A deal that promised to be the largest leveraged buy-out in history might actually be consigned to history, after an auditor said it could not vouch for Bell Canada's solvency if it is taken over by a private equity consortium. The Canadian telecoms giant agreed a takeover at the height of the buy-out boom in July 2007, an acquisition that would have been funded with US$34bn (£22bn) in debt from the US credit markets. But with just weeks to go before the ill-starred deal was finally scheduled to close, KPMG raised a new and potentially fatal hurdle.
The stock market slide of the past few months has meant that the Bell Canada pension fund is now substantially underfunded and at the same time, the market value of the company's assets has also been reduced.
As a result, KPMG will not be able to deliver an opinion that the company would be solvent when it loaded up with new debt, the audit firm said.
Shares in the company – which is formally known as BCE Inc – plunged by 30 per cent, as investors realised that the original agreement set a solvency test as a condition of closing. KPMG's ruling means "the transaction is unlikely to proceed", BCE said.
"We are disappointed with KPMG's preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing,"
Siim Vanaselja, BCE's chief financial officer said. "The company disagrees that the addition of the leveraged buy-out debt would result in BCE not meeting the technical solvency definition."
A consortium led by the Ontario Teachers' Pension Plan and the US private equity firm Providence Equity Partners won agreement to take control of BCE in an auction of the company, beating out better-known rivals including Cerberus Capital Management and Kohlberg Kravis Roberts. With a total value of C$51.7bn (£27.4bn), it was the largest private equity buy-out signed, agreed during a period of rampant deal-doing.
The record set during the previous buy-out boom in the Eighties – by the KKR takeover of RJR Nabisco in a deal immortalised in the 1990 book Barbarians at the Gate – was beaten three times last year.
None of those deals could be signed today, with credit markets having frozen up. Citigroup, which is providing about US$11bn of the US$34bn debt to the Bell Canada consortium, is believed to have already written down the value of those loans, because it can no longer expect to sell them on in the securitised loan market – and it may make a multi-billion dollar windfall if the buy-out does not now go through.
Although Bell Canada management said they would try to change KPMG's mind, analysts said only a sharp rebound by the stock market in the weeks before the scheduled close on 11 December was likely to save the deal.
Wires crossed: Bell Canada buyout
June 2007 The C$51.7bn deal sets a new record for leveraged buy-outs.
February 2008 The telecoms regulator expresses doubts over aspects of the deal, forcing corporate governance changes to boost the influence of Canadians.
May 2008 An appeals court sides with angry bondholders and blocks the deal, prompting the company to go all the way to the Canadian Supreme Court for approval.
July 2008 The buyers and their bank backers force a renegotiation of the terms of the deal, winning an effective price cut by postponing the close and axing remaining dividends.
November 2008 KPMG's refusal to sign off on the company's future solvency could be the final straw.Reuse content