Saturday, July 5, 2008

Note to CRTC: Lest there be any doubt about where “de facto” control of BCE will reside

Hint: It isn't Canada

By; Brent Fullard
Catalyst Asset Management Inc.

Well, this article below in today’s Globe is quite an eye opener about the inner workings of the BCE takeover by US private equity with US junk bond debt.

Now I know what Jim Leech meant when he said: ““We bring the money, but our partners, Providence and Madison Dearborn are experts in this field.” I thought by that comment, Jim Leech he was simply referring to the telecom side of things, but obviously he was referring to the whole kit and caboodle.

Teachers’ deferred to Providence when it came to final negotiations with the BCE Board. Meanwhile the BCE Board, incredulously, deferred to Providence and Providence’s negotiations with Citibank when it came to determining just how much debt could be piled on to BCE’s balance sheet. Talk about laissez faire management, on the part of both Teachers’ and the BCE board.

BCE and Teachers’ were merely subservient order takers and/or bystanders......told that there’s “no room to negotiate” they didn’t negotiate, but instead capitulated.

I don’t think raising the reverse break fee from $1 billion to $1.2 billion is anything remotely equal to asking shareholders to forego $1 billion in accrued and unpaid dividends. Sorry, “asking” should read “not asking”......since they too were told. Canadians as schmucks, in the hands of the US and all things Wall Street groovy.

I am reminded of the words of CRTC Chairman concerning about another highly questionable aspect of this deal.......”I am astounded”....... when in fact, actually I am not astounded, given the players involved.

The article below tells us that the deal announced yesterday was the product of negotiations between the CEO of Providence and the Vice Chairman of Citibank, and acceded to by those in roles of fiduciary responsibility

In the end, 'no room to negotiate'

As buyers grew worried that BCE was stagnating, the tone was: 'Listen guys, do we want to do this deal or not'


With files from reporter Lori McLeod

July 5, 2008

An emissary from one of BCE Inc.'s suitors walked into a Toronto boardroom almost two weeks ago and gave the phone company's directors an ultimatum that would make or break the $35-billion deal to sell to a group led by the Ontario Teachers' Pension Plan.

Jonathan Nelson, the head of Providence Equity Partners, had just finished gruelling months of talks with the nervous banks that were on the hook to lend about $30-billion for the deal. He told the board that the price of the deal could stay at the originally negotiated $42.75, but the banks would only write the huge cheque if BCE agreed to some big concessions.

The company would have to push back the deadline for the deal to sell to Providence and Teachers by several months to Dec. 11 and cancel its dividend, moves that would be tough on shareholders but would raise cash and give the banks more breathing room. It was a take-it-or-leave it proposition, said Mr. Nelson, who was leading the discussion with the board because he had been quarterbacking talks with the banks since April.

"There is no room to negotiate. This is it," Mr. Nelson told the directors who were gathered in a boardroom of BCE's law firm Stikeman Elliott LLP, according to people familiar with the talks.
Print Edition - Section Front

The banks were unwilling to budge any further. With credit and stock markets worsening that week, he warned the board not to tempt fate.

Those weren't the only concessions demanded of BCE. The buying group had its wish list too, chiefly the ability to implement a so-called 100-day plan for big changes at the company even before the deal closed, according to people involved in the talks. That effectively meant an end to current chief executive officer Michael Sabia's tenure because the buyers had already pegged George Cope, the head of BCE's Bell Canada phone arm, to lead the company on their watch.

Still, it took almost two more weeks of all-nighter-filled negotiations to reach a deal as BCE balked at some terms. At one point, BCE chairman Dick Currie relayed a message from Mr. Sabia: He wanted to stay until the deal closed. But the buyers were insistent. Changes had to start immediately.

The buyers, which also include Madison Dearborn Partners and an arm of Merrill Lynch & Co., were growing increasingly concerned that BCE's business was atrophying as the process dragged on, leaving the company in a kind of suspended animation where big decisions on matters such as network investment weren't being made.

The tone was "listen guys, do we want to do this deal or not," said one person involved in the talks.

By Thursday night, the final terms of the bank agreements were done, and yesterday morning, in a teleconference, the BCE board agreed to the terms. Mr. Cope would take over in a week.

BCE will probably look at asset sales to reduce debt, big work force cuts at the middle management level and ways to fix problems with customer service that have bedevilled the phone company.

"Given the level of certainty in this agreement, our perspective is it's time to get moving," Mr. Sabia said in an interview. "That will be priority No. 1."

Even at $42.75, the price Teachers and Providence agreed to pay when they won the auction for BCE a year ago, the deal still includes what is essentially a stealth price cut of at least $1.10. That's because BCE has cancelled its quarterly dividend of 36.5 cents a share even though shareholders will have to take the risk of holding the stock until the closing in late 2008. Nonetheless, BCE shares rocketed to their biggest gain in six years, closing up 13 per cent on the TSX yesterday.

"There's a lot of people saying we don't mind that, what we want is the deal to get done," said Gavin Graham, a portfolio manager at Guardian Group of Funds, which holds BCE shares.

The beneficiaries of the delay and the withholding of the dividend are primarily the banks which promised to fund the deal with about $30-billion of loans - Citigroup Inc., Deutsche Bank AG, Royal Bank of Scotland and Toronto-Dominion Bank. The moves enable BCE to pile up as much $1.5-billion in extra cash by year end, reducing the amount the banks have to lend in brutal credit markets. In return, BCE extracted a bigger break-up fee of $1.2-billion, $200-million more than in the prior agreement, from the buyers should the deal fall apart.

Many observers had predicted that the buying group would not be able to negotiate a financing deal with the banks because they stood to lose billions of dollars on loans that were agreed to last summer before the credit markets went into a deep tailspin.

People familiar with the talks credit Providence's Mr. Nelson and Citibank vice-chairman Chad Leat with keeping the bank negotiations on track. Providence has a long term relationship with Citibank. When Mr. Nelson sat down with Mr. Leat earlier this year, they agreed they wanted to avoid the turmoil of any litigation.

Both Providence and Citibank found themselves in a messy court battle in New York and Texas earlier this year over stalled negotiations to acquire Texas-based Clear Channel Communications Inc. That deal was successfully renegotiated, but the banks, including Citibank saw their reputations dragged through the mud during the dispute.

According to people familiar with discussions, Mr. Nelson and Mr. Leat agreed to meet without any advisers or lawyers to navigate acceptable lending terms for the banks.

It is understood that Mr. Nelson was adamant that the buyers could not amend the terms of their offer for BCE too drastically because such a move would have required the company to take the deal back to its shareholders for a vote, which might scuttle the deal.

Even by ceding to the demand from the buyers for more control now, the company ends up in a potentially awkward situation of being run according to the wishes of the private-equity firms while still a public company for months to come, investors said.

"That will be an interesting corporate governance issue to deal with," said Rob Callander, a portfolio manager at Caldwell Asset Management, which sold most of its BCE shares earlier in the takeover drama. "I wouldn't think the existing board would want to be in a position to approve really dramatic events until the transaction is consummated. On the other hand, if there are things the company can be doing in preparation, I wouldn't think the old board would want to stand in the way of that."

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