Monday, December 8, 2008

Be careful of what you lobby for: Michael Sabia's dog's breakfast

Is BCE noise a prelude to lawsuits?

Andrew Willis, today at 5:43 PM EST

There's a sense that the latest developments around BCE are aimed at the lawsuits that will inevitably follow a failed deal, rather than trying to resurrect a buyout that no longer suits the times.

The latest rumours around BCE have one blue chip firm - PricewaterhouseCoopers - contradicting the work of rival KPMG that effectively scuttled the deal. Some sort of accounting cage match may be required.

All this noise reflects, in part, positions on who should wear the blame if the expected comes to pass, and the $35-billion takeover of BCE is officially killed on Dec. 11.

It's not just reputations that are at stake.

For starters, it's possible (but unlikely) that break fees will need to be paid by one side to another. Those penalties are material, even for the $108-billion Ontario Teachers Pension Plan.

BCE promised to pay its potential buyers - led by Teachers - an $800-million break fee if the company killed a buyout first agreed to back in June, 2007. Going the other way, the Teachers fund and its allies owe BCE $1.2-billion if they renege.

Right now, it doesn't look as if either side owes the other a break fee. The deal is falling apart because in KMPG's opinion, BCE would not pass a solvency test loaded down with $32-billion of buyout debt, and a favourable opinion from KMPG was a condition for closing the deal.

BCE's lawyers at Sullivan Cromwell inserted that solvency test into the takeover agreement as a way to placate BCE's existing bondholders. BCE and Teachers agreed KMPG would do the honours. No one side is to blame if the accountants decide the balance sheet doesn't pass muster.

But that won't stop various parties from resorting to lawyers at 10 paces if the deal fails.

BCE is making noise about suing Teachers, it's single largest shareholder, to extract that break fee. If PricewaterhouseCoopers has rendered a favourable solvency opinion, as reported by Bloomberg, then BCE common shareholders might try to sue KMPG.

While they are at it, common shareholders might use a favourable opinion from PricewaterhouseCoopers to launch a lawsuit against Teachers, for failing to close the deal, or against the four banks that didn't end up lending on the transaction.

Citigroup, Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank are on the hook for the BCE buyout loans, and will be thrilled to wiggle out of that commitment on Dec. 11, as the mark-to-market losses on the leveraged debt would be huge.

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