Will The BCE Takeover Go Through?

by Mike Holman

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Most Canadians are probably familiar with the company BCE (Bell Canada Enterprises) since it is the biggest telephone provider in the country. Last June, the Ontario Teacher’s fund made the winning bid of $42.75 per share for BCE for a total of $35 billion dollars. Since that time the collapse of the credit market has made the deal less profitable for the banks providing the loans which include Citigroup, Deutsche Bank AG and Royal Bank of Scotland. There have been many rumours regarding the deal and if it would go through or not. This is one of the reasons why the stock has been trading between $32 and $38 in recent months which seems pretty cheap considering the shares should be worth $42.75 when the deal is finalized June 30.

Yesterday it was announced that a lawsuit by BCE bond holders was successful in a Quebec court which could mean that the deal doesn’t get done. The lawsuit was intended to block the takeover which the bond holders feel is unfair to them. The case will now go to the Supreme Court of Canada which will delay the takeover at a minimum.

Last fall when the stock was trading at about $38, Mr. Cheap and I had a conversation about BCE and if it was “free” money to buy it at a discount to the takeover purchase price. We both thought it was, but at the same time there was the risk that the deal wouldn’t go through for whatever reason. If that happened we figured the stock would go back to it’s pre-takeover price of around $30 which would be a big loss from a $38 purchase price. Given the limited upside at the time, neither of us went for the “sure thing” and it looks like we made the right choice.

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max
Only time will tell but considering that the banks lending the money want out of the deal and the fact that telcos in general have lost value over the past year (the deal might be valued too high), there are a lot of good reasons why this deal might not happen. Telus which is another large Canadian telco has lost a quarter of its value over the last several months.

What is stopping the BCE takeover deal?

Basically, the investors who own the BCE corporate bonds are upset because the buyout will mean the new BCE will have a lot more leverage (debt) than the old BCE which will reduce the quality of the bonds thereby lowering the bond values. The bond holders want more say in the deal or to get compensation. BCE is arguing that the bond holders should have known there was a risk of a takeover and subsequent down grading of the bonds.

What do the banks think about BCE?

The banks that are providing the financing for the deal are Citigroup, Deutsche Bank AG and Royal Bank of Scotland. Since the deal was created, the credit markets have taken a beating and the banks will likely lose money on the loans. While they are still obligated to go through with the deal, they have a lot of incentive to withdraw if given the ability to do so.

BCE takeover history

pre-2007 – BCE stock price languishes for many years.

February 2007 – two groups make bids for BCE. One bid involved the Teachers, the other the CPP (Canada Pension Plan). Both were turned down.

April 2007 – BCE puts itself up for auction.

June 2007 – Teacher’s group puts in the winning bid of $42.75 per share.

Jan 2008 – BCE bond holders go to court to kill the deal since the bond values have dropped a lot.

Mar 2008 – bond holders lose court case but will appeal.

May 21 – bond holders win key court case to block deal.

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{ 12 comments… read them below or add one }

1 telly

On the other hand, I made that bet. :( However, I did sell on Monday (bought on the US exchange) to break even. It was just a small amount of speculation money but glad to have pulled out when I did. I was just trying to make a quick buck!

2 growthinvalue

Funny, I’d noticed that BCE shares were languishing below the tender offer about a month ago. I had a hard time explaining to an investing newbie friend of mine why that was.

At the time, I considered buying some BCE myself for that exact reason, but I thought better of it.

IMHO, buying a company like BCE in the middle of an acquisition like this is pure speculation. The only thing I’m sure of is that in 12 months, somebody will have bought them, but whether they’ll pay $25 or $42.50 a share (and whether it turns out to be a good buy for them) I have no idea.

Basically, the current stock price reflects that risk. There’s no such thing as a free lunch.

3 Four Pillars

Telly – I really didn’t think it was a bad move to buy some BCE, especially if it was a small amount.

GIV – there is not guarantee that anyone will buy BCE.

4 Nobleea

I must be reading something wrong here. The web sources I read say BCE is currently yielding 4.5% (at 33$ share price). Do you think investors would let it get down to 25$? Would that not give a yield of almost 6%? Regardless of what happens with the takeover.

I bought BCE yesterday at 32.27 and sold today at 33.15.

I think the deal will go through, but at a lower price. Maybe in the 39-40$ range. And perhaps not by June 30.

5 Four Pillars

Nobleea – good question. I can’t see it getting as low as $25.

Mind you, BMO was yielding about 6% at its lowest point a few months ago.

6 Cash Canuck

I think BCE is a good example of what to be wary of when you’re doing Buffet-style takeover arbitrage (buying a stock below the takeover price). You have to factor in the likelihood of the deal falling through.

With mega-takeovers like this one, I think there are a lot more interested parties, and a lot more hoops to jump through to get the deal done.

With credit markets being so tight, I think big takeovers are going to be few and far between and it’s likely that opportunities like this won’t come up too often in the near future.

7 Al

I’ve held BCE stock for a long time and voted in favour of the takeover at $42.75 per share. If the price is to change from that, another vote should be required which may or may not go through. I’m not sure what my personal threshold is, but then I don’t own nearly enough for it to matter.

8 Nicolas

Nobleea

Out of curiousity, you says you sold for a bit less than a dollar gain. How many did you sell for this to be a good deal?

Cask Can, you make a good point about the risks of such mega-takeovers. On the other hand, with all those different steps (CRTC/Courts/Industry Canada), such an event can be very profitable for those familiar with the regulatory and legal dimensions of this transaction.

9 Nobleea

Nicolas;

Enough to cover all the commissions and leave some extra cash in the pot. No taxes, it’s in an RRSP account.

What is a ‘good deal’? I say any dollar amount, that you wouldn’t have other wise had, is a good deal. It worked out to a ‘trivial’ 2% return after all was said and done. I like to annualize it – something like 5000%. Of course, that implies that I’d have to do a trade like that every day the markets are open. However, just doing it once a year would be the same as going with a low cost ETF or a high MER mutual fund. And those in the PF blogosphere spend many an entry/comment discussing that.

10 Nicolas

Makes perfect sense. And this BCE thing is a once a year(s) event.

11 Cash Canuck

Nobleea;

Annualizing that return is very important, I agree. From a pure takeover-play perspective though, the BCE deal becomes less attractive as the process grinds onwards. As the delays mount, that annualized return plummets, even though you may still get the full offer price.

12 Nicolas

We’ll have the a good idea what the answer will be on Friday at 16h30.

http://csc.lexum.umontreal.ca/fr/news_release/2008/08-06-19.2/08-06-19.2.html

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