders. Teachers said today that it “will continue to fulfill its obligations under the terms of the agreement” to buy BCE.
Citigroup Inc., Deutsche Bank AG, Toronto-Dominion Bank and Royal Bank of Scotland Group Plc are on the hook for about $34 billion for BCE, according to regulatory filings. The banks have sold debt that backed buyouts at discounts to face value to get the debt off their books. In the case of BCE, it would cost billions of dollars.
The average high-yield, high-risk loan is tading at about 66.6 cents on the dollar, just shy of the record, according to Standard & Poor’s LCD. Prices have plummeted almost 9 cents since Nov. 6 and 28. 3 cents this year as investors in the debt have been forced to liquidate funds.
Toronto Dominion said it would probably have to keep the loans. “It’s going to be hard,’” said Toronto-Dominion Chief Executive Officer Edmund Clark said this month. “If you take a look at the market, we’re going to hold this on the balance sheet.”
