There’s a lot of hand-wringing going on over growing concerns the $52-billion leveraged buyout of BCE Inc., Canada’s largest telecom carrier, is going to fall apart.
If the deal does go kaput, it will be the best thing to happen to BCE and its customers.
How come?
Well, if the deal is consummated, BCE will $32-billion of debt to service at a time when competition from cablecos is wickedly fierce. Despite this competitive landscape, BCE would still need to jump-start cash flow to pay down debt. One tool already being used by BCE to boost cash flow is raising prices for existing services – aka squeezing customers.
Of course, this approach won’t work because the cablecos are only more than happy to position themselves as more affordable/better options, while also being able to raise their prices. At the end of the day, BCE just pisses off even more consumers, while giving them yet another excuse to jump ship to a cableco.
The highly-leveraged deal a shaky idea from the beginning, and it’s even more so now when the global credit crisis. If the deal goes pear-shaped, there will be lot of embarrassed people and pissed off investors but, in the end, it will a positive for BCE as it scramble to remain competitive.
FACTBOX: Too much debt puts big BCE buyout in peril
THE PROPOSED BUYOUT
- Ontario Teachers’ Pension Plan, with U.S.-based private equity firms Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity, are offering C$42.75 a share in cash to take BCE private.
- Under terms of the deal announced on June 30, 2007, Teachers Private Capital will hold a 52 percent stake in BCE, Providence 32 percent, Madison Dearborn 9 percent, and other Canadian investors 7 percent.
- BCE would pay a break fee of C$800 million in certain circumstances, while the buyer would pay C$1 billion fee.
- The buyer has commitments for facilities to support ongoing liquidity needs for the company, BCE said when it announced the agreement.
- The deal has received approval from Industry Canada and the Canadian Radio-television Telecommunications Commission. It was backed by Canada’s Supreme Court in June. The top court overturned a lower court decision that sided with some bondholders who claimed the deal was unfair.
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2 Comments
Mark:
I have a hard time understanding your comment that “…competition from cablecos is wickedly fierce.” Wickedly fierce? With regard to wireless, a previous post you made says and I quote “The reality is there little real competition in wireless markets so there’s little need to use lower prices as a strategic tool.”. So what we have in wireless is rising prices and limited options. This represents wickedly fierce competition? As for internet services and cable fees, wickedly fierce competition is not how I would describe these markets.
I would hate to think what normal competition would bring…
I would suggest the telecom market in Canada is anything but competitive…
What I meant that the cablecos are competing against Bell in the home phone, high-speed Internet, wireless and TV markets. Now, that’s wicked competition.