Sunday, February 3, 2008

What BCE doesn’t want you to know about its private leveraged buyout

The following is the text of a full page ad that appears in this week's Ottawa Hill Times (page 5).

Willfully transforming BCE from Canada’s most widely held public company with a low cost of capital and investment grade credit into a highly debt-ridden junk bond credit issuer with a high cost of capital, and narrowly held by four private equity funds, three of them U.S., defies three Acts of Parliament:

1. Telecommunications Act:

“To enhance the efficiency and competitiveness, at the national and international levels, of Canadian telecommunications.” TELECOM ACT SECTION 7

The four private buyers of BCE, Ontario Teachers’ Pension Plan, Providence Capital, Madison Dearborn and Merrill Lynch do not have sufficient investment capital of their own to acquire the $34.2 billion of public equity in BCE. They only have some $8 billion to invest. The balance of the purchase price is coming from the company itself who will incur an additional $26 billion of debt, on top of the existing $10 billion of debt already borrowed by the company, thereby rendering BCE into a junk bond issuer with an extremely high cost of both debt and equity capital.

Telecommunications is a rapidly changing capital intensive business, highly dependent on the cost of capital. As such, the CRTC should deny the proposed sale, since it fails this basic provision of the act, to promote efficiency and competitiveness.

Taking what is Canada’s most widely held public company with over 90% Canadian ownership, and allowing it to be narrowly held by four financial institutions, with only 54% Canadian ownership, funded with $26 billion in new debt obligations that are over 80% foreign-owned, also explains why the CRTC should deny the proposed sale, since it fails:

“To promote the ownership and control of Canadian [telecommunications] carriers by Canadians.” TELECOM ACT SECTION 7

The Catalyst Proposal does however fulfil these policy goals by preserving BCE as Canada’s most widely held public company with an investment grade credit rating and lowest possible cost of capital.

2. Bell Canada Act:

“The works of the Company are hereby declared to be works for the general advantage of Canada.” BELL CANADA ACT SECTION 5

The interest payments that are required to service this $26 billion in new debt to be incurred by BCE are deductible from taxable earnings, which means that BCE will pay no corporate taxes, nor will BCE’s new equity owners. The result is that $793 million in annual taxes will be lost by the Canadian Government annually if this proposed transaction proceeds. In addition the 150,000 member Communications, Energy and Paperworkers union is adamantly opposed. CEP’s President, David Coles stated that such a sale of BCE to private equity is:

“a direct threat to thousands of jobs, to Canadian economic sovereignty and to our cultural heritage. For these reasons, the CRTC should deny the proposed sale, since it fails to result in any advantage for Canadian shareholders, taxpayers, or the government of Canada.”

The Catalyst Proposal does however fulfil these policy goals by preserving BCE for the general advantage of Canada.

3. Order in Council directive to CRTC:

On December 13, 2006, Parliament instructed the CRTC to regulate in a manner that pays greater regard to market dynamics and to:

“rely on market forces to the maximum extent feasible”

On April 16, 2007, BCE publicly announced that it had formed a special committee to review alternative means to maximize shareholder value. In doing so, BCE made the market aware of its intentions, thereby exposing itself to market forces in an formal manner. A deadline of June 26, 2007 was set for submissions by outside parties. BCE received four such proposals. Three were private equity proposals, including the one from Teachers’ and the fourth was a recapitalization from Catalyst Asset Management.

The Catalyst Proposal was unique from the other three proposals since, in addition to maximizing shareholder value, it also preserved the credit worthiness of BCE as an investment grade credit and maintained BCE as a broadly held public company with over 90% Canadian ownership, thereby preserving the $793 million in annual tax revenues to the Canadian government paid by BCE shareholders.

BCE acted to subvert the existence of the Catalyst Proposal by not disclosing it to their shareholders as required by securities law, thereby avoiding having to explain their reasons for not recommending it to shareholders.

BCE also sought to prevent Catalyst from intervening before the CRTC public hearings of February 25, 2008 in a letter to the CRTC dated January 4, 2008.

The proposed sale of BCE to private equity is the result of a process in which market forces were deliberately suppressed by BCE, thereby preventing the optimal solution from occurring: the Catalyst Proposal.

Conclusion: The CRTC should deny the private sale of BCE to Teachers’ and instruct BCE to properly disclose the Catalyst Proposal to its shareholders for their consideration as the optimal outcome for shareholders, all other stakeholders, and therefore the CRTC.

Complete information about the Catalyst Proposal and the submissions by Catalyst Asset Management to BCE and to the CRTC are available at: or by calling 647-505-2224.

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