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Quebec court helps kick off round of BCE finger pointing

awillis@globeandmail.com

Let the blame game begin in the botched BCE buyout.

The high-priced lawyers and investment bankers charged with closing the world's largest leveraged buyout now have egg on their faces, after a Quebec court ruled the takeover is unfair to BCE bondholders. Shares in BCE dropped 12 per cent in the wake of this setback, on a widespread belief this deal will never get done.

The court was straightforward in addressing the buyout's flaws. Owners of $5.1-billion in BCE bonds saw their holdings plunge in value after the buyout was announced, as the market priced in the risks that came with the phone company's plan to shoulder $34-billion of new debt.

In a unanimous ruling, five judges wrote: "Once there is, as in this case, a significant adverse effect on a class of security holder (debenture holders), while other security holders (shareholders) derive substantial benefits by an arrangement, the corporation has the burden of demonstrating that the arrangement is, nonetheless, fair and reasonable."

To the shock of the deal-making community, the court decided BCE did not satisfy that burden.

This unexpected legal decision went against law firm Davies Ward Phillips & Vineberg, which represented BCE in court, along with Goodmans and a boutique firm called Woods LLP, which both acted in the Quebec court for the Ontario Teachers' Pension Plan-led buying group.

On the other side of the court, three law firms won this victory for the bondholders: Miller Thomson Pouliot LLP, Fishman Flanz Meland Paquin LLP and Thornton Grout Finnigan LLP.

In hindsight, questions will also be raised about the way BCE's bankers - led by Goldman Sachs - conducted the final stage of the auction.

The bondholders' lawsuit spells out last-minute changes to the structure of the winning bid that were allegedly done to disenfranchise debt owners. The lawsuit states that after making its first pitch, the Teachers group was told to rework the offer to avoid "triggering of protection mechanisms for debenture holders."

The winning bidders did so by resorting to what the bondholders called a "spider structure." It will be interesting to learn how much weight the judges placed on those changes.

RBC Dominion Securities, BMO Nesbitt Burns and CIBC World Markets also advised BCE during last year's auction.

This is the second time in recent memory a Quebec court has shot down a high-profile leveraged buyout. Recall that a judge in la belle province saved Gerry Schwartz from disaster by blocking Onex's bid for Air Canada in 1999. Onex walked, rather than appealing, and in doing so missed being caught up in the 9/11 nightmare. Davies Ward Phillips & Vineberg was Onex's main counsel on that (non) deal.

coxe packs the house

After standing-room road shows that featured jokes about investment bankers, BMO Nesbitt Burns strategist Don Coxe completed the largest closed-end fund seen this year by raising $260-million.

Mr. Coxe, universally respected for his commodity calls and engaging presentations, headlined the initial public offering of the Coxe Commodity Strategy Fund. The BMO veteran will provide an overview on the fund for portfolio managers, while the bank's Harris Investment Management unit will be in charge of picking individual stocks.

BMO Nesbitt Burns led this deal, which saw units sold for $10 each to a retail audience. Underwriters were hoping they could break $100-million on this IPO, so demand was a pleasant surprise.

And what did Mr. Coxe have to say about his colleagues in corporate finance? One stockbroker who took in a packed presentation at Toronto's King Edward Hotel said the BMO strategist brought down the house by saying something along the lines of: "You've got to hand it to investment bankers. In the tech wreck, they took all our savings. Now, with the subprime crisis, they've come back to take all our homes."

See Andrew Willis's Streetwise Blog at ReportonBusiness.com

© 2007 The Globe and Mail. All rights reserved.

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