Bell Canada deal at risk as banks try to renegotiate debt terms

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The Independent Online

The biggest leveraged buyout of all time might be about to shrink, according to rumours swirling around the C$51.7bn (£26.8bn) takeover of Canada's telecoms giant, BCE.

Shares in BCE – more commonly known as Bell Canada – plunged yesterday on news that a consortium of banks which had committed to finance the deal were now trying to renegotiate terms, in light of the credit crisis.

Investors bet that, if BCE follows the pattern of other troubled buyouts, existing shareholders will have to accept a lower price for the company in order to prevent the deal from collapsing altogether. The stock fell 6 per cent in early trading yesterday and is now more than 14 per cent below the takeover price agreed with private equity bidders last July.

A consortium led by the Ontario Teachers' Pension Plan won BCE in a frenzied auction, beating out offers from other consortia which included aggressive private equity firms Kohlberg Kravis Roberts and Cerberus Capital.

The winning consortium had secured promises of debt financing from lenders include Citigroup, Deutsche Bank and Royal Bank of Scotland, but the banks demanded unexpectedly onerous terms for their loans during negotiations last week. Private equity sources said they believed the terms – which included higher interest rates and tougher debt covenants – were designed to collapse the deal.

The banks did not return messages or declined to comment yesterday.

Banks have repeatedly sought to renegotiate the terms of giant buyout deals since the start of the credit crisis last summer. Before then, private equity firms had been able to secure larger and larger amounts of debt on easy terms from banks who were able to quickly sell on the loans in the financial markets. The market for leveraged loans, however, has dried up, meaning banks face losses on the loans they have on their books, and most are seeking to avoid taking on additional loans if they can get out of them.

The Bell Canada deal had not been expected to close until the end of June.

Last week, Citigroup and RBS were among a consortium of banks which won better terms for loans to finance the leveraged buy-out of Clear Channel Communications, the US radio group, which was also among the biggest deals of the buyout boom 18 months ago. As part of the renegotiation, Clear Channel shareholders accepted a cut in the price.

Joseph McKay, an analyst at Desjardins Securities, told clients in a recent research note that Bell Canada's shareholders may have to accept a price as low as $39.25 a share, compared with the $42.75 originally agreed.

One executive involved in the negotiations told The New York Times that the Bell Canada situation is "Clear Channel, the sequel".

It took 18 years for the private equity industry to beat the "Barbarians at the Gate" record, the $25bn that Kohlberg Kravis Roberts paid for RJR Nabisco back in 1989, but several deals last year topped that figure.

Ontario Teachers is one of the world's richest pension funds, with more than C$100bn in assets. It has been a major backer of private equity since the industry was in its infancy, although the Bell Canada deal is one of the first where a pension fund is acting as a principle in a major transaction.

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