BCE a lesson in M&A froth

Today’s Globe makes the generic observation concerning KCP: “May be one of a raft of buyout targets that are unable to cope with heavy debt loads in the face of the slowing economy.”

Which gives new meaning to Goldman Sachs: (BCE’s financial advisor) in a kiss-off letter to BCE’s Board June 29, 2007:

“We express no opinion as to the impact of the transaction on the solvency or viability of BCE or the ability of BCE to pay its obligations when they become due.”

Goldman Sachs also gives new meaning to the term Love ‘em and leave ‘em.

Except in the case of BCE it’s Lever ‘em and leave ‘em

KCP a lesson in M&A froth
Investors bid loans down to distress levels
BOYD ERMAN
Globe and Mail
February 14, 2008

Standard & Poor’s: on BCE’s resultant credit worthiness:

“The multi-notch downgrade reflects our view that BCE no longer possesses an investment grade financial policy, given the likelihood that the [Teachers’] LBO will be finalized in the near term.

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 associated heavy interest burden.”

Moody’s Investor Services: on BCE’s resultant credit worthiness:

“With book debt expected to increase by more than 300%, the company’s risk profile will be profoundly affected by the proposed Teachers’ transaction, and its rating could be adjusted by several notches.”

Standard & Poor’s: Impact of lower rated debt on BCE’s cost of capital:

“Because an investment-grade rating indicates a safer investment, a speculative-grade company with lower ratings must pay investors more for the greater risk they take when buying non investment-grade debt. Lower credit ratings result in a correspondingly higher cost of capital.”

Telecommunications Act: Explicit policy objective:

“To promote the efficiency and competitiveness of Canadian telecommunications carriers”

Standing Committee on Industry, Science and Technology: April 2003 Report

“A higher cost of capital slows the rate of capital investment and, in turn, the roll out of competitive services

A cost of capital differential of approximately 1.18% exists between Canada’s incumbent telephone carriers and Canadian cable companies. This incremental cost equates to about $1.46 per month per cable subscriber.”

Darren Entwistle, CEO of Telus’ on BCE’s LBO: Censored, since:

"We did insist on a clause that Telus would not be able to disparage other alternatives available to the board, such as private equity" said BCE chairman Richard Currie.

Ted Rogers, CEO of Rogers Communications on BCE’s LBO:

"I believe we should just keep doing what we're doing and don't get diverted by all this high-falutin stuff going on — big suits walking around having meetings all the time." Ted Rogers has no time for the private equity players who have approached his company to partner on a bid for rival BCE Inc. and on other deals in recent months. In fact, the head of Rogers Communications Inc. said Monday: "We told them all to go to hell."