BCE M&A Arbitrage
April 28, 2008
We added to this position today. We think the biggest risk to the deal remains that the U.S. and European banks involved will try to pull out the financing as they have done in the Clear Channel deal. However none of the banks involved have hinted at backing out and OTTP and TD Bank have been consistent in their claims that they believe the deal will go through. We think that American M&A arbitrageurs are the ones keeping the spread wide as American investors were the most spooked by the recent credit crunch. Since the crunch began last summer there has been a tendency to lump all leverage-affected deals together. Remember, BCE is a much different company than Clear Channel in regards to cash flow generation and capex requirements. We view BCE’s balance sheet as strong, with more than C$2 billion in debt reduction and minimal funding requirements. Even with a spike in capital spending at Bell Canada operations to support wireless and wireline broadband access, BCE has had sufficient cash to support its dividend. Pre-takeover, BCE planned to pay out 70% to 75% of its earnings in the form of dividends, including spending on building out its broadband network. This strong financial position, along with private equity’s proposed productivity improvements, should provide enough support for the financing close.
Risks:
1) Approval by the CRTC is dependent on greater Canadian content on the BCE board post-LBO, although Industry Minister Jim Prentice has already given conditional approval to the deal. We don’t think this is significant enough to sink the deal.
2) The bondholders’ appeal starts today in the Appeals Court. Again, the Quebec Superior Court already threw out the bondholders’ case against the deal in March and most people believe Appeals will do the same. There is still a chance they can take there case to the Supreme Court if they lose.
RETURN POTENTIAL: 13.2% over two months, 78% annualized
HEDGE: Long the equity, long Bell 7.65% Dec. 2031
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