President and CEO of BCE Inc., George Cope.MARK BLINCH/Reuters
The news is not good for most of the leveraged buyouts done during the boom that preceded the financial crisis. But the BCE Inc. deal, the biggest of them all before it fell apart, might well have have bucked that trend.
With hindsight, there's every reason to believe that the $52-billion buyout would have had a good chance of working out favourably for Ontario Teachers' Pension Plan.
A group led by Ontario Teachers' Pension Plan struck the deal to buy BCE for $42.75 a share in mid-2007. Even by the heady standards of the time it was a monster deal.
It came just as credit markets were unravelling. The deal died 18 months later when an accounting firm determined that BCE wouldn't meet a test in the buyout agreement.
Many assumed that Ontario Teachers breathed a sigh of relief, and it may well have, at being let off the hook, given that the financial world was rapidly falling apart.
But three years later, the view is a bit different.
BCE stock is approaching the buyout price. The company is paying out more and more cash to shareholders. And George Cope, the chief executive who was handpicked by Teachers before the deal fell apart, is executing on the business plan that Teachers helped to craft.
As a leveraged buyout, the big concern with the BCE deal was whether the company would be able to generate the cash to pay down the huge amount of debt that the $52-billion transaction would have required.
BCE has been winning customers with its new focus on service and upgraded technology, and that's meant that cash flow has remained strong, even with increased investment required to keep pace in the telecommunications business.
Since the deal failed in December, 2008, BCE has paid $3.9-billion in dividends and spent a further $1.4-billion repurchasing shares.
On Thursday, BCE announced another dividend increase that will see it pay out a further $1.65-billion of common share dividends in 2012. The company said it will also buy back as much as $250-million more of shares.
In all, that's as much as $7.2-billion over four years that could have been used to cover interest costs and pay down the debt load from the Teachers transaction.
The transaction contemplated about $32-billion of new debt. Assuming Teachers could have gotten the financing to close the deal (which was still an open question when the transaction failed for other reasons), a rebound in credit markets not long after would have likely meant BCE would not have been paying high rates on its debt.
While credit markets froze in 2008, a year later they were wide open and companies were borrowing at record low rates. Teachers and BCE would likely have been able to refinance the BCE debt to reduce interest costs.
BCE's acquisition debt was going to be rated at the low end of the investment grade range. Picking a ballpark interest rate of 6 per cent, not far off where five-year bonds like that have been trading since then, suggests interest costs on $32-billion of debt totalling something like $1.9-billion a year. For the first few years it would have been tight but the company could have managed.
As the company's cash flow improved, and the capital investment slowed, the new owners would have been left with the textbook buyout: A company that is able to service its debt, improve its operations, increase in value and throw off excess cash to either pay down debt or fund dividends to shareholders.
For public shareholders, the failure of the buyout was a short-term blow as the stock slumped. But long-term, it's been a clear win. BCE shareholders are getting the benefit of Teachers' plans and leadership, in the form of Mr. Cope. That means increased value and bigger dividends.
And if BCE ever wins its attempt to sue Teachers for a $1.2-billion break fee that BCE still argues it's owed, there's a little bit more juice in the broken deal for BCE shareholders yet.