Are sad days ahead for BCE shareholders?

BCE Takeover Part 28

It is hard for some people to admit when they’re wrong.

In the blogophere, we have the luxury of returning to posts hours later to fix up the more mundane mistakes and typos that get made from time to time. But there’s one mistake that I may not be able to hide from after months of making the point in black and white: my blind faith that the BCE (BCE:TSX) going-private transaction will be proceeding as announced last summer (see prior posts ending with “BCE’s downside volume part three“, December 14-07).

Earlier today, a serious Bay Street person shared a perspective that suggested that he knew what he was talking about, and he had the import of someone that had some very current and specific insight into the machinations at BCE Going-Private Central.

This person tells the following story, and in the interests of keeping you up to date with the relevant news of the day, here is the word from this one “source”:

1. Citbank’s lawyers are actively looking for ways to get their client out of the contract that binds the debt syndicate.

2. OTPPB is working with BCE’s Special Committee to recut the going-private price to be $2 to $4 per share lower than the previously-announced $42.75 takeover price; the theory being that the Special Committee recognizes that shareholders would prefer a deal of some sort to close — at prices that would still be above the current quote — than press on without any deal whatsoever and see where the share price falls to when the dust settles.

3. The challenge with 2. above is that by negotiating a different takeover price, OTPPB provides Citibank with the chance to walk as the previously announced transaction will have changed…even if for the better. Citibank doesn’t seem to want to play at any price, the story goes, which means that OTPPB et al need to find a new group of lenders to replace the Citi money. By dropping the takeover price, OTPPB’s syndicate can afford to pay higher interest rates on the debt in an effort to attract new mega loan providers.

There isn’t a week that goes by where BCE’s share price isn’t hit by a new rumour. I have scoffed at almost all of them, and added to my own position when it got down to $34.50. Some days certain influential journalists write about the deal changing, and the stock goes down by a buck as a result. A few days later, the very same newspaper takes a different approach, and BCE shares rally. It all seemed so emotional and unfounded by any facts.

But this story has a certain precision to it, and it makes one wonder if the upside is three bucks from here, and the downside is more than $6/share if the deal disappears completely. As much as I had felt absolutely certain about this deal closing, particularly having seen Jim Leech reinforce his commitment to the deal at the January 23rd Private Equity Symposium in Toronto, one has to do a gut check at this point.

As a longstanding believer that the deal was happening in Q2 2008 at $42.75, the precision of the story didn’t warm my heart. There’s $3 of upside opportunity if the deal gets recast at $38.75; and $6 – $12 to the downside if it doesn’t. If this story is true, you have to have a high degree of confidence to like that risk/reward dynamic.

I’m now not so sure.

MRM
(disclosure – I own BCE shares)