BCE Buyers/Lenders Value Money Over Reputation

PHILADELPHIA, June 23 (Reuters) – At the end of the day for Wall Street, the only thing that matters is money.

Canadian telecommunications company BCE Inc (BCE.TO: Quote, Profile, Research, Stock Buzz) (BCE.N: Quote, Profile, Research, Stock Buzz) may have won a legal victory for its $34.1 billion takeover, but the banks funding the deal have asked for significant financial concessions that could still jeopardize the deal, sources familiar with the situation said on Monday.

The banks have sought deeper economic concessions, including the addition of safeguards on the debt agreements or more lucrative terms on lending the money, sources said. The banks also have actively considering walking away from the deal, the sources said.

BCE stock and bond prices on Monday reflected uncertainty about the deal as investors weighed the positive news of the Supreme Court of Canada decision, backing the company against a group of bondholders, against the risk of renegotiated terms.

“All options are on the table. Everything you would normally consider is being considered — sticking with the deal, changing the terms, or walking away. It's all still very much up for discussion,” said one source who declined to be named.

On Friday, the four banks financing the debt portion of the deal said they stood behind their original commitment. The banks, which include Citigroup (C.N: Quote, Profile, Research, Stock Buzz), Deutsche Bank (DBKGn.DE: Quote, Profile, Research, Stock Buzz), Royal Bank of Scotland (RBS.L: Quote, Profile, Research, Stock Buzz) and Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz), declined to comment on Monday.

That public statement may be the banks' intention and goal, but “does not reflect the negotiations behind the scenes,” a second source said.

Although talks between the banks and BCE's buyers have been ongoing for months, discussion have intensified following Friday's court ruling and the banks have become more aggressive in asking for financial concessions, sources said.

On Monday, BCE received final approval for the deal by the Canadian Radio-television and Telecommunications Commission, which marked the completion of all required regulatory approvals.


“The legal battle has ended, we are now turning to the economic battle. Both the private equity and lenders are no longer as interested in the deal as they once were,” said Columbia University Law School Professor John Coffee.

Although the lenders may risk bad publicity for demanding safer terms on the debt or potentially exploding the deal, investment banks face too much pressure to protect their balance sheets, analysts said.

“I think the past nine months have proven that dollars are more important than reputation,” said Joel Greenberg, partner and co-chair of law firm Kaye Scholer LLP's Corporate and Finance Department.

The negotiations to revise the BCE deal reflect the weak credit markets and mirror the recent battle surrounding the buyout of radio operator Clear Channel Communications Inc (CCU.N: Quote, Profile, Research, Stock Buzz).

Clear Channel accepted a lower takeover as part of a legal settlement between its buyers and several bank lenders. Some of the banks involved in the BCE deal were part of the lending group for Clear Channel.

“The Clear Channel banks clearly were willing to risk reputation in order to protect themselves. They risked huge publicity and scrutiny, but they were willing to go to the mat and fight and probably got terms they wouldn't have otherwise gotten,” Greenberg said.

Under the terms of the BCE deal, the regulatory approvals must obtained before June 30. BCE said on Friday that it now aims to close the deal in the third quarter due to the legal delays.

“There's a limit on how much money is out there and there's a limit on the number of banks that can provide it. This is a tight market,” said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners.

“The amount of deals that have gotten renegotiated and the number of deals that have collapsed has taken a limited toll on the reputation of the banks and the private equity firms,” Sonenshine said.

In January, for example, student-lending company Sallie Mae settled a lawsuit over its failed buyout by a group led by private equity firm JC Flowers and received $31 billion in new financing.

“Look at the Sallie Mae deal. That fell apart and the world moved on. It's not like no one wants to talk to JC Flowers or JP Morgan anymore,” Sonenshine said.

Shares of BCE hit a high of C$38.12 on Monday, but settled to close at C$36.58 on the Toronto Stock Exchange. The stock trades below the C$42.75 per share offer by the Ontario Teachers' Pension Plan and its U.S.-based private-equity partners.

BCE's 5-percent notes due in 2017 fell to about 80.5 cents on the dollar, to yield about 8.2 percent, traders said. The bonds were trading as high as 84 cents on the dollar last week.

“Even though we think this deal has a better chance of reaching a funding-settlement in the near term, the stock will likely reflect the potential for further funding risk until further news is announced,” National Bank Financial analyst Greg MacDonald said in a note to clients.

MacDonald said if the deal was to collapse for any reason, BCE's board would be pressured to come up with a different “shareholder-friendly” plan. The stock would nonetheless plunge to about C$30 or less immediately as arbitrage sellers unwound positions, he wrote.

If the BCE deal unravels, the telecommunications company would survive and banks and buyout firms would move on to the next deal, analysts said. The biggest risk is another round of legal fallout.

“There is huge pressure on the banks not to dishonor their commitments. They are in a place where they can't play this wrong. If they do, there will probably be plenty of painful litigation for everyone on all sides,” Greenberg said.

By Jessica Hall
(Additional reporting by Wojtek Dabrowski in Toronto, Walden Siew and Jui Chakravorty in New York; editing by Phil Berlowitz)