Wall St. relieved but concerns over BCE deal remain

By Anupreeta Das - Analysis

SAN FRANCISCO (Reuters) - If relief was the first emotion the would-be buyers of BCE Inc (BCE.TO) (BCE.N) felt after Friday's court decision allowing the $34.1 billion deal to proceed, anxiety may have been the second.

That's because questions remain about whether the deal will now go through and, if so, at what price.

Pinning down final financial terms for the deal -- with a June 30 deadline looming and credit markets tight -- could still create trouble for the world's biggest leveraged buyout.

The deal may be renegotiated at a lower price or may even fall through if the banks that committed to financing the debt portion and the private equity buyers of BCE, Canada's largest telecommunications company, are unable to reach an agreement.

"In this credit market, that's a hell of a lot of financing that has to happen and (whether the deal will get done) is a big question mark," said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners.

"Nobody should be cavalier in this market about predicting the completion of a $34 billion deal," he said.

The once-frothy leveraged buyout market was knocked out cold by last summer's subprime mortgage contagion, which eventually killed investor appetite for the high-yield loans and bonds used to finance such deals.

Wall Street banks were thus stuck with billions of dollars in leveraged loans and forced to write down the value of loans in a number of leveraged buyouts, leading to tension between them, the private equity buyers and target companies.

In a joint statement after Friday's decision, the banks that agreed to finance the BCE deal said they stand behind their original commitment. They also said they expect the deal to close as per the definitive agreement with the buyers.

The buyers of BCE, parent company of Bell Canada, include the Ontario Teachers Pension Plan; private equity firms Madison Dearborn Partners, Merrill Lynch Global Private Equity and Providence Equity Partners; and Toronto-Dominion Bank (TD.TO).

The lead lenders include Citigroup Inc (C.N), Deutsche Bank AG (DBKGn.DE) and Royal Bank of Scotland Plc (RBS.L).

SOME HOPE FOR VETO

But a source told Reuters on May 19 that the banks funding the deal have sought to renegotiate the financing terms and had submitted new financing terms to the buyout group, which contained higher rates and other "onerous" conditions.

In an interview prior to the decision, Columbia University Law School Professor John Coffee said concerns about financing would continue to hamper the deal after the court ruling.

"There probably will be some banks quite happy that the debt holders may be able to veto the transaction," he said.

BCE bondholders had challenged the deal in a lower court, saying its debt-heavy nature treated them unfairly by shrinking the value of their holdings.

Brett Barragate, a partner at law firm Jones Day, said the banks may have been hoping the Canadian Supreme Court would instead uphold the May 21 ruling by the Quebec court that sided with bondholders.

"I think they were all hoping very much that this case would have gone the other way, because it avoids this deal ending up like Clear Channel," Barragate said.

Banks financing the $20 billion buyout of Clear Channel Communications Inc (CCU.N) had appeared unwilling to account for any losses on the loans they agreed to make. The deal descended into litigation, pitting the banks against the private equity buyers. In the end, a settlement was reached which saw the deal recut at a lower price of $17.9 billion.

"Now you have the real problem," Barragate said. "This deal's going to move forward and the banks who issued the commitments will have to fund it or try to get out of it."

(Additional reporting by Megan Davies, Chelsea Emery, Lynne Olver, Paritosh Bansal and Emily Chasan; Editing by Braden Reddall)