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Tickers in this Article: BCE, CCU, C, DB, RBS, SLM
Shares of BCE Inc. (NYSE:BCE) dropped on Monday as new concerns arose about the funding of its leveraged buyout. The deal was brokered nearly a year ago and at the time right before things got really messy in the credit markets. The problem now is that if the banks take on the risky debt for the deal as previously agreed, they will immediately take hits on it. Recent troubles with other buyouts suggest that this deal may change significantly.

Things Looked So Good
The deal for a group of investors, led by the Ontario Teacher Pension Plan, to take BCE, the parent of Bell Canada, private was announced during the summer of 2007. At that time, things in the credit markets were already looking bad, but were due to get much worse in the months to come. The deal, as it was announced, would have been the biggest leveraged buyout in history, being valued around $52 billion, including debt, preferred equity and minority interests.

The debt associated with leveraged buyouts was thought to be fine, until the market started revaluing all of it. The past deals that have been done have left the funding banks with lots of bad debt on their balance sheets. If the deal gets done as is, the banks involved will have to add more problems to their already struggling balance sheets. (To read more on the ratings of banks, see What Is A Corporate Credit Rating?)

First Clear Channel, Now BCE?
The funding syndicate includes Citigroup (NYSE:C), Deutsche Bank (NYSE:DB) and Royal Bank of Scotland (NYSE:RBS). Those banks don't want to provide the funding now, since they have already been riddled with enough problems over the last year. This is a similar story to what happened to Clear Channel Communications (NYSE:CCU), where the banks initially balked at the deal, but then agreed to a lower price to save some face. The Clear Channel deal price ended up dropping to $36 per share compared with the original $39.20 per share.

The banks listed above were the same ones that forced the lower price for Clear Channel, and recent reports are saying that the case will be the same for BCE. Other deals such as the one for student loan buyer Sallie Mae (NYSE:SLM) have fallen through due to funding problems. With all the contracts in place for BCE, I think the deal will go through, but it will just look a little different. With more than $30 billion of the deal in loans, there is a lot of room for change.

The lending syndicate presented new terms for the deal including higher interest rates and tighter lending terms. The Ontario Teacher Pension Plan said that the new terms are onerous, but I think something will be worked out by the two groups and the deal will go through in some capacity. That is the good news. The bad news with the terms of the deal uncertain, there may be too much flexibility in the final price. There may be a little upside from here, but I would recommend that regular investors stay on the sidelines due to the potential risks.

The Bottom Line
The BCE deal faces trouble as the lending banks are balking at providing the funding and taking more risky debt on their books. The banks have presented new terms to the BCE buyers with tighter deal terms. I think the deal will likely go through, but without finalized terms the value could change somewhat dramatically. I would recommend being a spectator on this deal.

For more on risky debt, check out The Fuel that Fed The Subprime Meltdown.

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