BCE Takeover 2

The press release that came out from BCE (BCE:TSX) in response to the story this morning in the Globe and Mail was interesting, as much by what it did say, and how it was said, as what it didn’t:

“At the request of the TSX Market Regulation Services, BCE today issued a statement to confirm the fact that there are no ongoing discussions being held with any private equity investor with respect to any privatization of the Company or any similar transaction. BCE further stated the company has no current intention to pursue such discussions. As per the Company policy, BCE will not comment further on rumours and speculation.”

Translating the key points in the press release:

– “no ongoing discussions being held” equates to “we have had discussions with private equity investors” in the past
– “the company has no current intention to pursue such discussions” equates to “we didn’t like the price they offered so there won’t be a deal to announce tomorrow”
– “BCE will not comment further on rumours and speculation” is a proxy for “we will not put out another press release unless we’ve signed a definitive deal”

Is it just me, or does the fact that BCE’s own newspaper, The Globe and Mail, is the one that broke the story on its front page not confirm that this is all happening? Would Messers Willis and Reguly actually run a story such as this based upon a single source that they didn’t know prior to yesterday?

Can you imagine how sure they’d have to be in the story (and their section editor, and his boss the actual editor, and their publisher) for it to actually make it into print? A story involving your actual owner cannot, naturally, be anything but carefully reviewed and published with the highest aplomb and precision. (Not a time to be a sloppy libelist with but a single source, ala of the competing paper in Don Mills.)

One could even speculate on the likelihood that BCE’s own people (or their financial advisor) leaked it to their own newspaper to ensure that the National Pest didn’t run it first; single sources or not.

So, despite the lukewarm denial press release of this morning, the takeover is inevitable. The “ROB boys” have the story. This is what’s called a “negotiation in public”, and it ensures that Apollo, Blackstone, Onex and the rest get a chance to do their own work before the BCE Board signs a LOI or enters into an exclusivity period (and maybe a break fee) with KKR.

It’s a brilliant strategy. And the ROB boys get a scoop, as well.

Shareholders should get ready for some white-knuckle weeks while the BCE Board negotiates a better deal – with more (?) surety of regulatory approval.

As for the short research piece put out today by Genuity Capital Markets on the level of leverage available to a BCE private equity deal:

“We estimate that if BCE is levered up to 5x debt to EBITDA, private equity would still have to inject $6 billion to privatize the company, if a privatization bid were done at a 25% premium to the market – At the end of 2006, BCE’s net debt was $12.3 billion and net debt to EBITDA (excluding pension expense) was 1.7x. If we assume the company was levered up to 5.0x 2006 EBITDA excluding pension expense, a private equity buyer could raise $24.5 billion to privatize BCE just from its own balance sheet. However, BCE’s market cap at the end of yesterday was $24.3 billion. If we assume say a 25% premium, this would generate a privatization equity value of $30.4 billion. This means that private equity would still have to inject around $6 billion of incremental equity to privatize BCE. While this is clearly possible, BCE would still have to be controlled by Canadians, making capital raising a potential challenge, but not impossible by any means.”

…they just don’t know how crazy the credit market is right now. If the textbook division of Thomson can raise debt in the range of 8x EBITDA to finance that buyout, surely BCE can do better than 5x. And they will.

The deal sings at that point.

MRM