June 20, 2008
Supreme Court Approves $52 Billion Buyout of BCE By Teachers’ Plan
By Julian Beltrame, THE CANADIAN PRESS
OTTAWA - The Supreme Court of Canada removed a major hurdle that threatened the world's largest leveraged buyout, giving a unanimous go ahead Friday to the $52 billion sale of Bell Canada parent BCE Inc. (TSX:BCE).And both the Ontario Teachers' Pension Plan heading the takeover bid and the banks financing the deal quickly welcomed the decision and joined BCE in asserting they will move ahead to finalize the acquisition this summer.
Business observers also welcomed the Supreme Court decision, saying it clarifies rules governing future takeovers and corporate responsibility to shareholders and bondholders. If the court had ruled against the BCE buyout, they said, it would have threatened Canada's capital markets and made it more difficult for Canadian companies to raise capital internationally.
In New York, Citigroup, Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank (TSX:TD), the four banks lending money to Teachers and its partners, said they remain committed to financing the deal, which is slated to close by the end of the month.
"The banks expect that the transaction will close in accordance with the definitive agreement between BCE and the sponsors," the lending group said in a statement. "We continue to negotiate the financing documents in good faith with the sponsors and stand behind our original commitment to the transaction."
Teachers CEO Jim Leech said he was "continuing to work to complete the acquisition.
Meanwhile, BCE revealed it had received final approval from the CRTC for the deal Friday and expects Industry Canada's backing next week. The telecom company said it hopes the sale will close in the third quarter which ends Sept. 30.
"Today's unanimous decision by the Supreme Court affirms BCE's long standing position that the plan of arrangement complies with the rights and reasonable expectations of Bell Canada debentureholders," said Richard Currie, chairman of BCE and Bell Canada.
"With this decision by the Supreme Court and the confirmation of regulatory approvals, we are now in a good position to complete the transaction. "We expect all parties to the transaction will honour their commitments."
On Friday afternoon, Canada's highest court ruled 7-0 to overturn last month's also unanimous decision of the Quebec Court of Appeal that the sale of the iconic Canadian company to the Teachers and its U.S. partners illegally ignored the interests of bondholders.
A group representing bondholders who lost the case expressed disappointment at the Supreme Court ruling and gave no indication what their next move might be.
The decision was handed down at 4:30 p.m. ET, after North American markets closed, but BCE stock moved sharply in after hours trading regardless, gaining more than $2 a share from its $34.60 close.
The Supreme Court did not give reasons for the decision, saying its detailed ruling would be handed down within six months.
But many in the business community were already breathing a sigh of relief with the judgment, saying something akin to chaos would have ensued if the court had ruled the other way.
"It would have opened the floodgates for any stakeholder to make a claim and what it would have done is handicap Canadian firms seeking investments," said professor Richard Powers, director of corporate governance at the Rotman School of Management at the University of Toronto.
"We've had trouble enough attracting foreign investment in this country."
Powers said the court apparently ruled that a corporation's basic duty is to maximize shareholder value and the long term interest of the firm, and that its duty to bondholders - who lend it money - is to fulfil the requirements of the contract by making interest payments and paying the principal when bonds mature.
"This is one of the most important decisions that's ever come out of the Supreme Court with regard to corporate law," said Elliott Soifer, vice-president of Desjardins Securities International.
"We're very relieved because this is the way that we always understood the capital markets work and the Supreme Court has clarified that," said Soifer. "We eagerly await the actual reasoning so that we can get a better understanding but we expected this outcome."
And legal analysts were already suggesting that the case will be considered a landmark when the reasons are posted.
"I expect this will be the kind of case that corporate law professors make their students read because it lays out the groundwork," said law professor Lionel Smith, director of the Quebec Research Centre of Private and Comparative Law at McGill University.
The bondholders had argued that a 2004 Supreme Court precedent meant the BCE directors had a fiduciary duty to consider the interests of all stakeholders, not just shareholders, in the transaction.
The bondholders claimed that saddling Bell Canada with an additional $34 billion in debt reduced their holdings to junk bond status and would cost them upwards of $1 billion.
The decision was one of the speediest on a complex issue - the justices only heard arguments on Tuesday and normally would have taken months to render a judgment.
But with a June 30 deadline on the $42.75 a share deal looming, the case was put on the fast track by the justices at every stage, from taking on the appeal, to hearing arguments and finally to Friday's decision.
Had the court decided to uphold the Quebec court's interpretation of the directors' responsibility, it would most likely have stopped the sale in its tracks.
Even with the court's green light, the deal is far from certain to reach conclusion in its present configuration.
Despite assurances from the bankers groups Friday, they hold the key to the final resolution of the acquisition since they are slated to provide $34 billion in financing to complete the deal.
In recent months, the banks have been pressing for changes to the terms to reflect tighter credit markets around the world with some observers warning the final pricetag could be lowered by between 10 per cent and 15 per cent.
As well, the losing bondholders are believed to still have legal options open to them, including challenging the arrangement allowing the Teachers to own more than 30 per cent of a company's shares.
Teachers' received approval from the Financial Services Commission of Ontario, which regulates pensions in the province, through the technicality of arranging for a former executive, P. Morgan McCague, to hold the teachers' 66.7 per cent of class A voting shares. The manoeuvre raised eyebrows at the CRTC when the federal regulator agreed to grant regulatory approval.
But Theo Peridis, professor of strategic management at York University's Schulich School of Business, said that case would be difficult for bondholders to make in court and that he saw little more they could do to legally challenge the deal.
"I'm sure the bondholders are disappointed, but I'm not sure what else they can do."
Whether the takeover eventually succeeds, most observers expect further restructuring of Bell Canada, which has already cut jobs and sold non-core businesses such as Telesat.
Bell Canada and its proposed new CEO George Cope are expected to refocus the company as the Montreal telecom operator faces more intense competition in its wireless and Internet data businesses.
Industry analysts also expect Bell to intensify efforts to compete more aggressively with cable TV operators such as Rogers Communications (TSX:RCI.B), Videotron and Shaw, which have been taking data, landline and other telecom business away from Bell in recent years.