BCE has the hedge funds nervous

Date: Monday, December 17, 2007
Author: Andrew Willis, Globe and Mail Streetwise Blog

Hedge funds are dumping BCE, partly on fears that the phone company buyout will be repriced, but also to raise capital after taking a beating in recent weeks.
There are sales desks and analysts pushing a theory that due to the credit crunch, the $42.75-a-share Bell Canada takeover will have to be marked down, though the phone company and the buyout group have never suggested this is the case. Canaccord Capital is one of the dealers taking this view, according to a trading note sent out by the firm.
The repricing rumours are catching so-called risk arb funds, which play takeovers, at a vulnerable time.
Bell Canada became a hedge fund favourite in July, when Ontario Teachers Pension Plan led a group that offered to buy the company in the largest leveraged buyout ever seen. Bell Canada stock traded as high as $41 after the deal was announced. Now many of those funds are coming off a money-losing period and face a temptation to raise cash on liquid positions, such as Bell Canada, that have made them money and could be at risk.
In the past five days, Bell Canada stock has sold off steadily in heavy trading and the stock is now at $38.54 a share on the Toronto Stock Exchange. More than 8 million shares have changed hands Friday, twice the normal daily volume.
At current prices, buying Bell Canada today implies a 30-per-cent plus return for investors who hold to the expected close of the buyout, in late March or April.
While this is a large discount, reflecting the perceived risk of the deal, it is in line with the spread between current prices and closing prices on U.S. leveraged buyouts. There are also rumours that the BCE buyout will be derailed by lawsuits filed by the phone company's bondholders. The debtholders' push to block the deal is still before the courts, and given little chance of success.
A number of U.S. LBOs have been cancelled or repriced following the August credit crunch. Ontario Teachers made a point of saying during the worst days of Augus it would not change the terms of the deal.
The Teachers fund and its supporters, private equity funds Providence Equity Partners and Madison Dearborn Partners Madison, would have to pay a $1-billion break fee if they drop the BCE buyout, and the trio would face enormous damage to their reputations if they reneged. In the past, there has been chatter that the buyout fund's bankers, led by Toronto-Dominion Bank and Citigroup, would pay part of the break fee if they were let off the loans, but the banks have consitently denied asking for any sort of relief.