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11/26/2008
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Bell Canada's Takeover Deal In Danger Of Failing

An audit by KPMG revealed that it does not believe BCE "would meet the solvency tests" stipulated in the deal.

The massive takeover of Bell Canada (BCE), assumed to be signed, sealed, and delivered months ago, collapsed Wednesday when the $51 billion deal failed to pass a solvency test.

BCE's stock plunged 40% in early trading Wednesday.

The Montreal-based firm reported that an audit by KPMG revealed that it doesn't believe BCE "would meet the solvency tests" stipulated in the deal. The privatization of Bell Canada, which is often billed as the largest takeover ever, has a deadline of Dec. 11 and a collaboration of hedge funds, private equity vehicles, and banks was scheduled to meet this week to sort out the agreement.

The privatization of BCE began even before the Canadian government gave approval in the spring of 2007 for the deregulation of the country's telecommunications industry. At the time, buyouts were flying high and there was no inkling on the horizon of the financial meltdown in worldwide financial markets that began deteriorating more than a year later.

While the Ontario Teachers' Pension Plan would be on the hook for the biggest part of the deal, major US players have also been involved in the transaction. They include Providence (R.I.) Equity Partners, Citigroup, Merrill Lynch, and Madison Dearborn Partners. The Wall Street Journal noted that the banks that had previously committed to finance the deal would likely rejoice over the collapse, because the deteriorating global economic scene makes it difficult for them to resell bonds and loans. Citigroup, for instance, could be responsible for covering $11 billion in financing.

BCE immediately challenged the KPMG report that the amount of indebtedness involved in the financing of the deal would be inadequate.

"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," said Siim Vanaselja, BCE's CFO, in a statement. "The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition."

BCE added, however, that if a favorable opinion on the transaction can't be reached on Dec. 11, "the transaction is unlikely to proceed."

Apart from the privatization deal, BCE CEO George Cope observed that the company still meets all current solvency tests. According to media reports, Cope said: "BCE today enjoys solid investment grade credit ratings, has $2.8-billion of cash on hand, a low level of midterm debt maturities, and continues to deliver solid operating results."

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