The BCE Deal May Be Dead, But…

12/03/2008 12:01 am EST

Focus: GLOBAL

Benj Gallander

President, Contra the Heard

Despite the seemingly doomed merger, Benj Gallander, president of Contra the Heard, still likes the prospects for this Canadian telecom.

Arbitrage is a pretty tricky game. So much so that between the time this article was written and the publication date, the stock price of BCE Inc. (TSX: BCE) tumbled by a third when [auditing firm] KPMG declared that BCE would not meet the solvency tests as defined in the [amended merger] agreement.

When one of us purchased his position in BCE last March at $36.24, the logic was that the $42.75 transaction led by the Ontario Teachers’ Pension Plan would go ahead with about an 80% probability. This meant a premium of almost 18%, likely achieved within six months, given the projected closing date. Toss in a dividend of about 4% and the profit would be lovely.

The downside risk, as estimated from this corner, was that if the deal was not sealed, the shares would plop into the $30 range, perhaps below. Still, the dividend would be obtained.

Wrong! First the dividend that had been consistently paid since 1881 was eliminated for the “bird in the bush” of the closing price staying intact. Now investors are on the losing side of both the dividend and the whole transaction.

There were others problems along this long ride. Previously, banks being the slippery entities they sometimes are, indicated that they would walk even though the ink was already dry. The deal was therefore amended. Later, due to the economic crunch, The Royal Bank of Scotland, which had backed the deal, faced its own demise before it was nationalized. Citigroup (NYSE: C), the biggest player in the arrangement was also just rescued by the US government.

This deal has been akin to a long-running soap opera. It still might somehow be pulled off, but even if not, BCE in the $25 range is a mighty pleasing prospect, long term. Odds are the dividend will be reinstated. Plus there is an excellent chance of appreciation. [And] the wild card is that a transaction will still occur, but likely at a lower level than $42.75.

Whatever happens, odds are people buying in now will do much, much better than the Contra loser.

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