In the summer of 2007, the Ontario Teachers’ Pension Plan agreed to buy BCE (a phone company) for an absurd price of C$52 billion ($42 billion). The deal was supposed to close December 11. Now the deal appears to be falling through over solvency issues.

The Canadian Press is reporting BCE says Teachers’ buyout ‘unlikely to proceed’ if solvency opinion not improved.

Bell Canada’s roller coaster ride to privatization may finally crash under the weight of its prospective massive debt after an accounting firm raised serious doubt that the world’s largest leveraged corporate buyout could succeed.

Bell parent BCE Inc. (BCE) said Wednesday a KPMG analysis indicated the company could not meet solvency tests in the agreement under which the company will be acquired by an investor group led by the Ontario Teachers’ Pension Plan.

The opinion marked the latest hurdle for the $52-billion cash and debt deal, the largest takeover in Canadian history.

BCE said it disagrees, but “should KPMG be unable to deliver a favourable opinion on Dec. 11, 2008. (when the takeover is slated to close), the transaction is unlikely to proceed.”

Shares in the company were hammered down in heavy trading to their lowest level in six years. After falling to $23, they closed at $25.25, a drop of $13.10 or 34.16 per cent on the Toronto Stock Exchange.

KPMG indicated BCE meets solvency tests under its current capital structure – but would not after being weighted down with the debt involved in the proposed takeover. In coming to its conclusion, KPMG assessed the value of BCE’s future liabilities and assets that have eroded with the market meltdown.

BCE’s underfunded pension liabilities are believed to be one of several challenges faced by the Montreal company.

Elliott Soifer, vice-president of Desjardins Securities International, said he doubts the deal can be salvaged by altering terms, including the $42.75 purchase price.

But industry observers believe Teachers’ and the consortium of banks are likely delighted by the KPMG opinion because it potentially clears a path to extricate themselves from a tightly written deal that was signed when market conditions were much brighter.

They are also said not to be on the hook for a $1.2-billion break fee, although the parties are expected to pay tens of millions of dollars in banking and legal fees.

Citigroup and Toronto-Dominion Off The Hook Too

Bloomberg is reporting Citigroup, Toronto-Dominion Gain on BCE Transaction.

Citigroup Inc., Toronto-Dominion Bank and Deutsche Bank AG gained after BCE Inc. said its C$52 billion ($42 billion) takeover may collapse, helping the banks avert potential writedowns from financing the world’s second- largest leveraged buyout.

Citigroup, Toronto-Dominion, Deutsche Bank and Royal Bank of Scotland Group Plc are on the hook for about $34 billion for financing the BCE takeover, according to regulatory filings. The banks face potential writedowns because the global credit crisis has pushed down loan values, and made it harder for the lenders to find other banks willing to take on some of the debt.

The lenders have already taken writedowns from the credit crisis. The U.S. government agreed on Nov. 23 to support Citigroup with a $20 billion capital injection and a shield against losses on $306 billion of loans. Toronto-Dominion was forced to sell as much as C$1.38 billion in common shares this week to shore up its balance sheet after posting trading losses.

“It would have been nearly impossible,” to sell the loans, said Ron Mayers, vice chairman and head of alternative strategies of Desjardins Securities Inc. in Montreal. “Obviously that had negative financial implications for them.”

The buyout group led by the Ontario Teachers’ Pension Plan agreed to buy BCE in June 2007. Toronto-based Ontario Teachers’ is the largest shareholder of Montreal-based BCE.

Previously the Québec Pension Plan (Caisse) and the Ontario Teachers’ Pension Plan were on the hook for some $33 billion in ABCP. See 20 Canadian ABCP Trusts File Bankruptcy.

Where there’s slush, figure Citigroup and the Ontario Teachers’ Pension Plan will be deep in it.

Leveraged Buyout Boom Is Over

Bloomberg is reporting LBO Boom’s Last Vestiges Would Disappear With BCE Deal’s Demise.

The C$52 billion ($42 billion) purchase of BCE Inc. by private-equity firms may collapse, erasing the last vestiges of a leveraged-buyout boom that ground to a halt almost 18 months ago.

The BCE deal, led by Ontario Teachers’ Pension Plan, Madison Dearborn Partners LLC and Providence Equity Partners Inc, is biggest remnant of a record $1.42 trillion of LBOs in 2006 and 2007. Its demise would be more evidence of how private- equity firms have shifted from multibillion-dollar buyouts to shopping for distressed companies amid a dearth of financing and a deepening global recession.

“BCE is really an Old World transaction,” said Randy Schwimmer, senior managing director and head of capital markets of New York-based Churchill Financial LLC. “In the New World, private equity buyers are looking to tease out value wherever it can be found, whether that’s in smaller new issues, distressed paper or mining their own portfolios.”

Announced private-equity deals have dropped more than 70 percent to $202 billion so far this year, according to data compiled by Bloomberg. The biggest transaction this year was the $7 billion stake bought by investors led by TPG Inc. in Washington Mutual Inc. That investment evaporated five months later when the U.S. government seized Washington Mutual’s assets, wiping out the TPG-led group’s $2 billion in equity.

At least $55 billion of LBOs have fallen apart since last year. The botched transactions include J.C. Flowers & Co.‘s agreement to buy SLM Corp., the student lender known as Sallie Mae; casino operator Penn National Gaming Inc.‘s deal with Fortress Investment Group LLC; and KKR’s plan to buy Harman International Industries Inc.

“It’s easy to imagine a scenario where we don’t have normalized markets again until 2011,” said Sean Ryan, an analyst at Sterne, Agee & Leach in New York. He pointed to the 1988 purchase by KKR of RJR Nabisco Inc., the $30 billion which stood as the biggest LBO on record until 2006.

“After all, how many years did it take for RJR Nabisco to get eclipsed?” Ryan said.

BCE Weekly Chart

click on chart for sharper image

The Ontario Teachers’ Pension Plan is the largest shareholder of BCE. If the deal collapses, the teachers can thank their lucky stars they are not the only shareholder.

Canada May Have First Deficit Since 1997

While on the subject of Canada, inquiring minds are noting Canada May Project First Deficit Since 1997

Canadian Finance Minister Jim Flaherty probably will project the government’s first deficit in 13 years today as revenue evaporates, and may confirm the world’s eighth-biggest economy is on the brink of a recession.

“Don’t worry about the deficits,” said Mike McCracken, chairman of forecasting company Informetrica Ltd. in Ottawa.

At a meeting this month of the Group of 20 industrialized and emerging economies in Washington, International Monetary Fund Managing Director Dominique Strauss-Kahn urged nations to inject stimulus worth 2 percent of gross domestic product. For Canada, that would represent about C$30 billion.

Harper himself said the day before that Canada would run a “short-term” deficit to stimulate the economy if necessary, though he would seek to avoid a series of deficits that would outlast a period of sluggish growth.

The government must help companies in the auto industry immediately, because “they might run out of money within weeks, and it’s quite possible they’ll be bankrupt if we wait until February,” John McCallum, a Liberal Party legislator and former chief economist with Royal Bank of Canada, said yesterday.

“We’re seeing consumers being very careful with their spending — they’ll fix something when it breaks, but when it can wait, it waits,” said Richard Roy, president of Boucherville, Quebec-based automotive-parts distributor Uni- Select Inc.

“All the economists who seem worth listening to are saying you have to spend in order to get out of a situation like this,” said Laura Singleton, 49, a homemaker visiting Parliament with her family from Rainy River, Ontario. “My understanding is that we aren’t doing any measures like that at the moment. I am wondering why.”

Don’t Worry About Deficits Just Spend

Financial insanity is nearly everywhere you look.

CBCNews is reporting Flaherty hints at early budget to stimulate economy.

Finance Minister Jim Flaherty may table the next federal budget early to include infrastructure spending and other provisions to stimulate the ailing economy.

He said any package could be included in a sooner-than-scheduled budget, although he did not give a specific date. His officials also suggested that announcing stimulus measures before the next budget is a possibility.

Flaherty noted that the government has already committed to a $33-billion infrastructure fund that needed to begin releasing money sooner rather than later.

On Sunday, at the Asia-Pacific Economic Cooperation group’s summit in Lima, Prime Minister Stephen Harper made similar comments that the economy appears headed for a technical recession and might have already slowed to “just about zero” growth.

Harper also suggested during the summit that the Canadian government will introduce a stimulus package to boost the economy, while trying to avoid setting the stage for a long-term government deficit.

Signalling a shift in his usual anti-deficit stance, he acknowledged that countries that choose to implement fiscal stimulus packages will likely find it necessary to run budgetary deficits.

The prime minister noted, however, that whatever short-term new spending his government pursues, it “will ensure that Canada does not return to long-term structural budgetary deficits.”

Canadian Reality

The reality is Canada is in a recession, that recession is going to pick up steam, and there is nothing Canada can do about it that makes any sense.

Mike “Mish” Shedlock
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