TORONTO (Reuters) - BCE Inc (BCE.TO) (BCE.N) shares fell 12 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.
The Quebec Court of Appeal late on Wednesday sided with 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 the buyout could have been structured to provide a satisfactory price for the company’s shares while avoiding an adverse effect on the debenture holders.
The company has filed a motion with Canada’s Supreme Court for a fast-track appeal of the Quebec ruling, and said the timing of the deal’s close hangs on that decision.
BCE shares tumbled C$4.48 to C$32.64 on the Toronto Stock Exchange and fell $4.73 to $33.10 in New York. As more than 26 million shares changed hands in Toronto, the exchange halted trading in the stock because of “data integrity concerns.”
The TSX later said it had resolved a “trading message protocol issue” and expected trading in BCE shares to open as usual on Friday morning.
The Quebec court ruling came days after reports that the banks financing the buyout were trying to renegotiate terms, also raising uncertainty.
“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.”
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 the appeals court ruling essentially stops the deal from proceeding, unless the higher court rules the other way.
His clients are ecstatic about the result and plan to oppose any attempt by BCE to overturn it, he said.
The deal has led to a 20 percent drop in the value of the bonds in question and prompted ratings cuts, Meland said. At the same time, equity investors have been offered a premium.
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.
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 under the C$42.75 offer price as investors worried the deal could be repriced, delayed or scrapped amid 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 Quebec ruling added to doubts.
“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.
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 competition regulators.
Reporting by Wojtek Dabrowski; editing by Rob Wilson