LBO Market Gets a Boost as BCE Compromises With Buyers, Banks

By Jason Kelly and Frederic Tomesco

July 7 (Bloomberg) -- BCE Inc. struck a compromise with its private-equity buyers and their lenders, keeping the world's largest leveraged buyout on track to be completed and giving a lift to the moribund takeover market.

A group led by Ontario Teachers' Pension Plan will close the C$52 billion ($51 billion) purchase by Dec. 11, Montreal- based BCE said in a July 4 statement. The three-month delay gives the banks more time to sell debt used to finance the LBO, while a decision by BCE not to pay common stock dividends effectively lowers the buyers' costs by more than C$900 million.

The transaction is one of the few to survive the global credit contraction that ended the buyout boom a year ago. Banks may increase LBO lending once the market absorbs the C$34 billion of bonds and loans issued for the BCE deal, said Rick Nathan, a managing director at Kensington Capital Partners Ltd. in Toronto.

``Given the overall environment for LBOs, this is quite an accomplishment by the buyer group,'' said Nathan, whose firm oversees about C$400 million in private-equity assets. ``There is a fundamentally different psychology in the marketplace. The sun is starting to come up.''

Banks have cut the backlog of LBO loans made before credit markets seized up in August to less than $100 billion from $350 billion, according to fixed-income research firm CreditSights Inc. in New York. The reduction came as more than 60 deals announced last year valued at a combined $174 billion were abandoned, including purchases of Alliance Data Systems Inc. and Harman International Industries Inc., according to data compiled by Bloomberg.

Shares Climb

Banks also are unloading debt committed to takeovers including those of Clear Channel Communications Inc. and Chrysler LLC by selling it at discounts of as much as 35 percent.

BCE rose C$4.49, or 13 percent, to C$39.64 on July 4 in Toronto Stock Exchange trading, the biggest gain since April 2002. The U.S. markets were closed in observance of the Independence Day holiday.

The company, Canada's largest phone carrier, agreed in June 2007 to be acquired for C$42.75 a share, or C$34.2 billion, topping the $32 billion acquisition of Dallas-based power producer TXU Corp. completed last October as the biggest LBO.

Toronto-based Ontario Teachers', Canada's third-largest pension manager, teamed up with Rhode Island-based Providence Equity Partners Inc. to take BCE private. Madison Dearborn Partners LLC in Chicago and New York-based Merrill Lynch & Co. also are investing in the deal, which is being financed by banks led by New York-based Citigroup Inc. and Deutsche Bank AG of Frankfurt .

Huntsman, Penn National

BCE avoided the fate of other soured deals, some of which remain mired in litigation. Huntsman Corp., the chemical-maker that last year agreed to be bought by Apollo Management LP- controlled Hexion Speciality Chemicals Inc., sued New York-based Apollo's founding partners in Texas after that deal collapsed.

Fortress Investment Group LLC and Centerbridge Partners LP scrapped their $6.1 billion takeover of racetrack and casino owner Penn National Gaming Inc. on July 3. The private-equity firms paid the company $225 million and provided a $1.25 billion interest-free loan to end the deal.

Even after losing more than 1 million local-phone customers in the past three years to rivals such as cable companies, BCE dominates the Canadian telecommunications industry. As of March 31, BCE had about 7.7 million local-phone subscribers, 6.3 million wireless customers and 2 million high-speed Internet users. In the first quarter, BCE's cash flow from operations amounted to C$894 million.

Dividend Withheld

The BCE deal played out similarly to the conclusion of Clear Channel's purchase. That transaction averted failure after Thomas H. Lee Partners LP and Bain Capital LLC agreed to a reduced offer of $36 a share, or 8.2 percent less than the price that the buyout firms committed to pay last year.

The new BCE deal allows the buyers to dodge another round of approvals, including by shareholders, since it doesn't change the purchase price.

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 breakup fee of C$1.2 billion, or 20 percent more than in the original agreement, if the purchase doesn't get done.

While the BCE deal's survival gives a boost to the LBO market, it doesn't signal a return of the debt markets to full health, said Edward Nash, managing director and head of mergers and acquisitions at Canadian Imperial Bank of Commerce's CIBC World Markets unit in Toronto.,

``For that, we need to ride through the current credit crisis,'' he said.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Frederic Tomesco in Montreal at tomesco@bloomberg.net.