BCE buyout faces a Humpty Dumpty moment

(Fortune) -- A surprise court decision gave Bell Canada a great fall and all the dealmakers and all the deal kings may not be able to put the $51 billion takeover together again. And that may be no tragedy to some of the parties.

A Quebec appeals court late Wednesday blocked the proposed private-equity driven buyout of BCE (BCE). In a 5-0 decision, the court sided with bondholders who saw the addition of an estimated $34 billion in debt as detrimental to their holdings. BCE says it will appeal the decision, a process that could take eight months to resolve if the Supreme Court of Canada decides to hear the case.

"This was considered the least likely thing that could derail the deal," says a Toronto based money manager who asked not to be named.

The news came just days after a group of banks financing the deal sought to change the terms of the arrangement in light of the ongoing credit crunch. The higher interest rates and more strict credit guidelines would likely serve to trim the value of the deal, say analysts.

Taken together, the two developments may just give remorseful buyers a way out of the deal. A representative for the buyers did not return calls seeking comment, but the group has stated as recently as Thursday that it remains committed to making it happen.

When struck in June 2007, at the exact last moment of the buyout boom, the BCE takeover was the largest of its kind. It called for the Ontario Teachers' Pension Plan to join forces with private equity shops Providence Equity and Madison Dearborn in a $48.5 billion transaction that included $15.5 billion in debt. With the decline of the dollar relative to the Canadian loonie, the value of the deal is around $51 billion.

Bell Canada was attractive in many ways to private equity investors. BCE was a former monopoly generating tons of cash with a lackluster management and some valuable underlying assets like a national telecommunications network. New management would likely have slashed costs, sold assets and tried to boost revenue.

But analysts say unlike U.S. phone giants that managed to cultivate growth through wireless and data expansion, Bell Canada was simply watching its core business erode as cable companies like Rogers seized the wireless opportunities.

"I think people realized the price paid for BCE was too high," says the investor. "It was the last LBO announced before the credit crisis."

To be sure, BCE could win an appeal or settle with the bondholders. And Providence Equity and the others in the group of buyers could renegotiate terms for the financing to keep the deal alive.

They could also say their hands are tied and walk away.

"This could be their get out of jail free card," says the money manager. "They just have to be careful how they play it."