BCE: Beyond the mere hypothetical

Yesterday, the Quebec Court of Appeals overturned the ruling of Judge Joel A. Silcoff on the matter of the oppression of the BCE bondholders by the group of private equity firms led by Ontario Teachers' Pension Plan, who proposed to acquire BCE by way of $8 billion of equity and $34 billion in new debt to be assumed by BCE itself.

This debt-ladened leveraged buyout reduced BCE's existing bonds to junk bond status from their prior investment grade status, the financial equivalent of going from HIV negative to HIV positive.

As if they needed to be told, the Quebec Superior Court ruled that the "process [of BCE's Board of Directors] was flawed" and that "“if it was possible to structure an arrangement so that a satisfactory price could be obtained for the shares, while attenuating the adverse effect to the debenture holders, then the Board had a duty to examine it”.

To most people, such advice would be unnecessary, as it is simply a restatement of common courtesy. Meanwhile the notion of a alternative transaction that "attenuated the adverse effect to BCE debenture holders, while at the same time obtaining a satisfactory price for BCE shareholders was something that was a very real and viable prospect that was presented to the board of BCE by Catalyst Asset Management. See letter to board dated June 25, 2007.

This formal proposal to the BCE Board by Catalyst's was beyond the mere hypothetical being posited by the five judges of the Quebec Court of Appeals. It actually was presented. Furthermore It was designed with their hypothetical objective, explicitly in mind.

Meanwhile the Catalyst proposal also achieved the maximization of other benefits not contemplated by the Quebec Court of Appeals, namely an outcome that was optimal to consumers and employees and one that maximized the tax collection on BCE's massive earnings for Ottawa.

The chart above provides a comparison of the Catalyst Proposal with that of the Teachers' proposal. The chart is also available here.

Strange that BCE neglected to disclose the existence of the Catalyst Proposal to its shareholders, as required by securities disclosure laws, in its Bid Circular date August 7, 2007. No doubt there were those within BCE who would rather that the existence of a contemporaneous alternative that was superior to that of the Teachers' proposal remain a mere hypothetical, rather than a tangible alternative, because even the Quebec Court of Appeals was wrong when they wrote in their judgment that "there were three proposals".

Wrong. There were four proposals, including the one from Catalyst.

No doubt this omission in fact will be of interest to Canada's Supreme Court, should BCE foolishly pursue this deal to that ultimate destiny. The Supreme Court judgment need not be based on the mere hypothetical of an alternative that maximized the outcome for both BCE shareholders AND BCE dentureholders, but rather on the hard reality that such an alternative was presented to BCE's Board and summarily concealed.