By: Brent Fullard
Catalyst Asset Management Inc.
Bell Canada bondholders argued this week before the Supreme Court that they wanted “business ingenuity” to be brought to bear on this situation by the Board of BCE and to have been offered a solution that respected their “reasonable expectations”.
Perhaps the bondholders can explain what part of “the Catalyst Proposal preserves the investment grade credit of Bell Canada’s bonds” that they don’t like or felt wasn’t worthy of presenting to the court as evidence of deliberate oppression in the face of contemporaneous alternatives to the contrary?
Why did the bondholders not present these facts about the existence of the Catalyst Proposal to the trial judge? The QCA? The SCC? Didn’t they do their homework? What dynamic is at play within the larger financial institutions of which these bondholders are merely subsets, that compels them to ignore this pivotal argument at their disposal?
It’s quite difficult to be helped in this world of ours, when, as the Bell Canada bondholders have done, you go out of your way to deny the helping hand that had been offered in a contemporaneous manner and in substance far greater than some plaintiff letter sent to BCE by bondholder PH&N seeking a meeting and alluding to some non-descript so called “solution”, on which the bondholders have based much of their case.
Why are the bondholders allowing BCE to make inherently misleading statements to the Supreme Court that “Three offers were submitted at the end of the auction process..... Moreover, all of these offers would have reduced the credit ratings of the Debentures to below investment grade...”, when that doesn’t conform with reality?
The truth is the bondholders can argue this case any way they want, however there is something fundamentally wrong with our system of justice if a landmark ruling that will affect the very nature of how our capital markets operate is being decided on a subset of the facts. It’s almost as if the Supreme Court will become complicit in the denial of the true “business ingenuity” that exists in our country in what may prove to be court ordered exercise of “dumbing down”. The BCE bondholders are pursuing a narrow commercial outcome based on a narrow set of facts. Who made them the champions of anything? Not me.
The Catalyst Proposal and its non-disclosure by BCE is the smoking gun argument that definitely proves two key points. (1) BCE acted in bad faith and/or exercised poor business judgment. (2) BCE was presented with a win-win solution that it failed to publicly disclose or rationalize its reasons for not pursuing. A solution which overcame the constraints imposed by the zero sum game known as the Teachers’ LBO. A solution which maximized shareholder value AND preserved Bell Canada’s investment grade credit (see attached). This would have provided Supreme Court Justice Abella considerable comfort and insight when she asked “What ought [BCE] to have done? What would it have meant (in practical terms)?” in her attempts to better understand whether the zero sum game doctrine was at play that pits bondholder against shareholder.
The bondholders need to explain to me why their PH&N letter sent to BCE is a better argument in support of their case than the following facts that were very much in the public domain, immediately preceding and following the discussion I too had with Jim Pattison and after I, unlike they, was invited by Ed Waitzer (special advisor to BCE’s SOC) to submit the Catalyst Proposal before the public auction deadline of the morning of June 26, 2007, which I did and which was press released:
Excerpts from Catalyst June 22, 2007 press release below: (Bell Canada refers to BCE insofar as the company had just approved its name change in June 2007 from BCE to Bell Canada)
The Canadian Solution will put all of Bell Canada's shareholders, both large and small, on a more equal economic footing. Most importantly, the Canadian Solution would permit all existing Bell Canada shareholders to achieve a full valuation for their shares by recapitalizing the resulting company in a value maximizing manner, akin to how these various private equity bidding groups will capitalize the company, or how Telus will finance its acquisition, through the efficient use of debt. However, the Canadian Solution will be done in a manner and on terms that are not oppressive to existing Bell Canada preferred shareholders and bondholders and notably will preserve Bell Canada as Canada's most widely held public company and preserve the competitive landscape in this key industry segment.
Existing shareholders would maximize the value of their current investment in three ways.
First, the Stapled Securities being offered as consideration would be received in a tax efficient fashion, preserving maximum economic value for all shareholders, individuals and pension fund investors alike.
Second, the Stapled Securities will be structured in a manner whereby the combined interest income and dividends on each Stapled Security will be greater than the existing dividend on Bell Canada common shares. It is anticipated that the Stapled Securities will have an initial payment of combined interest and dividends equal to $2.55 per Stapled Security or $2.55 per former Bell Canada common share. Bell Canada currently pays dividends at the annual rate of $1.46 per share. On the ability to service a combined payment of $2.55, Bell Canada CEO Michael Sabia previously had this to say:
"We've assessed very carefully the issue of payout ratio and the level of distributions in general in a manner that gives us a very high degree of confidence in our ability to continue to invest and grow and develop the business."
Third, Bell Canada shareholders will retain all the upside inherent in their existing Bell Canada investment and not be faced with reinvestment risk associated with the cash proceeds from any of the alternative going private transactions.
At the recent annual shareholders meeting, Bell Canada's CEO, Michael Sabia, spoke about Bell Canada being at an important "inflection point" in its business and he feels all the hard work of the past five years under his leadership is about to bear fruit in the form of a better positioned and more profitable company. Therefore, it could be argued, now is not the time to sell Bell Canada shares and be faced with the reinvestment risk of identifying a new investment with similar income and growth potential if such an alternative even exists. Furthermore, under the Canadian Solution, any new regulatory changes that are on the horizon, such as the possible relaxing foreign ownership rules or the like, will accrue to the benefit of its long standing existing Bell Canada shareholders and not its new private owners.
Excerpts from Catalyst June 25, 2007 press release:
Under the Catalyst proposal that was submitted in writing to the Special Committee of the Board of BCE this morning, it is contemplated that........
Based on current market conditions and today's level of yield requirement by investors and the EBITDA growth guidance provided by the company of 4% - 6% for 2007, Catalyst is of the opinion that the Stapled Securities will have a trading value of between $42.50 and $52.00 with a mid point valuation of $47.25. Under current market conditions, Catalyst believes that the Stapled Security would trade in the upper half of this value range over time as a result of ongoing retail demand for quality growth/yield oriented investments.
Thursday, June 19, 2008
Posted by Fillibluster at 7:38 AM