BCE Inc. investors had been betting on whether the telecommunications company would be taken out by private equity groups; now, they're betting on the price of the transaction.
The likelihood that BCE will be taken out has risen ever since Clear Channel Communications Inc. agreed on a new price with its own private equity groups. But as some observers are now pointing out, the risk that the BCE deal will be re-priced – that is, lower than the original price of $42.75 a share – has also risen.
Clear Channel announced on Tuesday night that Bain Capital and Thomas H. Lee Partners will pay $36 (U.S.) a share for the company, about 8 per cent lower than the original deal for $39.20 a share.
Joseph MacKay, an analyst at Desjardins Securities, noted that this is good news for BCE shareholders because three of the banks involved in the Clear Channel deal (Citigroup, Royal Bank of Scotland and Deutsche Bank) are also involved in the BCE deal, making the deal more likely to succeed.
“On the negative side, the probability of the BCE privatization being repriced has also increased in our opinion,” Mr. MacKay said in a note. “If the same level of reprice as Clear Channel were to occur, the BCE transaction would be revised to $39.25 (Cdn.), providing minimal return from current levels.”
Indeed, BCE shares traded at $39.40 on Wednesday mid-morning, up 30 cents. That means the shares have recently moved from trading at a steep discount to the agreed-upon transaction price to a slight premium to what could be a new price.
“All in, given the small 9 per cent return and the risk associated with repricing, we believe that caution is warranted on BCE at current price levels,” Mr. MacKay said. Despite the risks, he is maintaining a “buy” recommendation on BCE, with a 12-month target price of $42.75.
