BCE Takeover part 23

Not the fanciest of titles, but “How long are the faces at Providence and Madison Dearborn?” looked at touch unwieldy.

Unless the two key U.S. funds (Providence and Madison Dearborn Partners) backing the pending OTPPB takeover of BCE (BCE:TSX) hedged their Canadian dollar exposure on June 30th, the senior partners there must be walking around their offices in a daze right now.

Turn your mind back to June 30th, when the agreement to pay C$42.75 for BCE’s shares was announced. At the time, that equated to a US$40.13 share price. Implying a CDN dollar at US$0.9387

With a Canadian dollar buying US$1.10 this morning, 17.2% higher over the four month period, that C$42.75 clearing price is now US$47.03/share. At C$42.75/share, BCE’s press release reported the takeover price reflected a 7.8x multiple of LTM trailing EBITDA as at March 2007. With the vast majority of Bell’s EBITDA coming in the form of CDN$, one would expect that the two U.S. private equity shops can’t be happy that this massive deal is getting more expensive by the day…unless they hedged out their currency risk at the time.

At a recent Thomson / Buyouts Magazine Conference in Toronto, one U.S.-based private equity fund manager told the audience that his fund will not hedge currencies once they make investments in Canada. “We raise U.S. dollars from LPs and we return U.S. dollars to our LPs. Foreign currencies go up and they go down. They don’t want us speculating on currencies.” The four other U.S.-based P.E. panelists nodded in agreement.

Who knows if this is a universal rule, but if it is, are Providence and Madison now paying painfully more than the 7.8x Canadian EBITDA they thought they were paying for BCE?

MRM
(disclosure – I own BCE)