By: Brent Fullard
By now it has probably become obvious to all, that the fate of Teachers’ $8 billion purchase of BCE, turns on the credit market’s willingness to lend $34 billion to BCE, on top of the $12 billion of BCE debt already outstanding.
To safeguard itself against the deal’s completion risk, BCE was to have been paid a $1 billion reverse break fee by the purchasers if the deal didn’t get consummated by June 30, 2008. The reverse break fee is meant to be an insurance policy of sorts. Under the revised terms of this deal, this reverse break fee has taken on the dimensions of a call option.....in fact, a re-priced “at the money” call option.
On July 4, 2008 (US Independence Day) it was announced that BCE had agreed to a new set of terms with Teachers' and the three US purchasers, consisting of:
- new outside closing date of December 11, 2008, extended by six months
- suspension of dividends on BCE common shares
- increase in reverse break fee by $200 million to $1.2 billion
This was quite the move by the purchasers and quite the unilateral capitulation by the BCE board. Implicit in the board’s actions is the acknowledgment that a reverse break fee of $1 billion was insufficient to safeguard against the original deals non-completion. Otherwise the BCE board would have simply told the purchasers to either close the deal on the terms agreed to, or pay the $1 billion reverse break fee.
Obvuiously the Board was not indifferent as between these two outcomes, both of which the board had negotiated. As such, one can only conclude that the $1 billion reverse break fee that the board had negotiated was insufficient.
Instead, the BCE board decided to fundamentally change the terms of the deal by suspending the payment of dividends on the BCE common shares and extend the closing date by six months. As such, BCE shareholders are no longer being paid to wait, as the deal drags on for almost 18 months. This dividend suspension means that there is now some $1 billion of additional cash in BCE that the Purchasers had not originally bargained for. This additional cash is equity. The Purchasers $8 billion in equity has been augmented (at no cost to them) by an additional $1 billion in free equity. In this respect, the purchasers have lowered the purchase price in such a manner as to preserve their original deal economics, even though their original deal economics had been eroded by the declining debt markets and the increased cost of borrowing, a risk that the Purchasers were intended to shoulder, but in the end, didn't.
Why did the BCE board determine that preserving the Purchasers’ original deal economics was more important than preserving the original deal economics to the vendor (ie BCE shareholders who were now being short changed the dividend)? Furthermore, why not simply demand performance from the purchasers, whose potential non performance was “insured” by the $1 billion break fee?
Instead the BCE Board gave the Purchasers a six month extension to close the deal, and a repricing of the deal? What did they get in return? A $200 million increase in the reverse break fee. The reverse break fee has now, in effect, become a call option. The Purchasers have a new 6 month option on the state of the credit markets to finance this deal on terms that are more favorable than those which BCE shareholders agreed to. The reverse break fee was supposed to have been the insurance policy. The conduct of the BCE board in renegotiating the deal would suggest that $1 billion is insufficient insurance to address non performance. And what are we to believe? That $1.2 billion is?
Keep in mind, Much of that $200 million increase is merely the "time value of money" as Teachers' has simply delayed the payment.
Furthermore, the repricing that took place in mid June that was embedded in the deal agreed to on July 4, 2008 has been largely unraveled by subsequent deterioration in the leveraged loan market. However that will not necessarily determine the fate of this deal.....after all, the Purchasers were granted a free a six month call option on the state of the credit markets, courtesy of BCE’s board, although not with the approval of shareholders.
And what “messaging” accompanied this reversal of the reverse break fee, from insurance policy to call option? For that we turn to ex-politico, and current BCE spokesman, Bill Fox:
“It speaks to the commitment of the purchase group,” Mr. Fox said.
My response: Yeah, right. In fact, quite the opposite, since this reverse break fee has become nothing more than a free, re-priced, at the money call option. What could be more non-committal than that?
Tuesday, July 22, 2008
Posted by Fillibluster at 9:03 AM