BCE privatization in doubt

“We are disappointed with KPMG’s preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing,” says Siim Vanaselja, BCE’s chief financial officer. “The company disagrees that the addition of the leveraged buyout debt would result in BCE not meeting the technical solvency definition.”

BCE plans to continue to work with KPMG and the purchaser to seek to satisfy all closing conditions.

The consortium of investors, BCE Acquisition Inc., issued a statement saying it would continue to “[work] closely with BCE to take the actions required by the definitive agreement in connection with the transaction and will continue to fulfill its obligations under the terms of the agreement.”

The proposed transaction has oscillated from “dead deal” to “done deal” many times since it was unveiled in the summer of 2007. On Monday, it was considered a sure thing once more, after the U.S. government announced it would prop up banking giant Citigroup, the biggest lender on the deal.

Shares of BCE dropped as much as 40% when they opened for trading on Wednesday.

The question now is how low can it go, since its price sustainability — as high as nearly $38 a share recently — was largely based on the guaranteed sale price if the merger went through.

“I think you’re probably seeing the bottom of the floor,” says Adrian Mastracci, a portfolio manager with Vancouver-based KCM Asset Management. “I would put little faith, if any, in this deal going through. It’s been a year–and-a-half, with hiccups all along. I think you have to make the assumption it’s not going to happen.”

For Mastracci, that means there’s a likelihood the company will reinstate the dividend payment it canceled earlier this year. For most investors left holding the stock it likely means making a hard decision as to whether to sell now — knowing that there’s only a faint hope of the stock going back over $40 a share — or consider keeping the stock as a dividend-paying vehicle.

“If they don’t reinstate the dividend, this thing could drop a little more,” he says. “If the acquisition falls through, you’re likely going see a dividend — that would be my bet.”

Planning around BCE shares will not be easy. There are still a lot of legacy shareholders who have likely had the stock for decades. Mastracci counsels advisors that they need to approach portfolios on a case-by-case basis.

“There is no one solution to fit all cases,” he says. “BCE is still one of the most widely held stocks in Canada. It’s everywhere. It’s in just about every portfolio in the country.”

Indeed, on the mutual fund side, BCE remains a core holding for many large cap, Canadian-focused mutual funds.

Philip Lee, a fund analyst for Morningstar Canada, notes that managers have had differing views on whether the deal would go through and whether they wanted to gamble on the uncertainty of that deal.

“When we talked to Michael Embler, the lead portfolio manager of [Franklin Templeton’s] Mutual Beacon Fund, he didn’t have interest in BCE. He viewed the uncertainty of the deal as too much of a downside. He didn’t want to participate,” Lee says. “On the flip side, we were listening on a conference call not too long ago and Eric Bushell, chief investment officer of the Signature Funds at CI Investments felt that there was a good chance the deal was going through.”

Lee’s not sure if those particular managers positioned their portfolios on those views, but he does note that many large Canadian dividend-focused funds still have substantial holdings of BCE that appear in line with the weighting of the large-cap S&P/TSX 60 index.

Most notably, Investors Group’s monster-sized $11.5 billion Investors Dividend Fund reported at the end of August that it had a 2.5% weighting in BCE, or roughly $287 million.

Other large funds include the $5.6 billion CIBC Monthly Income Fund, which last reported BCE as 2.65% of its portfolio, and the $3.5 billion RBC Canadian Equity Fund, which last reported an allocation of about 2% to BCE.

Lee says the fund with the most substantial allocation may be Sentry Select Dividend Fund, which at the end of October had an almost 12% weighting to BCE. Lee suspects this may have less to do with design than with the fact that BCE had until recently held its share price while many of the other holdings in the fund’s heavy energy and commodities weighting dropped.

Still, the inclusion of BCE in so many dividend funds is perplexing, considering it cut its dividend.

“BCE did slash the dividend. A good question to ask if you’re a pure dividend fund, meaning it’s mandated that you must only hold dividend stocks, is why do you still have BCE in your portfolio?” Lee says.