Dec. 4 (Bloomberg) -- The private-equity firms that agreed to buy BCE Inc. for C$52 billion ($42 billion) may instead seek to acquire a minority stake in the Canadian phone company, according to two people with knowledge of the plan.

The firms have brought the proposal to the Montreal-based company and their bankers, said the people, who asked not to be identified because the talks are private. BCE, the country’s largest phone carrier, agreed to be taken private in June 2007 by Ontario Teachers’ Pension Plan, Providence Equity Partners Inc., Madison Dearborn Partners LLC and Merrill Lynch & Co.

The BCE purchase, which would be the second-largest leveraged buyout on record, was thrown into doubt last week when auditor KPMG said the deal may leave the company insolvent. The new proposal, coming before the Dec. 11 closing deadline for the LBO, may appeal to BCE as a way to salvage an investment if it can’t persuade KPMG to change its opinion.

“A deal like that leaves less hard feelings, may protect their pre-existing investment and leaves open the opportunity for a later buyout,” said Sachin Shah, a merger-arbitrage analyst with ICAP Corporates LLC in Jersey City, New Jersey. “The buyers seem to believe in BCE’s business.”

BCE is trading at about half the C$42.75-a-share LBO offer price because most investors doubt the deal will go through. BCE rose C$1.10, or 5 percent, to C$23 at 4 p.m. in Toronto. Ontario Teachers’, Canada’s third-largest pension-fund manager, owned 6.3 million shares as of Sept. 30, according to data compiled by Bloomberg.

Representatives for the buyers’ group and the banks declined to comment. BCE spokesman Mark Langton said the company is working with KPMG and the investors “to seek to satisfy all closing conditions” of the LBO transaction.

Preferred Securities, Dividend

The alternative proposal involves the buyers investing C$8 billion to C$10 billion in preferred securities for about 20 percent of BCE. It also calls for a cash dividend of C$8 to C$10 a share to paid to BCE shareholders.

Citigroup Inc., based in New York, and Frankfurt-based Deutsche Bank AG are leading a group of lenders that also includes Toronto-Dominion Bank and Royal Bank of Scotland Group Plc. The banks would need to approve the new transaction. The money required to finance the minority stake would be investment-grade debt of around C$7 billion or C$8 billion, compared with the C$34 billion the banks would fund if the buyout went ahead.

No Guarantee

The banks are set to suffer losses on the debt if the deal is completed. The average leveraged loan is currently trading at 67 cents on the dollar, according to Standard & Poor’s Leveraged Commentary & Data.

A new deal may not happen given issues including the short timeframe before the deadline, said the people. It’s unclear whether all members of the LBO group would participate in a minority purchase.

BCE said last week it doesn’t agree with KPMG’s solvency opinion. The banks and the buyers have sought to persuade KPMG to change its stand, the people said, describing that outcome as possible but not likely. Without that change, the deal won’t happen.

At least $55 billion of buyouts have fallen apart since last year after the collapse of the U.S. subprime-mortgage market drove up borrowing costs. Failed deals include the purchase of SLM Corp., the student lender known as Sallie Mae, and credit-card processor Alliance Data Systems Corp.

Earlier this year, Fortress Investment Group LLC and Centerbridge Partners LP scrapped their $6.1 billion takeover of racetrack and casino owner Penn National Gaming Inc. Instead of completing the takeover, the two private equity firms agreed in July to pay the company $225 million and buy $1.25 billion in preferred shares.

Deutsche Bank and Wachovia Corp. were the lenders on that deal.

To contact the reporter on this story: Jason Kelly in New York at jkelly14@bloomberg.net; Jonathan Keehner in New York jkeehner@bloomberg.net.

Last Updated: December 4, 2008 16:59 EST