Bell Canada's $51 billion sale hinges on bankers
Courts have paved the way for the largest leveraged buyout in history, but bankers may still scuttle the deal.
(NEW YORK) Fortune -- Bankers now find the ball back in their court as the proposed $51 billion buyout of Bell Canada won a key court decision late last week. Shares of Bell Canada's parent company jumped 7% on Monday after Canada's Supreme Court overturned a decision to block the deal, the largest leveraged-buyout ever attempted.
But the deal is far from done. The banks financing the merger, led by Citigroup (C, Fortune 500) and Deutsche Bank (DB), signaled last month they want changes to the original financing plan in light of the credit crunch now roiling the markets. Some analysts predict that the banks want a lower price.
"We expect the banks to play hardball," says Desjardins Securities analyst Joseph MacKay in a research note Monday. "We believe the banks will push for an 8% cut (in the deal price)."
A source close to the negotiation says the banks have asked for a number of new concessions "outside the original deal." While the banks have not asked outright for a price reduction, they have signaled their desire to see a lower price, according to the source.
The proposed sale of BCE, which owns Bell Canada, the country's largest phone company, was one of the last mega takeovers in the private-equity boom that ended abruptly nearly a year ago. Soon after BCE (BCE) agreed last June to sell itself to three buyers, including private-equity shop Providence Equity Partners and Canada's largest pension fund, the credit market seized up and deal flow slowed to a trickle. In recent months, a number of private-equity buyouts have fallen apart, including the sale of Sallie Mae parent SLM Corp. (SLM, Fortune 500) and electronics maker Harman International (HAR) ("10 private-equity deals gone bust").
As for BCE, the company's shareholders and Canadian regulators have already signed off on the deal. But it started to look shaky in May as word leaked that the banks were looking to cut a new deal in light of the ongoing credit crunch. While it's not publicly known what new terms the banks are seeking, it's possible they want higher interest rates on their loans, stricter credit guidelines and a likely cut in the deal price, according to some analysts.
The banks, while eager to write new deals and keep the revenue flowing, are under intense pressure to lower their credit risk and the chances of default among borrowers. For BCE and the buyers, the danger is that the banks' new terms could prove too onerous to make the deal worthwhile.
Negotiations with the banks took a backseat last month when a Quebec appeals court, in a surprise move, blocked the deal in a 5-0 ruling. The court sided with bondholders who argued that the $34 billion in new debt that Bell Canada would take on would render their holdings nearly worthless.
Following the court decision Friday, Jim Leech, the chief executive of Ontario Teacher's Pension Plan, Canada's largest pension plan, said in a prepared statement: "We are pleased with the Supreme Court's decision and are continuing to work to complete an acquisition of BCE."
A representative for the pension fund declined to comment on negotiations with the banks. Providence has said it remains committed to making the deal happen.
Credit Suisse sees a 60% chance that the deal goes through at the original price, a 30% chance that it gets trimmed about 9%, and a third, more remote possibility that the deal falls apart.
The BCE deal was conceived in a hot market for private equity buyers. Bell Canada offered some of the key traits that make buyouts a success. The former phone company monopoly was seen as poorly run but with valuable underlying assets like the largest national phone network in Canada. The new owners will likely slash costs, sell assets and look to boost revenue in an effort to sell it again or take it public.
Neither BCE nor the buyers have any incentive to see the deal fall apart. If the buyers back out of the sale (either because the banks won't finance it or for some other reason), they must pay BCE $983 million, according to terms of the original deal. If BCE abandons the sale, it owes the buyers $751 million. 
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