BCE: What Happens if the Bondholders Win?

There may be a “Plan B” for some if the Supreme Court of Canada upholds the recent ruling of the Quebec Appeal Court regarding BCE Inc. (BCE), but more than just the shareholders will be smarting:

1. Think of Michael Sabia. Soon after the Ontario Teachers’ Pension Plan [OTPPB] deal was signed, he announced that he’d be retiring upon the change of control. With something like a C$28 million payout on a C$42.75 takeout price, who could blame him? Who, other than OTPPB chiefs, that is?

If the deal dies on the altar of the Supreme Court, Mr. Sabia won’t have a change of control to trigger his option vesting, which isn’t very relevant as BCE shares will settle in the C$28 - C$30 range in any event.

Nevertheless, having announced his retirement, can he put the genie back in the bottle? Moreover, would George Cope stand for it?

2. Think of the investment bankers. There are at least C$100 million of success fees riding on this deal (see prior post “BCE’s excessive deal fee party” September 17-07). If you are a Canadian investment bank with a meaningful role, your cut could be C$20 million. At least C$6 - C$8 million of that fee would wind up in the bonus pool (short term and LTIP) if the deal closes.

In addition, the top two-deal team MDs would see at least C$300,000 - C$400,000 added on to whatever their 2008 paycheck would have been; should it all come together and close, that is. If not, that fee is nada (other than maybe a C$200,000 “work fee” that was paid last summer, they’d get zippo - the square route of zero), and having worked on the file for an entire year, there won’t have been much time to bring in other beaver pelts to fill that hole. This is a binary outcome indeed.

3. Think of the corporate and securities lawyers. If the deal happens, they’ll be asked to cut their billable hours by, say, 20%. With a happy client and lots of future potential work, that won’t hurt at bit. If the deal doesn’t close, look for a 30% haircut. In addition, the PE firms won’t be the new owners of BCE, so there’s less new legal work down the road as well. On C$10 million in M&A-type legal fees, that incremental 10% is pure, foregone profit for the largest players on the file. Ouch.

Such are the pains being felt right beneath the surface, while seven very able Supreme Court Judges decide whether or not these frowns will be turned upside down.

Disclosure: The author owns BCE.