Although privatization may reduce the value of BCE but may increase liquidity for BCE. * Consumers- Interested in maintaining services with BCE. Privatization may result in an improvement in quality since the new owner(s) would attempt to improve the company after takeover. * Employees- Interested in maintaining their jobs. Winning or losing is unknown as intentions of the new owner(s) are unknown. Strategic Oversight Committee- Interested in maximizing shareholder value and would be considered a winner if privatized.
Examine and comment on the reaction of the stock and bond markets to the various key events in the litigation time line. In the early part of 2007 BCEs stock had been trading around $30 per share and the value of the bonds were around $122. In April 2007, Ontario Teachers’ Pension Plan(Teachers’) filed a Statement of Beneficial Ownership (Schedule 13D) notifying the Securities and Exchange Commission of their intentions to attempt a leveraged buy out of BCE.
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Once it was made public that BCE was a LBO target the stock and bond markets reacted drastically and inversely of each other. The stock price soared to $39 per share, a 21% increase in value. Meanwhile the bonds suffered a sharp decline going from $120 to $109, a 10% decrease in value. This is typical of a situation in which a company is threatened with a hostile takeover because the target firm is struggling and the potential buyer will add value to the target firm. The added value will drive the stock prices up as investors expect an upswing in the value of the target firm.
These trends were expected to continue to fluctuate until a purchaser won the auction process. On June 26, 2007 it was announced that Teachers’ won the auction process with a winning bid of $42. 75 per share. The winning bid would entail Bell Canada to take on $38. 5 billion in debt that would result in a downgrade of the BCE bonds credit rating to below investment grade. Bond prices fell from $109 to $105 during this time period while the stock price rose slightly to $41 per share.
During the time period between the approval of the bid and the injunction filed by the bondholders with the Quebec Superior Court prices for stocks and bonds varied. This was to be expected with the uncertainty surrounding the Courts decision as to whether or not they would allow or suspend the sale of BCE to Teachers. By the time the Court made their decision on March 7, 2008 to allow the sale of BCE to resume, the bond values fell an average of 18% from April 2007. Meanwhile the value of the stocks remained about 20% higher than when the LBO process initially started.
Following the Superior Courts decision the bondholders filed an appeal in a last ditch effort to reverse the Courts decision. Though the appeal process would not stop the decreasing value of their bonds. The bondholders were hopeful they would win their appeal and prevent the bonds from being downgraded, which would return value to their bonds by not increasing the debt of Bell Canada. While the process of appeal was being heard by the Court of Appeals, the value of the bonds decreased even further trading at a low of $90.
At the same time BCEs stock was trading between $35-$39 per share. The Quebec Court of Appeal decision came on May 2008 and shockingly sided with the bondholders. The Court stated that the Strategic Oversight Committee did not consider the unfavorable effect a downgrade in credit ratings would have on BCE bondholders that would be forced to sell their bonds at a severe loss. Following the Quebec Court of Appeals’ decision to overrule the Superior Courts decision the value of BCEs stocks suffered a severe decrease, dropping from $39 per share down to $33 per share (a 15% loss in value).
Meanwhile the bondholders’ expectations were met and it showed in the increased in value of the bonds, as they rose from $93 to $104 (a 11% increase). 3. What were the major differences in the Revlon case and the Quebec Court of Appeal’s approaches to how the board should weigh the various stakeholder interests? The case of Revlon, Inc. v MacAndrews & Forbes Holding Inc. led to a revolutionary decision in regards to hostile takeovers. The responsibility of the board of directors is typically to act in the best interest of the corporation. However, the U. S.
Supreme Court of Delaware determined that when the sale or breakup of a firm is inevitable, the fiduciary obligation of the directors of the target firm change considerably. The court deemed that the fiduciary obligation, when firms’ are “in play” as a takeover target, must now be merged with the best interest of a firms’ stockholders by securing the highest purchase price possible. Thus a firm would enter into an auction process whereby they would obtain the maximum price available, which Revlon did not do. Ronald Perelman, CEO of Pantry Pride, initially approached Revlon Inc. in regards to a negotiated or if need be a hostile takeover at a price range of $42-45 per share.
The initial offer was rejected and when Pantry Pride revised their offer, it was apparent that Revlon would be sold or broken up. Prompting Revlon to take defensive measures such as a poison pill, adopting a Note Purchase Rights Plan, and the repurchase of five million out of thirty million shares to help prevent/delay the takeover. Revlon then entered into negotiations with Forstmann and eventually approved the leveraged buyout via Forstmann by means of providing inside financial data, a lock up and a no-shop agreement. Revlon’s’ fiduciary responsibility to shareholders was violated by failing to receive the maximum price per share possible as it was known that Pantry Pride would exceed any offer by Forstmann.
These actions destroyed the bidding process for Pantry Pride, prompting them to file an injunction with the Delaware Supreme Court. Where the Delaware Supreme Court found Revlon’s’ agreement with Forstmann was insufficient in attaining the maximum price possible. Though the cases against BCE and Revlon have similarities there were major differences in the actions taken by each firm.
BCEs leveraged buyout was opposed by debenture holders from one of its subsidiaries (Bell Canada). While in the case of Revlon, Pantry Pride a potential buyer of the firm challenged the buyout deal by Forstman arguing that they would have provided a better offer for the shareholders. Meanwhile Bell Canada’s debenture holders argued that the buyout would devalue their bonds by lowering the credit rating of these bonds to below investment grade. Creating a problem since the majority of Bell Canada’s debenture holders were restricted to investing in investment grade bonds.
The resulting downgrade in the credit rating of said bonds would force these debenture holders to sell their bonds at a loss, to the tune of an eighteen percent loss. At the same time the value of stockholders investments increased by forty percent, wherein lied the problem for BCE. Under the precedent set by the Revlon case the winning bid (for BCE) would be recognized as fair and acceptable. Though in light of the conflicting claims from Bell Canada’s bondholders, the Quebec court of appeals perceived the acceptance of the buyout as biased towards the stockholders.
Also, the Court of Appeal found the process to be flawed by disregarding the interests of the bondholders by not considering the thirty million dollars of debt taken on by Bell Canada. So, the Court held that, “there is no principle that one set of interests — for example the interests of shareholders — should prevail over another set of interests. ”3 Thus the court rejected BCEs assumption that they were protected under the preceding Revlon line of cases that supports the interest of shareholders prevails when conflicted with the interest of creditors and other stakeholders of a firm.
Ultimately the Quebec Court of Appeals determined that merging the interest of a corporation with shareholders was not enough. They reasoned that the best interest of all stakeholders of a firm should be considered when a company is an LBO target. Implying that bondholders and other stakeholders of a firm must be considered by the board of directors in determining the best course of action during a takeover. Another major difference in the LBO’s was process of guiding the firms through the hostile takeover attempts.
Revlon was in exclusive negotiations with only two firms and they took defensive measure to ensure that Forstmann would be the purchaser of the firm. While BCE conducted an auction where the highest bid was granted the right to purchase firm. 4. As a member of the BCE’s board, what course of action would you recommend? As members of the board of directors, we would recommend a restructuring of the traditional focus for conducting business in the best interests of only the shareholders.
Many corporations have many stakeholders who are affected by the decisions made by the board of directors for the corporation. At BCE we learned that the best outcome for shareholders can negatively affect the bondholders, not to mention employees, suppliers, consumers and so on. We should attempt to work out a sale of BCE but find a suited buyer which can accommodate the interests for a majority of the stakeholders, If not a perfect overall solution for all stakeholders, sort of a win-win strategy.
With our current situation, we should create a decision tree of sort and identify the stakeholders affected, whether negatively or positively and determine the best course of action. Next we should determine how to accomplish such an action. Maybe a refinancing of debt or even a chapter 11 reorganization (although this may devalue the stocks of the corporation by increasing risk exposure). In following such an approach, the board can justify their decision in front of any court of law, and prevent any potential lawsuits. BCE is a publicly traded company and should make their decisions as such… as how it would affect the public.