The first thing one needs to know about the pending rape and pillage of BCE is that the upcoming CRTC Hearings on the proposed leveraged buyout are public hearings on only the broadcasting assets of BCE and not BCE's vast telecommunications assets. In BCE’s own application to the CRTC, they state that the value of the transaction is $39.8 billion, and the value of the broadcasting asset are $0.1 billion.
As such Parliament should not be looking to the CRTC to necessarily look after and enforce the many policy objectives of the Telecom Act or the Bell Canada Act, that if rigorously applied would render this proposed deal a complete non-starter. Therefore it is incumbent on parliament to enforce the will of these Acts, since the absence of action will come at a stiff price to all Canadians, starting with the annual loss of $800 million in tax revenue at a time when $800 million a year in lost tax revenue means an awful lot.
The rape and pillage of BCE arises from the fact that 80% of BCE's purchase price is coming from BCE itself, 10% from Teachers'. 10% from US private equity. Meanwhile Teachers’ is prohibited by its own regulations from holding more than 30% of the votes of any corporation, directly or indirectly. Hence, the leveraged buyout of BCE is a rape and pillage of the foreign takeover variety.
Here’s what the credit rating agencies are saying:
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.”
And here’s what BCE”s financial advisor, Goldman Sachs wrote in its letter to BCE’s board back in June:
“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.”
Reads more like “Over to you, Alphonse.” Which in fact it is. Canadians are Alphonse. Meanwhile Goldman Sachs gets paid $48 million for being the sub-prime mortgage broker of record....provided the CRTC approves this sub prime mortgage deal.
Back in late June 2007. Michael Sabia was trying to put a brave face on the highly criticized sale process that he had just put BCE through, by saying we should all love the outcome for four reasons. Forty Two Seventy Five. As self congratulatory as that statement was, it needs to be understood that $42.75 is also largely self financing, given that the sources of the funds for this proposed takeout are as follows:
BCE : $34.20
Madison Dearborn: $1.53
So here we have a situation where for 20 cents on the dollar, these private equity firms are able to bulk up with the upside on the entire company. Problem is, the company gets trashed in the process and its junk bond credit rating comes at the cost of about $800 million to BCE’s existing bondholders and Canada’s largest telecommunications company gets saddled with $40 billion of debt that carries a 240 basis point INCREASE in the cots of capital, for what is now 80% of the company’s capitalization.
So what will that mean for BCE’s “competitiveness and efficiency”, which the Telecom Act is designed “to promote”?
What will that mean for the “ownership and control of Canadian telecom by Canadians” that he Telecom Act is designed “to promote’?
One thing is for sure. We know what 240 basis points increase in cost of capital will mean. One need only read the 2003 Report to the Industry Committee of Parliament to get a sense who will be financing this leveraged buyout:
“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.”
So the question becomes, where is Parliament on the rape and pillage of BCE?
"Bell Canada owns the largest phone company in the country and it is also one of the major players in print and broadcast media. Canadian legislation limits the amount of foreign ownership in these sectors and this takeover of
Bell Canada threatens to violate the intentions of those restrictions. I think Prime Minister Harper should send an unequivocal message to the investment community that he will not allow foreign interests to take control of thesekey economic and cultural development industries." David Cole, President of the CEP union.
“One only needs look at the recent sale of Canadian companies like BCE and Alcan to realize who benefits from these shakeups. While senior executives and shareholders pocketed millions of dollars, employees harvested only worry and anxiety. It’s a one-sided proposition that’s weighed totally in favour of the company.” Robert Bouvier, President Teamsters Canada
"At first blush, we're extremely concerned because it does represent one of the largest mergers of this nature in the telecommunications business in Canada. Canadians are already paying too much for their cell phones and we're
going to have to examine very closely the deal. And certainly we would always reiterate that we believe Parliament has a role to play." NDP Party Spokesman Ian Capstick June 2007
“Mr. Speaker, there are news reports of a hostile takeover of BCE. BCE is one of Canada's oldest and largest corporations in Canada.A foreign equity firm wants to snatch it up from underneath Canadians. The company that wants to do this, KKR, is so aggressive, an author entitled a book on KKR, Barbarians at the Gate. I know the government is predisposed to actually selling off Canadian companies and New Democrats understand that the government feels an empathy to do so, but this is a loophole.
I want the Minister of Industry to guarantee right now that he will close this loophole and protect Canadian jobs and BCE.” Brian Masse, NDP Finance Critic in Parliament March 29, 2007
Or is this just another facile exercise by the NDP in lowering ATM fees? All talk No Action
Meanwhile the Quebec separatist party, the Bloc, thinks its okay that one of Quebec’s leading iconic companies ends up in the hands of foreign private equity and ONTARIO Teachers'? And Quebeckers will pay for it with higher phone bills?
Sounds like a plan.
Sunday, February 24, 2008
Posted by Fillibluster at 9:16 AM