Uncertainty has again crept into the minds of BCE Inc. investors as the phone giant continues to work toward closing a $52 billion privatization deal amid a fresh round of financial turmoil on Wall Street.
After a brief period of relative stability, shares of the Bell Canada parent have fallen more than 5 per cent since the beginning of the month.
That includes a 4 per cent drop yesterday as investors feared the upheaval in the U.S. financial sector, brought on by the bankruptcy filing of Lehman Brothers Holdings Inc., would impact the financing of the BCE deal, which ranks as the world's largest leveraged buyout.
Shares of BCE closed at $37.85, down $1.75, on the Toronto Stock Exchange yesterday. That's a discount of 11 per cent on the $42.75 per share the Ontario Teachers' Pension Plan and its U.S. private equity partners have agreed to pay for the company no later than Dec. 11.
"Judging from the earlier decline this past week, the market's overall concern about funding has once again become an issue for the stock," said Greg MacDonald, an analyst at National Bank Financial, in a note to clients. "Investors will likely continue to experience volatility in this stock as the bank crisis will most certainly not end soon."
A possible silver lining that he saw for BCE investors is that Bank of America Corp. has agreed to buy Merrill Lynch & Co. for about $50 billion (U.S.) The American investment bank's private equity arm is a member of the BCE buyout consortium. "I would think the (Bank of America) acquisition should put Merrill on better financial footing, which should actually be positive for the BCE deal, given Merrill's $494 million equity pledge."
The BCE buyers also include Providence Equity Partners and Madison Dearborn Partners.
A consortium spokesperson could not be reached for comment.
The BCE takeover, valued at $52 billion when debt is included, has been a rocky proposition since first inked back in the summer of 2007 – right before the credit crunch hit. But it seemed to find its footing a year later after a favourable ruling by the Supreme Court of Canada and a final agreement with banks backing the deal signed in July.
The agreement reaffirmed the deal's financing and original purchase price in exchange for the withholding of a quarterly dividend payment and a longer window for the banks backing the transaction to market the debt, a process that has run into obstacles with the private equity deal to buy U.S. radio broadcaster Clear Channel Communications Inc.
"Clear Channel's low success in marketing its new leveraged debt gave BCE investors some concern this week," said MacDonald. "Nonetheless, ... we think the banks will only walk from this deal if they are unable to access the necessary capital."
That could happen if the U.S. Federal Reserve takes the unlikely step of following the lead of Europe's central bank to limit types of collateral it deems acceptable for short-term loans – a move that could make it more difficult for the BCE banking syndicate to raise funds it has pledged to the BCE deal.