BCE shares dive as court backs bondholders

A telephone booth and company sign are seen outside the offices of BCE Inc., Canada's largest telecoms group, in Montreal, May 21, 2008.

TORONTO (Reuters) - Shares of BCE Inc (BCE.TO) (BCE.N) fell more than 10 percent on Thursday on fears that a Quebec court ruling could kill its C$34.8 billion ($35.2 billion) buyout by a group of investors led by the Ontario Teachers' Pension Plan.

In a ruling released late Wednesday, the Quebec Court of Appeal backed debtholders who had complained the transaction -- the world's largest leveraged buyout -- was unfair.

The court said BCE, Canada's biggest telecom company, failed to prove that a buyout could have been structured to provide a satisfactory price for the company's shares while avoiding an adverse effect on the debenture holders.

BCE shares plunged C$4.48 to C$32.64 on the Toronto Stock Exchange and were down $4.77 at $33.06 in New York.

As more than 26 million shares changed hands in Toronto, the exchange announced it had halted trading in the stock because of "data integrity concerns."

News of the court ruling came days after reports that the banks financing BCE's buyout were trying to renegotiate terms, also raising uncertainty over whether the deal would close.

"In our view, the power in the negotiation between BCE/purchasers and the banks has just shifted significantly in favor of the banks," National Bank Financial analyst Greg MacDonald wrote. "In addition, the bondholders will not be satisfied unless they are paid in full."

BCE said it and its would-be buyers would seek to appeal to the Supreme Court of Canada. The court has nothing on its agenda for the weeks of June 9 and June 16, so it could tackle the issue before a June 30 deadline to close the takeover.

Legal experts said the Quebec court ruling will have wide-ranging implications if the high court lets it stand, as it will mean companies will have to balance interests of common shareholders against those of other investors.

Mark Meland, a lawyer representing the bondholders, said that, as it stands now, the appeals court ruling essentially stops the deal from proceeding.

"The court of appeal has decided that the deal will not go through," he said. "Unless (the ruling) is overruled by a higher court, the plan of arrangement is terminated."

Meland said his clients are "ecstatic" about the result and plan to "vigorously contest any attempt by BCE to overturn the judgment."

He said the deal has led to a 20 percent drop in the value of the bonds in question and saw their credit ratings cut. At the same time, equity investors have been offered a premium.

BONDHOLDER NEGOTIATIONS POSSIBLE

Genuity Capital Markets analyst Dvai Ghose said BCE could try to negotiate with bondholders, given that the bonds have a face value of C$2 billion, a small portion of the deal.

"BCE could offer early redemption with penalties," he wrote in a research note. "We would not ignore this."

Even before the ruling, BCE's stock had been well below the C$42.75 offer price as investors worried the deal could be repriced, delayed or scrapped, particularly given tight credit markets.

Canada Pension Plan Investment Board Chief Executive David Denison said a deal of BCE's size "could not happen in today's markets." The pension board had bid for BCE but ultimately lost out to the Teachers' offer.

MacDonald said the latest court ruling added yet another element of doubt.

"The market will consider the real possibility that the purchasers will walk from the deal after the June 30 outside date, after which they are no longer obligated to pay the break fee," he wrote.

The buyout proposal includes an C$800 million break fee that BCE would have to pay under certain circumstances if the deal falls through, and a reverse break fee of C$1 billion that the buyers would pay if they pull the plug.

POSSIBILITY OF TELUS BID LINGERS

There has been speculation that Telus Corp (T.TO), Canada's No. 2 phone company, could bid for BCE.

Telus was in talks to acquire BCE before the Teachers' group emerged as the winner. It walked away citing "inadequacies" in the bidding process.

However, many analysts believe a Telus bid would likely meet opposition from regulators, as it would lessen competition. Also, Telus shares are down some 28 percent from a year ago, making them a less attractive acquisition currency.

Teachers' partners in the BCE bid are U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity.

($1=$0.99 Canadian)

(Reporting by Wojtek Dabrowski; editing by Rob Wilson)