Leveraged Buyout of Bell Canada Enterprises

The Situation

Bell Canada Enterprises (BCE) is the largest telecommunications company in Canada, and the parent of Bell Canada, the company that provides most wireline telephone services in Canada. BCE's shares trade on the Toronto and New York Stock Exchanges.

In mid-2007, the Ontario Teachers' Pension Plan, together with two US private equity firms, announced an offer to buy all of BCE's shares and take the company private. At C$52 billion, it would have been the largest leveraged buyout (LBO) in history. But given Bell Canada's strategic importance to Canada, court approval was required for the transaction. A group of bondholders, whose interests could have been adversely affected by the LBO, filed suit to prevent the deal from closing. The bondholders claimed that the proposed transaction would be contrary to Canadian law because it would provide no benefits to Bell Canada and that they had an expectation that the investment grade status of their bonds would be preserved and maintained in all circumstances.

NERA's Role

NERA experts Dr. Andrew Carron and Dr. James Jordan were retained on behalf of BCE to provide expert testimony to the trial court. Dr. Carron and Dr. Jordan were asked to discuss potential economic benefits of LBOs to firms generally and to BCE in particular; whether the BCE LBO was different from other LBOs in terms of the level of risk; the potential negative impacts of LBOs on bondholders; whether those risks are generally known to participants in the bond market; and how such risks can be managed by bondholders. They also responded to the testimony on economic harm and mitigation propounded by the bondholders' experts.

Dr. Carron and Dr. Jordan submitted a joint expert report in November 2007. They described how the financial markets anticipate the possibility of LBOs and set bond prices accordingly. Some bond issuers provide protective covenants in exchange for a lower interest rate; many of the BCE bonds did not have such protections, a fact easily determined by prospective purchasers. Both Dr. Carron and Dr. Jordan then testified at the hearing in Québec Superior Court, which lasted 28 days. Following their direct testimony, they were questioned by the judge, counsel for three groups of bondholders, and a dissident shareholder.

The Result

On 7 March 2008, the Court released its rulings on the proposed transaction. In a lengthy opinion, the judge approved the transaction and ruled against the bondholders on every substantive point. The Court cited extensively the testimony of Dr. Carron and Dr. Jordan in its opinion.

On 21 May 2008, the Québec Court of Appeal overturned part of the trial court's decision, but on 20 June 2008 the Supreme Court of Canada set aside the decision of the Court of Appeal and upheld the trial judge's approval of the transaction. In its subsequent written opinion, the Supreme Court cited the evidence on foreseeability, market practice, and protective covenants that Dr. Carron and Dr. Jordan had presented at trial.

The LBO transaction ultimately failed to close as planned for reasons unrelated to the legal proceedings.