Largest private-equity deal called off on solvency measures

11 December 2008

A year and a half after it was struck, then the largest private-equity deal in history, the $41 billion leveraged buyout of the Canadian telephone company BCE Inc collapsed Wednesday when a valuation expert at auditing firm KPMG LLC issued a final opinion that the transaction would create an insolvent entity. (See: BCE's buyout deal in jeopardy as KPMG audit ups debt load)

The development was not entirely unexpected since the auditing firm came out with its adverse report late last month. KPMG, BCE's accountants, said that the company that would emerge from the deal would fail a solvency test because of its huge debt load.

BCE struck the C$42.75 a share cash deal to be bought by the Ontario Teachers' Pension Plan, along with US-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity nearly 18 months ago. (See: Pension group to acquire Canada telecom giant BCE for $48.5 billion)

One of the conditions to closing the deal was receipt of a solvency opinion from a recognised valuation firm. In a statement, the buyers said they terminated the agreement because KPMG had concluded, "a required test for the solvency opinion was not met."

They said that under these circumstances "neither party owes a termination fee to the other." Under the agreement, the buyers are to pay a C$1.2 billion termination fee under certain conditions. There has been speculation that there could be a battle over the break-up fee. One trader said on Wednesday that he thought it could end up in court.

The deal's collapse means that the banks that agreed to finance the deal will be relieved of their obligations.

Wall Street banks have suffered billions of dollars in losses on financing leveraged buyouts deals reached during the private equity boom of 2006-2007. The banks underwriting the buyout are Citigroup, Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank, which collectively agreed to provide financing of $34.35 billion.

However, they will take a minor hit in the form of loss of advisory fees. Typically, such fees are paid on completion of a deal.