MONTREAL – At about 6 a.m. this morning (Saturday), Bell Canada Enterprises entered into a definitive agreement to be acquired by a private investor group led by Teachers Private Capital, the private investment arm of the Ontario Teachers Pension Plan and two U.S. private equity firms, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC.
The all-cash transaction is valued at $51.7 billion (US$48.5 billion), including $16.9 billion (US$15.9 billion) of debt, preferred equity and minority interests. The BCE board of directors unanimously recommends that shareholders vote to accept the offer.
The equity ownership of BCE would be as follows: Teachers Private Capital 52%, Providence 32%, Madison Dearborn 9% and other Canadian investors 7%, which is satisfactory under our required Canadian telecom ownership rules.
Of course, now that the price the board will accept is known, there is an outside chance a hostile bidder could come to the table. Standing in the way of any other bids, however, is a whopping break-up fee of $800 million, payable by BCE in certain circumstances and a reverse break-up fee of $1 billion payable by the purchaser in certain circumstances.
Under the terms of the transaction, the investor group will acquire all of the common shares of BCE not already owned by Teachers for an offer price of $42.75 per common share and all preferred shares.
Since it’s been widely stated in the consumer press that the auction for BCE was flawed, to say the least – with Telus pulling out at the last minute citing problems in the process, BCE board chair Richard Currie went on the offensive in today’s conference call with the media, angrily calling some of the stories and their claims “outrageous.”
Some of the reports questioned the involvement of BCE CEO Michael Sabia in the sale process and made certain allegations that senior executives were manoeuvring to try and win the favour of one bid group over another.
Currie, it was clear on the conference call today, was fuming. He accused some of leaking “unfounded allegations to the media,” as part of a campaign to try and destroy the auction process. But, “their efforts to destabilize the process failed,” said Currie. The winning bid “attests to the effectiveness of the route we selected.”
However, he added, “We were deeply disappointed by those who launched personal attacks against BCE employees which maligned their reputations… The accusations were grossly unfair and untrue.”
And while a number of columnists with the major dailies wrote various things about the auction process, reporters could feel the chill over the phone lines when The Financial Post’s lead business columnist on the story got on the line to ask questions. (Ed. Note: Brrrr.)
The columnist, a source of much “sources say” speculation and rumour over the past few weeks, wrote a piece recently that accused BCE of actively scuttling the potential Telus bid for BCE by refusing to provide data to Telus in a timely manner.
When asked specifically about what turned out to be the Telus non-bid, Currie and Sabia explained it this way: “From the beginning of this process… there has been no fewer than 43 meetings of either the oversight committee or the full board of BCE,” said Sabia. That’s one every second day.
Saying the board held itself to the “very highest governance standards throughout,” said Sabia, he added “our fundamental challenge here was to deliver value for our shareholders” in a limited suitor market because whomever the new majority owner was, it had to be Canadian.
The difference between the private equity bidders and Telus was allowing a direct competitor direct access to sensitive Bell Canada data. BCE wanted a third party to handle the data so that Telus executives couldn’t have unfettered access to Bell’s back office. The company needed the third party, said Sabia, “to protect competitive integrity.”
“This was not a view shared by Telus,” he added, and it took a week to get to get over that hump. Currie and Sabia said they received legal advice that said such a third party is standard practice when one competitor is looking to purchase another.
BCE also insisted on a clause in its non-disclosure agreement which prevented Telus from disparaging any of the other bids in public, said Currie. Telus didn’t like that either, he said, which led to further delay. “It took another week to 10 days to complete that,” he explained.
As for why exactly, Telus didn’t bid? Sabia wouldn’t say. “That’s very difficult for me to speculate on,” he explained. “We believe we made every effort as we did with every bidder… we believe the door was open and for whatever reason, Telus chose not to go through that door.”
So what will the new owner bring? It appears as though Sabia and the rest of the senior management team and their vision are safe.
“We strongly believe that all BCE shareholders, Canadian consumers, and employees, including senior management, who will continue to direct the company from its headquarters in Montreal, will benefit from this transaction. We look forward to working together with BCE to make this a reality,” said Jim Leech, senior vice-president, Teachers’ Private Capital.
With the Teachers statement and in his talks with the huge pension fund, Sabia was confident enough to say: “There’s no question of dismantling a business or taking it apart… They don’t intend changes, so we’ll carry on.”
Financing for the transaction is fully committed through a syndicate of banks acting on behalf of the purchaser. The purchase price represents a 40% premium over what the press release called the “undisturbed average trading price” of BCE common shares in the first quarter of 2007, prior to the possibility of a privatization transaction surfacing publicly.
The transaction values BCE at 7.8 times EBITDA (earnings before interest, taxes, depreciation and amortization) for the 12-month period ending March 31, 2007.
"This proposed transaction concludes a comprehensive and disciplined review of the company’s strategic alternatives launched April 17," said Currie in the press release. "It will deliver substantial value creation for our shareholders. In addition, a majority of the equity will be owned by Canadians."
"The transaction delivers to our shareholders the economic benefit of the work done to focus on our core business and to strengthen Bell with a new cost structure and new competitive capabilities," added Sabia, also in the release. "All members of the investor group have outstanding track records in building strong and resilient enterprises and they share our commitment to customers, our employees and the communities we serve."
And from Providence Equity: "This is a unique opportunity to contribute to and participate in the growth of one of the world’s most significant communications companies," said Jonathan Nelson, CEO. "BCE offers state of the art services through its sophisticated network that extends throughout Canada. We look forward to working with BCE’s talented management and employees and our partners to build on the strong platform that is in place for the benefit of all of the company’s stakeholders."
The transaction, assuming no hiccups, will likely close in the first quarter of 2008. The purchaser anticipates requiring BCE, Bell Canada and Bell Mobility to redeem outstanding redeemable debentures maturing up to August 2010 pursuant to their terms as of and subject to the closing of the transaction.
The acquisition debt financing would become an obligation of BCE and be guaranteed by BCE’s then subsidiaries (other than Bell Aliant Regional Communications Income Fund and Northwestel Inc.). As to Bell Canada, the purchaser’s financing would comply as to ranking and security with the then existing Bell Canada debentures and medium term notes issued under the 1976 and 1997 indentures. In addition, the purchaser has obtained commitments to make available a combination of facilities in order to support the ongoing liquidity needs for the company.
The transaction is subject to the customary approvals, including CRTC approval for the transfer of Bell’s broadcast license, and Industry Canada with respect to the transfer of spectrum licenses.
It will be completed through a plan of arrangement, which will require the approval of two-thirds of outstanding common and preferred shares, voting as a class. Shareholders will be asked to vote on the transaction at a special meeting, the details of which will be announced in due course.
