Hanging up on BCE

Citigroup executives would have been forgiven for belting out “O Canada!” as they received a rare bit of good news on Wednesday. An unfavourable solvency opinion from auditors has probably derailed a deal to take Canadian telecoms company BCE private in the largest leveraged buy-out ever, absolving Citi from providing billions in financing at a time when they would have struggled to offload it. It is also likely that the buy-out investors, particularly the Ontario Teachers Pension Plan, are pleased at not having to pay a hefty valuation premium to similar companies on the public market.

The mood is less jovial at BCE. Executives watched the shares fall by about 35 per cent on the news to a level below that of spring 2007 before bid rumours surfaced. Those hoping a deal will still happen or that another suitor will emerge are deluding themselves. KPMG’s verdict is as ironclad an excuse as they come in the world of busted LBOs. Attracting an industry suitor is almost impossible given BCE’s size and laws limiting foreign ownership.

As wrenching as Wednesday was for shareholders, the news is not all bad. The very attractions that BCE held for LBO investors during the buy-out boom – predictable free cash flows and low financial gearing – are pluses in today’s credit crunch. Borrowing levels are lower than North American peers such as Sprint Nextel, Verizon Communications, Qwest and AT&T and well below Canadian rival Rogers Communications. BCE conserved cash this year by eliminating dividends and buybacks, paring capital expenditure and selling a subsidiary, arming it with cash to either repurchase shares on the cheap or perhaps even make some opportunistic acquisitions. BCE shareholders may one day even be glad that the credit crunch ruined their big payday.

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