BCE: Robbing Peter to pay Paul

Elegant solution given short shrift
Catalyst's plan nixed in favour of high-risk strategy

Barry Critchley,
Financial Post
Friday, May 23, 2008

Almost one year ago, Brent Fullard, president of Catalyst Asset Management Inc., presented a proposal to the special committee of BCE Inc. for the recapitalization of the company.

The proposed transaction was to be completed by way of an exchange offer whereby a newly formed Canadian corporation would offer one stapled security (a common share plus a subordinated debt security) for each common share.

Fullard's proposal -- which he described as "maximizing shareholder value in a tax efficient manner by enhancing the income by 75%" -- didn't get very far within BCE, which was pursuing an alternative strategy. But what has particularly irked Catalyst is that, over the past year, BCE has chosen not to make reference to the proposal.

Given this week's decision of the Quebec Superior Court, BCE must regret not giving the Catalyst plan more than a cursory examination. (When is the last time that a takeover involved seeking leave to appeal to the Supreme Court?) If nothing else, the Catalyst proposal has stood the test of time. In short, the proposal was robust.

"It was formal, it was presented to the board, it was picked up in the press, it explicitly dealt with the fact that the bondholders could be preserved and it was credible. With the Teachers deal, the equity owners are deriving some of their economic value at the expense of the bondholders. There is no robbing Peter to pay Paul with our deal," Fullard said yesterday.

Instead of focusing on Catalyst's elegant proposal, BCE implemented a strategy that was very high-risk, given the number of regulatory, financing and security-holder approvals that were required. On the regulatory front, the group led by the Ontario Teachers' Pension Plan had two problems to overcome: Under the provincial Pension Benefits Act it wasn't allowed to own more than 30% of a company either directly or indirectly, but under CRTC rules it had to end up with majority Canadian ownership. It designed an ownership structure that used Morgan McCague -- a former senior investment executive at Teachers -- to hold the bulk of the voting shares. (Teachers owned non-voting shares.) But McCague wasn't a free agent.

Ultimately the Ontario regulator, the Financial Services Commission, signed off though Konrad von Finckenstein, CRTC chairman, said he was "astounded."

"The interpretation that FSCO puts on these things is not the one that either I as a lawyer or former judge would put on that legislation and regulation. But, be that as it may, it is their position and we are here to judge whether you are in control or not. We just wanted to make sure that what you are doing is in accordance with Ontario pension law, and clearly the Superintendent feels that it is," he said. The CRTC signed off -- even if it was a "conditional approval."

This week two more problems occurred: talk that the bankers want new or better terms before they will provide the debt finance, and the ruling from the Quebec Court of Appeal.

That court didn't hold back. It said the "process [of BCE's board] 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."

In addition, it said "the interests of the debenture holders ... should have been considered by the board."

The irony: The matters that BCE/Teachers didn't address were the matters
for which Catalyst had a solution.

bcritchley@nationalpost.com