June 26 (Bloomberg) -- BCE Inc., Canada's biggest phone company, attracted three bids from investment groups that include Kohlberg Kravis Roberts & Co. and Cerberus Capital Management LP, in what may be the country's biggest takeover.

Telus Corp., the second-biggest phone company in Canada, withdrew at the bidding deadline earlier today, citing ``inadequacies'' in the auction process.

Shares in Montreal-based BCE had their biggest drop in two months on concern the Telus withdrawal lessens the chances of a bidding war, potentially reducing proceeds for BCE shareholders. Onex Corp., a Canadian buyout fund, and a Quebec pension fund also withdrew from the bidding.

``It's a very strange way to run an auction,'' said Jim Hall, who manages about 800,000 BCE shares at Mawer Investment Management in Calgary. ``It was a tactical error to give Telus so little time to bid.''

The Canada Pension Plan Investment Board, the country's second-biggest pension fund, bid with KKR of New York, said a person familiar with the offer. That investment group lost partners Onex and the Caisse de Depot et Placement du Quebec, which withdrew from the bidding.

The Ontario Teachers' Pension Plan in Toronto, BCE's largest shareholder, said late yesterday it would bid for BCE, whose market value is more than C$31.5 billion ($29.5 billion). Teachers' partners include Providence Equity Partners Inc. of Providence, Rhode Island. Teachers' spokeswoman Deborah Allan today declined to comment.

Cerberus, based in New York, also submitted a bid today, spokesman Peter Duda said, without elaborating. Cerberus is working with the Hospitals of Ontario Pension Plan, said the pension fund's managing partner Andy Moysiuk.

More Time

Some bidders have complained they didn't have enough time to prepare offers, and that BCE had the right to decide which investors could join the bidding groups. The deadline for bids was 9 a.m. New York time today, and BCE's advisers have been pushing the company to make a decision as early as the end of this week.

``The bidders don't appreciate the rush Bell and its advisers are forcing on the process,'' National Bank Financial analyst Greg MacDonald wrote in a note to clients. ``We believe the Bell Canada board will be obligated to extend the bidding deadline.''

BCE shares fell C$1.23, or 3 percent, to C$39.49 at 4:10 p.m. in Toronto Stock Exchange trading, the biggest decline since April 30. Shares of Vancouver-based Telus advanced 19 cents to C$62.19.

``In a deal of unprecedented complexity and size, we have succeeded in creating a truly competitive process,'' BCE spokesman Bill Fox said in an interview. ``It's not surprising that some party, seeking its own advantage, wants to complain because we have not tipped the process in any one direction.''

Default Risk

The perceived risk of owning BCE's bonds surged after the Telus withdrawal. Telus was considered the front runner by some investors, who said Telus could offer more money than the buyout funds because it can cut costs faster by combining the country's two biggest phone companies.

Credit-default swaps based on $10 million of BCE's bonds jumped $66,000 to $185,000, according to CMA Datavision composite prices. An increase in the five-year contracts, used to speculate on BCE's ability to repay its debt, signals deterioration in the perception of credit quality.

The increase indicates that investors are betting a buyout fund will win the bidding, and saddle the company with more debt. BCE has about C$11.9 billion in long-term debt, according to the company's 2006 annual report.

Reversal

``It's remarkable to have such a rapid reversal,'' said Gavin Graham, who helps oversee about $5.3 billion including BCE shares as chief investment officer at Toronto-based Guardian Group of Funds.

The withdrawal of Toronto-based Onex, Canada's biggest buyout fund, and the Caisse, the biggest pension fund manager, deals a blow to the Canada Pension Plan group, some investors said. The pension fund needs Canadian backers to meet requirements that all telecommunications firms in the country be controlled by domestic firms.

``I think this could push Bell to either extend or re- ignite the bidding process,'' said Troy Crandall, an analyst at Montreal-based MacDougall, MacDougall and MacTier. ``There's still time to get the lost players back to the table.''

Telus can wait to be invited back, or may even launch a hostile takeover of its own for BCE, Credit Suisse analyst Randal Rudniski wrote in a note to clients.

BCE's advisers include Goldman Sachs Group Inc., RBC Capital Markets and Bank of Montreal.

Onex spokesman Michael Locke didn't return a call seeking comment. Telus's Shawn Hall, Caisse de Depot's Gilles des Roberts and Canada Pension Plan spokeswoman May Chong declined to comment.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

Last Updated: June 26, 2007 18:30 EDT