M&A

Telecom LBO Hung Up on Solvency Issues

A potentially record-breaking deal to take Bell Canada private is stalled after KPMG reveals the telecom giant may not pass the solvency test.
Stephen TaubNovember 26, 2008

The reportedly largest leverage buyout in history may not be completed because the company could fail to meet solvency requirements.

BCE Inc., the parent of Bell Canada, raised doubts about moving the company into private hands after it received a preliminary view from KPMG that questioned the company’s solvency. KPMG has been working to deliver an opinion by Dec. 11, that verifies whether BCE meets required solvency tests. But based on current market conditions, KPMG’s analysis of the transaction to date, and the amount of debt being used to finance the LBO, the accounting firm does not expect to deliver an opinion that gives BCE a clean bill of health.

The receipt of a positive solvency opinion is a condition to closing the transaction, officials of the telecom giant emphasized.

However, KPMG indicated that BCE would meet all solvency tests under its current capital structure, according to a company statement. “BCE today enjoys solid investment grade credit ratings, has $2.8 billion of cash on hand, a low level of mid-term debt maturities, and continues to deliver solid operating results,” said George Cope, president and CEO of BCE and Bell.

Nevertheless, BCE noted that should KPMG be unable to deliver a favorable opinion by the December deadline the transaction is unlikely to proceed. “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 chief financial officer. “The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition.”

He added that the company continues to work with KPMG and the private purchaser to seek to satisfy all closing conditions.

In early July, BCE entered into a final agreement with a company formed by an investor group led by Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Plan, Providence Equity Partners Inc., Madison Dearborn Partners, LLC, and Merrill Lynch Global Private Equity, to acquire the company for $35 billion.

If the transaction does not take place, several banks will no longer be obligated to provide large sums to finance the deal, according to the Associated Press. The wire service noted that Citigroup is directly on the hook for $13 billion of the $35 billion in loans backing the BCE deal. The other banks involved are The Royal Bank of Scotland, Toronto-Dominion Bank, and Deutsche Bank, AP added.

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