Something's rotten in Denmark: Catalyst's Bell Bid Silenced

Excerpts from today’s Financial Post article entitled Catalyst's Bell bid silenced

These are testing times for Bell Canada Inc. investors as the country's largest takeover faces financial, regulatory and legal issues.
Yesterday was no exception: The stock traded down again, closing at $34.46 -- about $5 below the level of Jan. 1 -- as disaffected bondholders continued their claims in a Montreal courthouse, and as the market upped its risk estimate of the $50-billion-plus deal going through.

Through the drama, Brent Fullard, formerly with BMO Capital Markets, has reminded everyone of how Bell shareholders weren't told about a proposal his firm, Catalyst Asset Management, lobbed into Bell last summer. That proposal, involving a so-called stapled security, was sent to Donna Kaufman, one of the three members of BCE's special committee. A copy was also sent to Ed Waitzer, the Stikeman Elliott advisor to the Kaufman committee.

In Catalyst's e-mail, this was said: "Further to my conversation with Jim Pattison on Friday and Ed Waitzer on Saturday, please find attached a letter describing in greater detail our Stapled Security proposal including an overview of the benefits and an assessment of the relative risks. Our analysis holds that such a proposal, structured in the manner contemplated, would provide existing BCE shareholders with a tax-efficient surfacing of value of between $42.50 and $52, with a mid-point trading value of $47.25. In addition, this proposal would be a very good outcome for the company itself and all affected stakeholders, as fully described in the attached letter.

In that proposal, bondholders would have all been taken care of -- unlike the proposal accepted by Bell”


Excerpts from Canadian Press article entitled “Bondholders say BCE finessed takeover deal to avoid bond redemption”

The directors of BCE Inc. were kept in the dark about offers for the telecom giant by managers and advisers who manipulated the bidding process to freeze out bondholders in the sale of the company, lawyers for the bondholders said Monday.

The court was reminded that three BCE directors - Tom O'Neill, Jim Pattison and Donna Kaufman, the head of the strategic oversight committee - testified they were unaware or couldn't remember seeing all the details of the bids or how they would affect all stakeholders.

Excerpts from Catalyst Letter of June 25, 2007 to BCE’s Strategic Oversight Committee:

"[The Catalyst Proposal] preserves BCE’s investment grade credit rating and retains financial flexibility for Bell Canada to continue with significant capital reinvestment in its core businesses to remain a leading and growing competitor.

In addition, since the debentures contained in the Stapled Securities are subordinated in all respects to the outstanding debt of BCE, it is anticipated that ratings of New BCE’s debt will be preserved at a strong investment grade, as they were under the contemplated income trust conversion, for which the ratings were to have been (at least):

Long term debt:

DBRS: A(low)
S&P: BBB+
Moody’s: Baa1

Short term debt:

DBRS: R-1 (low) with stable outlook (confirmed)

Excerpts from Moody’s Credit Alert of September 2007:

With book debt expected to increase by more than 300%, the company’s risk profile will be profoundly affected by the proposed transaction, and its rating could be adjusted by several notches. Per Moody’s event risk policy, until both a full fact set is available and there is certainty of an event occurring, a definitive ratings assessment cannot be concluded. Accordingly, Moody’s review is ongoing and will be completed in due course.

In the interim, the available information does facilitate a preliminary and highly conditional assessment that can be used to illustrate key issues that will be considered. Given disclosure to date, and assuming there are no dramatic changes to the company’s business and asset portfolio, it appears that potential outcomes for BCE’s successor company’s (BCE Amalco) corporate family rating (CFR) range from B2to Ba3. It also appears that legal entity and debt structure considerations could cause Moody’s to rate individual debt instruments as low as Caa1and as high as Baa3.”

Excerpt from Standard & Poors Credit Alert of December 14, 2007:

As a result of the proposed LBO [of BCE by Teachers], Standard & Poors Rating Services expects reported debt to increase to about C$37 billion from about $10 billion at Sept. 30, 2007.
We originally placed the ratings on Credit Watch April 17, 2007. We subsequently we lowered the ratings on BCE in wholly owned subsidiaries to ‘BB-” from A- and kept them on Credit Watch Sept. 24, 2007.

On a pro forma basis, the company will have a highly leveraged capital structure, weakened credit measures, and significantly reduced cash flow generating capability owing to a dramatic increase in debt and the associated heavy interest burden.

Excerpt from the Telecommunications Act stating the policy objectives that govern Bell Canada:

7 (c) to enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications;

7 (d) to promote the ownership and control of Canadian carriers by Canadians;