PHILADELPHIA Nov 26 The floundering C$34.8
billion (US$28.2 billion) leveraged buyout of BCE Inc (BCE.TO)
faces its toughest challenge yet as it struggles to reverse an
accounting opinion on its financial health, legal experts said
BCE's accountants had issued a preliminary opinion that the
company that emerges after the buyout would not meet a solvency
test because of current market conditions and the amount of
debt involved in the financing.
A positive solvency opinion from KPMG, BCE's accountants,
is a condition if the deal is to close on Dec. 11, as planned.
Without it, BCE, the parent of Bell Canada, said the buyout is
"unlikely" to proceed.
The Ontario Teachers' Pension Plan, along with U.S.-based
private equity firms Providence Equity Partners, Madison
Dearborn Partners and Merrill Lynch Global Private Equity, are
offering to take BCE private.
Ironically, BCE's board inserted the solvency requirement
into the definitive agreement, one source familiar with the
situation said. BCE, however, said both sides agreed the clause
should be written into the agreement.
Now, that solvency opinion could be the undoing of the
largest leveraged buyout in history.
Since KPMG's view still remains preliminary, BCE could try
to satisfy the requirements before the Dec. 11 closing date,
launch a challenge against KPMG, or convince the buyers to
proceed with the deal regardless. All of those options are
fraught with problems, lawyers said.
"Even in the face of litigation, KPMG will just say 'I'm
the neutral messenger,'" Columbia University Law School
Professor John Coffee.
BCE could try to find another accounting firm to give an
independent solvency agreement or launch a legal challenge that
KPMG's opinion was flawed, legal experts said.
"BCE will likely bring in another consulting accounting
firm to evaluate KPMG's assumptions and show they made XYZ
errors or incorrect assumptions," said Donald Zakarin, head of
litigation at Pryor Cashman.
"There will likely be challenges to the assumptions that
KPMG used and potentially challenges to KPMG to re-evaluate its
assumptions," Zakarin said. "Accounting isn't cut and dry.
There's more than mathematical rigor involved."
The condition to have a solvency opinion by a third
party is rare in large deals, said Joel Greenberg, a partner at
law firm Kaye Scholer, who specializes in mergers and
Once it becomes part of the merger agreement, a court would
likely view it as strongly as any other requirement in the deal
-- such as regulatory or shareholder approval -- which would
make it difficult for BCE to argue that the provision was
subject to interpretation
BCE would have minimal leverage or legal standing to force
the banks to fund the deal since the solvency requirement was a
"If it's a condition that you get a solvency agreement,
absent being able to show some nefarious action on the side,
which there's no hint of here, it is a condition, and courts
would normally respect that," Greenberg said.
The four banks funding the deal, including Citigroup (C.N),
Deutsche Bank (DBKGn.DE), Royal Bank of Scotland (RBS.L) and
Toronto-Dominion Bank (TD.TO), have agreed to provide financing
of $34.35 billion.
BCE's failure to get a solvency agreement lets the banks
off the hook for the funding. BCE could try to renegotiate
terms with the buyers, or convince the lenders to proceed
despite the solvency opinion, but such odds are slim,
especially during the global financial crisis, lawyers said.
"A solvency opinion is a requirement of closing. Unless
someone is willing to waive that requirement, the deal won't
close. Especially in this environment, the chances of someone
waiving a solvency agreement are slim," Zakarin said.
(For more M&A news and our DealZone blog, go to
(Additional reporting by Megan Davies, Martha Graybow and
Emily Chasan in New York and Rachelle Younglai in Washington;
editing by Jeffrey Benkoe)