BCE, Ontario Teachers' Reach Final Agreement on Sale

By Chris Fournier and Frederic Tomesco

July 4 (Bloomberg) -- BCE Inc., Canada's biggest phone company, signed a final agreement with a group led by the Ontario Teachers' Pension Plan to complete the world's largest leveraged buyout after scrapping its quarterly dividend. The stock had its biggest gain in more than six years.

The C$52 billion ($51 billion) purchase of BCE, first announced a year ago, will be done by Dec. 11 at the original price of C$42.75 a share, the Montreal-based company said in a statement today. BCE won't pay dividends on its common shares, preserving as much as C$900 million to appease the banks financing the purchase.

BCE's financing accord is an exception in a leveraged buyout market that's been stalled by the subprime mortgage crisis and rising borrowing costs. Buyout loan defaults may be ``significantly higher'' than ratings companies' estimates as about $500 billion of debt used to fund the takeovers comes due, the Bank for International Settlements said in a report today.

``BCE's release is uplifting news, signaling the ability to close transactions with big funding requirements, at least for highly cash-generative assets,'' said Edward Nash, managing director and head of mergers at CIBC World Markets in Toronto.

BCE rose C$4.49, or 13 percent, to C$39.64 in 4:10 p.m. trading on the Toronto Stock Exchange, the biggest gain since April 2002.

Bank Financing

BCE shares last month traded as much as 25 percent below the offer price on concern that banks funding the purchase, including Citigroup Inc. and Deutsche Bank AG, may back out or reduce the price as financing costs rise and the U.S. economy slows.

``It's a morale booster,'' said Ian Nakamoto, research director at MacDougall, MacDougall and MacTier Inc. in Toronto, which manages about $4.8 billion, including BCE shares. ``People were pessimistic after all the talk of, `It won't get done' or `only at a lower price.'''

The buyout group and BCE made several changes to the agreement to win the backing of the bankers, who will provide C$34 billion in financing. The closing was pushed back almost three months from Sept. 30, giving the bankers more time to sell debt to pay for the purchase.

The common share dividend, which had been deferred last week, won't be paid, though preferred shareholders will get a dividend. The buyers must also pay a break fee of C$1.2 billion, or 20 percent more than in the original agreement, if the purchase doesn't get done.

Concession to Banks

Scrapping the dividend ``is obviously a concession, but in light of current market conditions, it's not unexpected,'' said Jim Hall, who manages about $1 billion, including 400,000 BCE shares, at Mawer Investment Management in Calgary. ``This is the way the world is supposed to work, and the 12 months of nonsense before this was trying.''

Toronto-based Ontario Teachers', Canada's third-largest pension manager, and Providence, Rhode Island-based Providence Equity agreed a year ago to pay C$42.75 a share, or C$34.2 billion, to take BCE private. Madison Dearborn Partners LLC in Chicago and New York-based Merrill Lynch & Co. joined the deal.

The Supreme Court of Canada on June 20 approved the takeover, reversing a lower court ruling that said the deal didn't treat bondholders fairly.

Funding Risk

Today's agreement ``largely eliminates the funding risk for the deal,'' National Bank Financial analyst Greg MacDonald said in a note to clients. Retaining the dividend for two to three quarters may be worth C$588 million to C$882 million to BCE, and was a ``concession for the banks to close the deal,'' he said.

The dividend cut reduces the cost to the buyers by as much as C$1.10 a share, MacDonald said.

George Cope, 46, chief operating officer of BCE's Bell Canada phone business, will succeed Michael Sabia as chief executive officer on July 11. Sabia had said he would step down when the sale closes.

``Work is now largely done,'' Sabia, 54, said in the statement. ``We have been planning this transition for some time. Now is the time to get on with it.''

BCE's priority will be to hang on to its customers, former Teachers' Chief Executive Officer Claude Lamoureux said last week. Lamoureux will join the BCE board.

The company lost 511,000 local-phone subscribers in 2007, compared with 463,000 in 2006 and 297,000 in 2005, according to last year's annual report.

``Rule No. 1 is, let's make sure everybody is happy,'' Lamoureux, 65, said when asked about BCE. ``If the clients are happy, then the owners are going to make some money.''

In addition to New York-based Citigroup and Deutsche Bank of Frankfurt, lenders on the BCE deal are Royal Bank of Scotland Group Plc and Toronto-Dominion Bank in Toronto.

To contact the reporters on this story: Chris Fournier in Montreal Cfournier3@bloomberg.net. Frederic Tomesco in Montreal at tomesco@bloomberg.net.