BCE Hires Second Auditor to Sway KPMG in Bid to Salvage Buyout

By Jonathan Keehner and Jason Kelly

Dec. 9 (Bloomberg) -- BCE Inc., Canada’s largest phone company, hired accountants PricewaterhouseCoopers LLP in a last- ditch effort to salvage its C$52 billion ($41.5 billion) takeover by a group led by Ontario Teachers’ Pension Plan.

The leveraged buyout was put in jeopardy last month when auditors at KPMG LLC told the company the deal, funded with C$34 billion of debt, would push it into insolvency. PwC was hired to help persuade KPMG to reverse its opinion, Montreal-based BCE said yesterday in a statement. If KPMG holds its ground, the transaction, set to close by Dec. 11, probably will collapse.

“When you get one answer you don’t like, you try to get another one,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “That’s the dance.”

The purchase by Ontario Teachers’ and private-equity firms including Providence Equity Partners Inc. and Madison Dearborn Partners LLC values BCE at almost twice its current stock price. According to a June 2007 merger agreement filed with regulators, a condition to completing the transaction is a solvency opinion “from KPMG LLP, or another nationally recognized valuation firm engaged by the purchaser and agreed to by the company.”

BCE climbed C$1.80, or 7.9 percent, to C$24.65 yesterday in Toronto after Bloomberg News reported the company had hired PwC. That’s 42 percent below the C$42.75 a share offer from the group, which also includes the buyout unit of Merrill Lynch & Co.

PwC was brought in to do “valuation work,” not the solvency opinion required by the takeover agreement, BCE said in the statement.

“BCE believes that PwC’s work supports the company’s position” that it would be solvent after the LBO, it said.

Debt-Market Doubts

The buyout of the parent of Bell Canada has been in doubt for months because with debt markets frozen, lenders led by Citigroup Inc. and Deutsche Bank AG would have trouble selling the bonds and loans needed by the buyers to pay for BCE.

Should the deal fail, the banks may avert at least C$10 billion in losses based on current prices for leveraged loans and high-yield bonds typically used to finance LBOs.

Representatives for Citigroup, Deutsche Bank and the buyers declined to comment. Carolyn Forest, a spokeswoman for PricewaterhouseCoopers in Canada, didn’t return a phone message seeing comment.

“This solvency opinion may allow BCE to argue the deal should be completed,” said Sachin Shah, a merger-arbitrage analyst with ICAP Corporates LLC in Jersey City, New Jersey. “The banks will have reservations about it because it’s from a new auditor.”

Fallback Plan Rejected

Last week, some of the buyers floated an alternative to the LBO. They approached BCE and the lenders with a plan to purchase C$8 billion to C$10 billion in preferred securities for about a 20 percent stake, people familiar with the plan said last week.

The banks balked at arranging the C$7 billion to C$8 billion in investment-grade debt to fund the fallback transaction, the people said. BCE said it never received a new offer.

The purchase would the second-biggest LBO ever behind the 2007 purchase of energy producer TXU Corp. by KKR & Co. LP and TPG Inc. for $43.2 billion, including debt. The BCE deal was announced weeks before record subprime-mortgage defaults triggered a global credit crisis.

To contact the reporters on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York jkeehner@bloomberg.net