News

— The BCE takeover deal is officially dead.

The announcement was made early Thursday by a group of potential buyers led by the Ontario Teachers Pension Plan.

Valuation firm KPMG had ruled that a key condition to the $35-billion deal for Canada's largest telecommunications company by Teachers and its American private equity partners was not met.

KPMG had determined that BCE Inc. wouldn't pass a solvency test required as a condition of closing the deal, which would have been one of the biggest corporate takeovers ever in Canada.

The death of the BCE deal likely won't come as much of a shock as it was widely expected in the wake of the KPMG opinion on the company's financial health.

KPMG released its report on Nov. 26 that BCE wouldn't pass its required solvency test.

BCE shares plunged by $13.10 to close at $25.25 that day after the KPMG report was announced, well below the consortium's offer of $42.75 per share.

The stock remained at about that level in the following weeks, despite reports of behind-the-scenes efforts to salvage the deal.

BCE shares spiked briefly Monday when it was reported the telecom giant told its would-be buyers that PricewaterhouseCoopers LLP issued a second opinion that said BCE would be solvent after the deal closes, contradicting the KPMG report.

However, it appears the KPMG opinion struck the fatal blow.

"Because KPMG has concluded that a required test for the solvency opinion was not met, this mutual condition to completion of the acquisition could not be, and was not, satisfied," said Thursday's statement. "Accordingly, the purchaser terminated the agreement in accordance with its terms."

The group said in the statement that no break-up fee will be paid, but analysts have said that is not a sure bet. They believe BCE might use the PricewaterhouseCoopers report to push for break fee of up to $1.2-billion.

Analysts say BCE is now a leaner and more focused competitor than it was before the takeover effort was launched nearly two years ago.

Industry observers say the tortuous process will have radically changed the company that owns Bell Canada and given Teachers, its largest investor, the changes it sought before leading the takeover bid.

"They have succeeded in driving the positive changes that they had been asking for all along," says Carmi Levy, a telecom analyst at AR Communications.

At the urging of Teachers, BCE promoted George Cope as chief executive and unleashed a series of dramatic changes to make it smaller, more efficient and a stronger competitor.

Some 2,500 positions were eliminated and layers of management trimmed. It rebranded the company and introduced new marketing. And it signed a deal with rival Telus to share the cost of building out an advanced wireless network capable of 3G technology.

As a result, BCE has a better sense than it did a year ago about what it's going to take to compete, said Levy.

He also noted that shareholders are in a fairly good position to reap long-term rewards because the company will be in a much better position to start generating cash.

It's debatable whether all shareholders will feel particularly blessed, since they were set to receive $42.75 a share cash from the Teachers group — which was to borrow most of the money — but the stock is worth nearly $20 less than that in today's market.

Among the first decisions the company will likely make in the wake of a failed deal will be the reinstatement of a dividend and the adoption of a share buy back, said Troy Crandall of MacDougall, MacDougall & MacTier.

"Not only will that be helpful to the share price, that will also be helpful for EPS growth at least for 2009," Mr. Crandall said in an interview.

Mr. Crandall doesn't expect the dividend that was withheld to ensure completion of the transaction will be distributed through a special dividend.

Instead, he thinks Bell will use the funds as part of the money to be earmarked for future growth. The strategy could include a fibre optic build out and the launch of Internet TV.

A merger with rival Telus is an option, but only in the longer term, and it will take Bell will take the time to revamp its strategy and unveil its plans in the new year, Mr. Crandall said.

"Maybe they may have bigger aspirations as a public company than as a private company on the spending front and the growth front."

While the private equity deal has collapsed, analysts believe BCE will use a favourable solvency report from auditors PriceWaterhouseCoopers to push the Teachers group to pay a break fee of up to $1.2-billion.

Some have suggested it may mark the launch of a protracted legal battle.

BCE's shares closed up 52 cents to $23.02 on Wednesday.