Shares of telecommunications giant BCE Inc. remained deep under water early Wednesday afternoon, after plunging 40 per cent at the opening bell following a warning by the company that its massive planned privatization is in jeopardy.
The shares were trading at $25.09 on the Toronto Stock Exchange, down $13.26, or 34.6 per cent, from Tuesday's close, having earlier fallen as far as $23, or 46 per cent below the $42.75 price the would-be buyers, led by the Ontario Teachers' Pension Plan, agreed to pay in June, 2007.
The rout followed a pre-opening warning from BCE that its planned $35-billion privatization was in doubt because it had failed a preliminary solvency test conducted for the would-be purchasers.
The Montreal-based company disclosed that that it had received a “preliminary view” from auditing firm KPMG that “based on current market conditions, its analysis to date and the amount of indebtedness involved,” it does not expect to be able to deliver an opinion on the closing date of Dec. 11 that BCE “would meet the solvency tests as defined in the definitive agreement.”
Unless this changes by that date, BCE warned, “the transaction is unlikely to proceed.”
It added, however, that it is continuing to work with KPMG and the purchaser is working to satisfy all closing conditions.
Teachers' concurred in a terse statement.
“The delivery of the solvency opinion is a condition to the completion of the acquisition of BCE,” spokeswoman Deborah Allen said in a brief telephone interview. “There's no more that we can say.”
The Teachers board of directors was meeting to discuss the matter Wednesday, a source said.
BCE, which would be saddled with an additional $32-billion in debt after the leveraged buyout, is disputing KPMG's findings.
“We are disappointed with KPMG's preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing,” BCE chief financial officer Siim Vanaselja said in the release.
“The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition.”
A spokeswoman for KPMG said the firm would not comment, citing client confidentiality.
Under the terms of Teachers credit agreement with its lenders, the banks required that BCE's auditors sign a certificate confirming that the value of BCE's total cash and assets exceeded all its liabilities, including the $32-billion of debt required to fund the takeover.
The so-called solvency test is a little known clause in banking agreements that became popular in the United States in the past decade as aggressive buyers, such as private equity funds, relied on increasingly heavy debt loads to fund their takeovers.
In telling BCE that it could not verify its solvency, at least on a preliminary basis, the auditing firm is effectively saying that the value of the company's assets had declined so significantly amid the global financial crisis that they would now be worth less than the company's liabilities if the acquisition were completed.
There has been speculation that the market rout has left BCE's pension plan so under-funded that the auditors have been unable to deliver a favourable opinion, although one person familiar with the matter said Wednesday that this is not the case.
“It's just the addition of that much debt in this capital market,” the person said.
In BCE's statement, chief executive officer George Cope noted that KPMG had also indicated that BCE would meet all solvency tests under its current capital structure.
“BCE today enjoys solid investment grade credit ratings, has $2.8-billion of cash on hand, a low level of mid-term debt maturities, and continues to deliver solid operating results,” Mr. Cope said.
In an e-mail to BCE employees, a copy of which The Globe and Mail obtained, Mr. Cope also said, “This debate over our solvency post-closing is obviously not a development we had hoped to face after such a lengthy and challenging road to privatization.”
However, Mr. Cope vowed to continue the strategy to streamline and strengthen the company and its key operating unit Bell Canada that he unveiled when he took over as CEO in mid July.
