Wednesday, March 5, 2008

Did BCE's board select the deal with the greatest embedded risk?

Notwithstanding what was disclosed in BCE’s Bid Circular dated August 7, 2007, BCE’s Board was faced with four proposals back in late June 2007.

Apart from their differing economics, these four deals had different dimensions of risk associated with them that can be categorized into four broad categories, with the fourth category of risk being the newly emerged and non- disclosed risk that Teachers’ was exceeding its pension regulations in acquiring more than 30% of BCE using a structure that, according to Teachers’, had never been formally approved by its regulator, as we have only now learned at the CRTC hearings.

Therefore, the four risks are:

(1) Financing risk
(2) Bondholder litigation risk
(3) CRTC approval risk
(4) Pension regulatory risk

There were four proposals received by BCE: Teachers’, CPP, Cerberus and Catalyst. Unlike Teachers’, CPP had other Canadian partners who were also pension plans in its group.

I am assuming that CPP did not exceed its 30% ownership threshold the way Teachers’ did.

Therefore the assignment of the above four categories of risk for the four proposals, reveals:

Teachers’: (1) (2) (3) (4)
CPP: (1) (2) (3)
Cerberus (1) (2) (3)

With the exception of the newly emerged fourth risk, the Catalyst letter to the Board of June 25, 2007 made explicit reference to these differing risks and discussed at length the need to maximize return and minimize risk.

Meanwhile here were the comparative economics:

Teachers’ All Cash $42.75 (fully taxable)
CPP: less than $42.75
Cerberus: Cash plus stock with a nominal value of $46.00 (as reported in the press)
Catalyst: All stock with a stated value of $42.50 to $52.00 (70% tax free rollover)

BCE's board recommended the Teachers' deal, but in so doing failed to disclose the pesnion regulatory risk that was embedded in it. Plus the company/board failed to disclose the Catalyst Proposal which delivered the best economics at zero risk.

Go figure.

By: Brent Fullard
Catalyst Asset Management Inc.

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