Getting to "yes" on BCE part 2

Since everyone was so kind and interested in the first post (“Getting to “yes” on BCE“), here is another idea. Wish I’d thought of it two days ago given all of the traffic on the 1st post, but since these banking folks are still apparently negotiating….

Rather than pay BCE shareholders $42.75 in cash at closing, why doesn’t OTPPB make the public shareholder base part of the lending group? Give us, say, $41 in cash now, and a deeply subordinated 5 Year debt note with a face value of $1.75 for each share we currently hold?

The note would rank below the bank debt, serving many masters:

– with 805 million shares outstanding at BCE, the banking syndicate would have to put up $1.4 billion less in debt — plus for them
– the rest of the debt that the bank syndicate would be advancing just became a better credit, since this subordinated paper would now be the most risky on the balance sheet — plus for them
– an improved credit profile for the remaining / reduced bank loan package means that the feared mark-to-market writedowns at closing won’t be as bad as they would’ve been without this tool — plus for them
– as the subordinated note holders would be ranking above OTPPB et al’s equity investment, we can have the confidence that we won’t lose a penny or our capital unless the equity folks get wiped-out (provided there is a prohibition on any dividend recaps) — comfort for us
– if the sub debt note paid an annual coupon of 8.5% quarterly, which is a guess at the credit profile of the note in question, we’d be receiving something in the range of our current annual dividend (on an after tax basis) plus some “waiting around” money — comfort for us
– with BCE shareholders sharing the investment profile of Canadian Income Trust investors, the concept of a 8.5% cash payout could certainly appeal — plus for some of us
– perhaps OTPPB would even agree to an equity upside participation warrant, so shareholders could participate in some of the value creation over the next five years — the banks are probably requiring it for their junior paper, so what’s good for the goose is good for us ganders

I recall that one of the contenders for this BCE prize back in June 2007 had an idea where current BCE shareholders would be part of a going private strategy, but I’ve yet to see any suggestions that would have us be part of the lending group.

And why not? In a $37.55 trading price world, $41 in cash now looks pretty good. And the BCE Board can take pride in the fact that they got us our original $42.75/share deal, unlike the folks at Clear Channel, Harmon Kardon, etc., etc.

MRM
(disclosure – I own BCE)