BCE says buyout unlikely to close

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TORONTO (Reuters) - BCE Inc said on Wednesday it was unlikely its C$34.8 billion ($28.2 billion) leveraged buyout would close next month after its accountants ruled that the company that emerges from the deal would not meet a solvency test because of its huge debt load.

Shares of BCE, Canada's biggest telecom company, plunged almost 40 percent as investors reacted to the latest twist in the saga of the world's largest leveraged buyout, which is being led by the Ontario Teachers Pension Plan.

The deal has already faced regulatory scrutiny as well as a Supreme Court of Canada challenge by angry debt investors as it inched its way forward to the scheduled December 11 closing date.

And on Wednesday, BCE -- the parent of Bell Canada -- said its accountants, KPMG, have found the company would not meet the buyout agreement's solvency test under current market conditions and the amount of debt involved in the buyout financing.

"This is the best Thanksgiving gift for the banks," said global head of investment banking at a U.S. bank, who declined to be named because he was not authorized to speak with the media. "They get to walk away -- it's the 'easy out' that they dreamed of but never thought they'd get."

BCE shares plunged 38.3 percent to C$23.65 shortly after market open on the Toronto Stock Exchange as investors digested the news.

Shareholders and analysts have long speculated that the banks underwriting the buyout -- Citigroup, Deutsche Bank, Royal Bank of Scotland and Toronto-Dominion Bank -- would try to seek a way out of their commitments as the financial markets continue to deteriorate.

Those concerns lingered even as Teachers, TD Bank and BCE -- Canada's biggest telecom company -- all repeatedly reassured investors that they remained pledged to the buyout and were working toward its close.

The investment banker, who is not involved with the deal, said the banks funding the deal would have faced a massive legal battle if they had walked away previously. But now, with BCE failing to get a solvency opinion, the banks have an escape and protection.

"The banks get to say 'We were willing and ready to do it. It's just BCE wasn't able to meet their side of the bargain'," the investment banker said.

BCE said it had received a preliminary view from KPMG that, based on current market conditions and the amount of debt involved in the buyout's financing, it does not expect to be in a position to deliver on the scheduled effective date of BCE's privatization.

A source familiar with the situation said BCE's board of directors inserted the solvency opinion into the deal as a condition of its closing. However, BCE spokesman Mark Langton said both the purchasers and the company agreed the clause should be written into the agreement.

The company said it disagreed with KPMG's preliminary view of post-transaction solvency and that it continued to work with the accounting firm and the purchaser to seek to satisfy all closing conditions.

"The deal is unlikely to proceed if we do not get that positive opinion," Langton said.

Aside from Teachers, the buyout group includes Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity.

BCE shares have long languished below the offer price of C$42.75 a share as investors fretted that the deal could be repriced, delayed or abandoned altogether because of problems in the financial markets.

Citigroup, Toronto-Dominion and Royal Bank of Scotland were not immediately available. Deutsche Bank had no comment.

In mid-June, BCE won the backing of the Supreme Court of Canada, which overturned a Quebec Court of Appeal decision that had said the plan, to be funded partly by taking on new debt, did not take adequate account of the interests of existing bondholders.

($1=$1.24 Canadian)

(Reporting by Wojtek Dabrowski and Scott Anderson in Toronto, Megan Davies in New York and Jessica Hall in Philadelphia; Editing by Lisa Von Ahn and Peter Galloway)

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