Capital Markets

LBO Tug-of-War Reaches Canada’s High Court

Bondholders don't want the world's largest leveraged buyout to go through — and they have a good chance of getting their way.
Stephen TaubJune 16, 2008

Canadian phone company BCE is asking its country’s Supreme Court to reverse an appeals court ruling that blocked it from completing a $50.7 billion leveraged buyout, which would be the world’s largest ever.

BCE bondholders lost their bid to stop the deal in a lower-court decision. The appeals court, however, agreed that the transaction did not adequately consider the negative effect on bondholders, Bloomberg News reported.

While leveraged buyouts usually are lucrative for stockholders of the company going private, since they invariably receive a premium for their shares, bondholders often are big losers. LBOs generally involve taking on debt, frequently causing rating downgrades for existing issues, which in turn drives down their prices in the secondary market.

The buyout, led by the Ontario Teachers’ Pension Plan, could be in jeopardy because of a 2004 case in which the Canadian high court unanimously ruled that boards of directors have a duty to act in the best interests of a corporation, according to Bloomberg. The wire service cited Theo Peridis, a professor of strategic management at the Schulich School of Business at York University in Toronto.

“If this was in the U.S., I would be sort of less optimistic for the bondholders,” Peridis told Bloomberg. “Here, I think it’s 50-50.”

Bondholders own about $1.4 billion (Canadian) of the company’s $5.2 billion of investment-grade debt maturing after 2010, it was noted in the May 21 appeals court ruling.

The debt holders include the TD Asset Management unit of Toronto-Dominion Bank, Canada’s third-biggest bank; Canadian Imperial Bank of Commerce, the country’s fifth-largest bank; Manulife Financial Corp., the largest insurer in Canada; and the province of Alberta, who claim that the buyout violated agreements with BCE.

Lionel David Smith, a law professor at Montreal-based McGill University, told Bloomberg that the debt holders should have been aware of the risks.

At the time the deal was announced in June 2007, BCE shareholders were offering a price that was 36 percent higher than the average in the year preceding the bid.

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