The ethical nub of the issue: making widows and orphans of BCE’s shareholders

By Brent Fullard, Catalyst Asset Management

On December 13, 2006, Canadian Parliament, by way of Order in Council, instructed the Canadian Radio-television and Telecommunications Commission (CRTC), to commence regulating the Telecommunications Act and Bell Canada Act in a manner that pays greater regard to market dynamics and to:

“rely on market forces to the maximum extent feasible”

Unfortunately, it has come to light that the chosen outcome of BCE’s recent public auction, namely the proposed leveraged buyout of BCE by a consortium of private equity buyers led by Teachers’, was not the product of such a pristine process, known as “letting free markets prevail”.

Quite disturbingly it has come to light that the process was flawed in this essential regard.

It has also come to light that the standards by which the purchaser holds itself to, under such circumstances, were also not adhered to, as a consequence of BCE’s conduct. It is also become evident that there were parties who benefited immensely from certain outcomes and not others, including affiliates of certain directors, senior management. and their advisors.

This leads us to the ethical nub of the issue:

The proposed sale of BCE to Teachers' fails the very standards by which the CRTC has been asked to regulate the Telecommunications and Broadcasting industries, in so far as (but not limited to):

An arbitrarily truncated subset of market forces (i.e. bid groups of Teachers’, KKR and Cerberus, to the exclusion of Catalyst), does not constitute reliance on market forces to “the maximum extent feasible” or, therefore, the public good, especially given that that subset of arbitrarily determined market forces includes only those possible outcomes that serve to maximize the collateral benefits to those responsible for the conduct of the public auction process and responsible for determining which proposal would ultimately be put to a shareholder vote.

This is a matter that should be of grave concern to BCE shareholders, bondholders, Canadian securities regulators and the CRTC, since the Teachers' deal was an outcome whose notional value of $42.75 represented an offer which was highly conditional in nature requiring, successful oppression of bondholders’ rights, approval by the CRTC and successfully raising over $26 billion of junk bond debt, a major challenge under any market conditions.

Meanwhile the Catalyst Proposal. which BCE has attempted to subvert by not disclosing it to its shareholders (nor its reasons for rejecting it) and and by objecting to Catalyst’s intervention before the CRTC, promised to deliver a trading value of $42.50 to $52.00 which equally importantly, was completely unconditional, requiring only shareholder approval.

Put in everyday terms, what kind of real estate agent would recommend to their client that they sell their home under scenario 1 at a price of $42.75 with major conditions attached including subject to financing when Scenario 2 entails selling your home for the equivalent of $42.50 to $52,00, with no conditions attached?

How pleased would you be if your agent did not inform you of the existence of the second alternative known as scenario 2? How pleased would you be upon further learning that Scenario 1 was the scenario that earned your agent the highest commission, whereas Scenario 2 resulted in a significantly lessened commission?

This is exactly what is happening with the denial by BCE of the existence of the duly delivered Catalyst Proposal and its attempts to subvert the Catalyst Proposal cited above. Except in this case the real estate agent agent is the Board and Senior Management of BCE.

Where are the securities regulators on this rip off in the making? Who is guarding the hen house?

Afterall, BCE is widely known as Canada’s most widely held public company. The quintessential “widows and orphans" stock. That term is about to take on a new meaning, if the securities regulators fail to act, namely Autorité des marchés financiers (AMF). Or failing them, the OSC or the SEC.