News

For the sake of saving 25 to 50 cents a share, BCE Inc.'s historic $35-billion deal is in jeopardy.

Sources say the directors and senior management at Canada's largest phone company were so confident in their legal position that they declined at least two chances to settle with bondholders over the past several months - the same bondholders who scored a surprise appeals victory on Wednesday that could potentially derail the takeover.

Estimates vary on what it would have taken to get the bondholders to drop their case, but one thing is certain: It would have been a lot cheaper in April, after the bondholders lost a legal bid to block the BCE deal.

The case could probably have been settled then for between $150-million and $200-million - or about 19 to 25 cents per BCE share, according to one person familiar with the bondholders' discussion.

At that price range, BCE might have even been able to do a settlement without the permission of the private equity buyers, led by Ontario Teachers' Pension Plan.

A member of one of the bondholder committees approached the company in mid-April to try to get the talks started between portfolio managers who manage BCE bonds and BCE executives.

"The idea was, 'no lawyers,' " said the bondholder source.

But the company turned them down before any discussion of price took place.

The directors also resisted pressure from a major shareholder to settle a dispute with bondholders. Investment managers at Mackenzie Financial Corp. lobbied the board of the phone company - and chief executive officer Michael Sabia - to reach an agreement with bondholders, both before and after a lower court's ruling.

Mackenzie reached out to Jim Pattison, the Vancouver billionaire who sat on BCE's special committee. Mr. Pattison, who had lent an ear to bondholder grievances in the past, was said to be sympathetic to a settlement, but the BCE board decided to wait.

It wasn't the first time the company passed on a chance to mollify its bondholders and potentially defuse a bombshell that now threatens to upend the largest leveraged buyout in history.

There was one meeting between a group of bondholders and BCE in September. But the bondholders were miffed that the company sent neither Mr. Sabia nor chief financial officer Siim Vanaselja.

"They sent their treasurer and he didn't say a single word, other than, 'We're not interested,' " said a bondholder who was part of that discussion and spoke on condition of anonymity.

The raw feelings over the way it was handled may hurt any settlement talks now, the bondholder said.

On June 26, Teachers submitted a bid of $42.25 a share, and proposed to amalgamate the company's business units once the deal closed, in order to minimize its tax bill. It's believed the amalgamation would have joined BCE Inc., the holding company, with Bell Canada, the telephone utility that contains most of the debt.

The structure would have triggered protection clauses for two sets of Bell debenture holders, which would mean paying more money to redeem those bonds. One source estimated that the added cost could have been $400-million. But it would have satisfied one group of bondholders, and possibly weakened the legal case of the others.

BCE's advisers, according to the court ruling, told Teachers its proposal was "less competitive from a structural point of view," so the pension fund hastily devised another proposal - 50 cents above its first offer - that did not trip the switch on the bondholders' protections.

When asked whether sticking with Teachers' original plan would have prevented the court fight, one principal in the takeover talks said: "I just don't know."

Insiders, however, say the board was in a tough position: On the one hand, it felt its duty was to get the best possible price for shareholders, which they did by extracting that additional 50 cents a share from Teachers. Yet these two quarters may have come at the expense of a truce with bondholders.

Kent Thomson, a Toronto-based lawyer with Davies Ward Phillips & Vineberg and lead litigator for BCE, sternly criticized the court ruling, which suggested BCE unfairly overlooked the interests of its bondholders during the sale.

"The board gave serious consideration to all sorts of complexities raised by the bids," Mr. Thomson said. "They made every conscientious effort to ensure the rights of the bondholders were adhered to."

Mr. Thomson also chastised the court for "ignoring extensive evidence" which showed that BCE and its directors carefully considered the interests of bondholders. A core focus of the appeal court decision was that BCE failed to show the court that it considered the interests of bondholders. He said BCE submitted substantial documentation, including an affidavit from CEO Michael Sabia outlining the time the company's offer devoted to studying bondholders' rights.

In addition he said Mr. Pattison personally visited last spring Phillips Hager & North, a major BCE bondholder, to hear their concerns about the transaction.

Insiders say BCE felt it had a strong legal position in running an auction designed, first and foremost, to get the best deal for common shareholders. Although the company could have paid a relative pittance to make the issue go away, sources said BCE felt empowered by the strength of its original legal victory.

Now, the cost of any settlement promises to be several times higher, thanks to the sweeping nature of the appeals ruling.

With files from reporter Boyd Erman