How the World’s Biggest Buyout Deal Crashed and Burned

A decade after the financial crisis, veterans of the $48.5 billion leveraged buyout of Bell Canada trade war stories.

By Scott DeveauScott Deveau and David CareyDavid Carey

It was the biggest corporate buyout that never happened.

But to hear the bankers and LBO artists tell the story of their $49 billion leveraged buyout of Bell Canada Enterprises Inc., you’d think they were reliving the adventure of their professional lives.

And they were.

One reason is the sheer daring of it. “There’d been a paradigm shift in private equity with the surge in big deals, and part of my job was elephant hunting,” Mike Walsh, a managing director in Deutsche Bank’s financial sponsor group at the time, recalls. “I identified BCE as a potential take-private candidate, but when I spoke to our telecom team, they said, ‘This can’t be done! It’s too big. You can’t raise the financing.’” He did.

Another is what happened to BCE after the deal imploded. It flourished—with what Jim Leech, head of Ontario Teachers’ Pension Plan’s private capital arm at the time, says is much of the board and management team his bidding group would have put in charge.  

Today the company’s shares are up more than 150 percent from the day the deal collapsed.

“It would have been a home run,” Mark Wiseman, then head of private investment at the competing bidder Canada Pension Plan Investment Board, says. “It didn’t beat what we projected—it crushed what we projected.”

In the end, it proved the last, glorious gasp of the past decade’s buyout frenzy, when debt-fueled purchase prices for hot companies hit ridiculous heights. Announced on June 30, 2007, the takeover of Canada’s largest telecommunications company, BCE Inc., the parent of Bell Canada, topped the $48 billion buyout of Texas utility Energy Future Holdings announced that February. Titans of Canadian business and U.S. private equity had starring roles. Jonathan Nelson, founder of Providence Equity Partners, took a bow on Fortune magazine’s cover.

The deal’s remarkable making and excruciating unmaking took more than two years in all, framed against the stomach-churning markets that took down Bear Stearns and Lehman Bros. For the leaders of the pension funds and private equity firms that bid on BCE, it remains the biggest missed opportunity of their careers.

The Bell Canada building in Toronto in April 2007, two months before the deal was announced.
Photographer: AP Photo/The Canadian Press

And the banks that survived the global financial crisis? For those that rushed to pledge tens of billions of dollars in debt financing for the BCE buyout, including Deutsche Bank and Citigroup, the event that sank it saved them from losing at least C$10 billion (US$9.4 billion, at the exchange rate then) on the loans as crisis-stricken debt markets shut down.

On the 10th anniversary of the deal’s announcement, Bloomberg spoke with seven of the people at the center of the storm about how the buyout came together, how it fell apart, and what might have been. Other people and companies mentioned in the story either declined to comment or didn’t respond to requests for comment.

The Players

Mark Wiseman

The Losing Bidder

Global head of private investment at Canada Pension Plan Investment Board (CPPIB). Teamed up with KKR to acquire BCE but was outbid.

Michael Sabia

The Target

CEO of BCE during the takeover talks.

Jim Leech

The Winning Bidder

Head of Teachers’ Private Capital, the private investing arm of Ontario Teachers’ Pension Plan. Joined forces with Providence Equity Partners and Madison Dearborn.

Michael Walsh

The Elephant Hunter

Managing Director in Deutsche Bank’s financial sponsors group. Helped put together the C$34 billion debt package for Teachers’ bid.

Stanley Hartt

The Dreamer

Chairman of Citigroup Global Markets Canada during the talks, Hartt broached a buyout to Sabia. Helped put together the C$34 billion debt package for Teachers’ bid.

Elephant Hunting

August-September 2006
The Canadian Pension Plan and KKR begin to plan a takeover of BCE.

Wiseman Andre [Bourbonnais] joined CPPIB in early 2006 to head up direct investing. We were at the Rogers Cup together in August and at that time, CPPIB was really small in terms of people. We were eating a hot dog and I said to Andre, “You know, we should think about taking Bell Canada private.” He almost choked.

It was a pretty obvious [leveraged buyout], given how frothy the markets were, given how available debt was, given the amount of cash flow the company generated. It was tricky because of the Canadian ownership rules. But the company was widely held, and any financial analyst worth their salt could have figured out taking it private would potentially generate some pretty healthy returns to the sponsor. Independently, KKR had figured that. I’m sure 100 other people had, too.

Andre Bourbonnais (Then head of principal investing at Canada Pension Plan Investment Board) The biggest deal I had ever worked on was probably not more than C$3 billion or C$4 billion. So it went from that to C$51.7 billion (US$48.5 billion). I had been warned that Mark [Wiseman] was after those big ideas. But I thought that one was too much. We were working 7 days a week, 15 hours a day. It was me and six guys—we had to put the entire team on it.

WalshBell Canada had a lot of free cash flow that lent itself to high leverage. Its fixed-line business was in a slow decline, so the investment thesis was to continue to harvest the fixed-line revenue, keep investing in the cellular phone business, and [diversify and grow from there]. When you bring the operational and financial discipline that private equity does to a huge corporation, you can create tremendous value.

SabiaWe had thought, ourselves, about taking the company private as a management buyout. The reaction we got at the time was it was too big.

HarttNot only was I involved in the deal, I dreamed up the deal! We were covering Bell and had done some work for them, including selling Telesat. We came to Michael [Sabia] and said, “There are people out there who look for companies that have billions lying around in cash, so you have to do something about it.”

He said he wanted to buy something. We came back and said the only thing you can buy is a company called Alltel, which is the third-largest cell operator in the U.S. It’s too big to buy yourself, so you’ll need to a get pension plan or someone to buy it with you. He came back and said it was a bridge too far and the board wouldn’t go for it.

Providence Equity’s Jonathan Nelson up in lights.
Source: Forbes

So I said, “Someone is going to take a run at you, Michael. Why don’t you consider getting a group together that you lead and buy it out.” Michael took it to the board.

I remember I was driving on Bloor Street and it was snowing and I couldn’t see the street signs when Michael called. He said, “Too much debt.”

I said, “If that’s the case, would you mind if I took it to someone else?” He said, “No, go ahead.” I think he was thinking that his theory would be confirmed and mine would be slapped down. So I went to see Leech.

LeechOur view was that the company was under-managed. The biggest thing was to put a management team in place that understood the business, get customer service right, and take out costs, because their cost structure was very high.

WalshThere’d been a paradigm shift in private equity with the surge in big deals, and part of my job was elephant hunting. I identified BCE as a potential take-private candidate, but when I spoke to our telecom team, they said: “This can’t be done! It’s too big. You can’t raise the financing.”

I wasn’t deterred. I put together a pitch book. The company was a crown jewel, and I realized that under Canadian law, you had to have a major Canadian investor in there. There were only one or two candidates, and Ontario Teachers’ [Pension Plan] already owned a sizeable stake.

We first went to Canada Pension Plan. Unbeknownst to me, they were already working on it with KKR. Also unbeknownst to me, Ontario Teachers’ and Providence had been talking. They’d only been working with one bank at that stage—Citibank—and they brought us under the tent with them.

So we teamed up with Citibank and put together the debt deal.

November 2006
CPP’s Wiseman, KKR’s Alex Navab, and KKR Co-Founder Henry Kravis meet with Sabia about taking the company private.

WisemanAlex and I paid Sabia a visit without putting anything on the table. We didn’t put him in a position that he’d have to disclose anything to the board. Our strategy was to be friendly at all times. They did the same analysis we all did. They knew they were going to be in play at some point. When TXU got done, it was obvious Bell could get done.

SabiaThe instructions I got from the board were to go tell them it’s not on. The buyouts that were being done at the time—the leverage levels—were just very, very high. From the board’s view, there was a pretty serious question about that much leverage being put on a capital-intensive business with the requirements to build out networks

Remember, at the time, an internet connection that delivered a megabyte was considered fast. Today, that’s a joke. But there was a lot of investment needed. Our board thought we were going to put the business in a straitjacket.

March 2007
BCE says it’s not in talks, after a news report that KKR might pursue a takeover bid sends BCE shares up 6.4 percent.

SabiaThere was a leak in the Globe and Mail. It was incorrect. It said Teachers’ and KKR were getting together. Teachers’ saw that article and their conclusion was, “We gotta move, because if that’s out there, KKR must be pairing up with someone else.”

April 9, 2007
A filing indicates that Ontario Teachers’ plans to seek board seats, make a takeover bid, or otherwise influence management.

WisemanTeachers’ dropped the bomb when they filed their 13-D in April. That essentially was saying: “We’re hostile.” We would have never done that. If management and the board said, “We don’t want to do this,” we would have gone away. But that started a process, and everybody had to lawyer up and bank up. Game on.

Piling Up Debt

April-June 2007
BCE officially starts exploring alternatives and meets with multiple potential suitors.

WisemanOnce the Teachers’ thing started, the board did the right thing and said they were looking at all their alternatives. We were very active in bringing at least one other [player], if not two other players, into the process. If you want to put the company in play, fine, but we’re going to ensure there’s intense competition here, and we’re going to drive the price as high as we can get it.

HarttThe whole idea was that Teachers’ would have 51 percent and the Americans would have 49, and that was to keep the regulators happy. It later became an issue with the regulators, because if the Americans know the business and the Canadians have the money, who's really going to be making the decisions?

Providence’s expertise in telecoms is unquestioned. We made the bid, and at first it wasn’t well received. I remember Dick Currie [BCE’s chairman] wouldn’t talk to me. He was an old friend. He would pass me in a restaurant and I'd say, “Hi, Dick,” and he'd just walk right by.

LeechIt was really fierce up front, because Canada Pension and KKR had effectively stymied the auction process. They had entered into an arrangement with the company that really disadvantaged all other players. I think their bankers totally misunderstood how many equity players there were in Canada that would be prepared to participate in such a huge transaction.

An ad from the Bell Canada campaign that featured beavers Frank and Gordon.
Source: BCE

WisemanThe whole other side of this story was putting together the debt package. Ken Lewis from Bank of America came to Toronto and met with me and [CPP’s then-Chief Executive Officer] David Denison and Andre. He offered to do the whole deal.

WalshIt was a C$34 billion debt package, but that wasn’t the only challenge. We also had to do a massive hedging program, because the Canadian capital markets couldn’t absorb that quantity of debt. We had to plan on raising the majority of the debt in U.S. dollars and structure a Canadian dollar swap in the forward market. Such a huge spot FX transaction would have certainly moved the Canadian dollar.

Ron  Lloyd(CEO of Credit Suisse Canada. Helped put together the debt financing for CPPIB and KKR’s bid.) The markets were so dramatically different then. From a regulatory perspective this would be challenging for any global bank to consider today. The difference with this deal was that you had this very long regulatory tail so you were obviously going to have to hold the liability on your balance sheet”.

WalshIt was June 10, 2007, a Sunday. I was entertaining a group of friends at the French Laundry, the Napa Valley restaurant, to celebrate my wife’s 50th birthday. I was walking up the steps to go in, and I said: “I’ll just take this call.” There were about 40 accountants and lawyers and us and Citibank on it. I thought it was going to be a half-hour.

The conversation lasted more than three hours. We figured out the debt package and the hedging program, but it ruined my wife’s birthday party. One of her friends felt sorry for me and brought me out a glass of wine. Afterward, Leslie said to me: “How much of an a--hole do you think the serving staff in this restaurant thinks you are, that you brought me here and never showed up?”

The Thrill of Victory

June 2007
The CPP and Teachers’ groups submit their bids. On the 30th, the Teachers’ group agrees to buy BCE for C$51.7 billion (US$48.5 billion at the time), including debt, in the largest leveraged buyout ever.

WisemanWe did a ton of due diligence in a short period of time. We had a million advisers and umpteen discussions. We bid C$40 a share flat, and Teachers' and Providence bid C$42.25. The bankers did a good job, because they convinced them that we were basically tied and they upped their bid by 50 cents, to C$42.75.

We never heard anything. I remember sitting by my phone for 24 hours. It was horrific. We knew we’d lost. In these processes, no one calls you to tell you you lost until the other side signs.

LeechTo put our group into a position to make a bid, Teachers’ stepped up and said we would underwrite 60 percent of it with the intention of selling down, post-transaction. We were starting to work on that.

But by the time we got into that, the financial markets were crumbling. Our druthers was not to be that big. But we were prepared to do it, and we stood up and underwrote it. That’s what made our consortium viable.

WalshBob Greenhill was advising BCE’s board. I think he was the one who told the sponsors that if they upped their bid by 50 cents, the deal was theirs. I heard that when Greenhill went back to the board and said he'd gotten it, there was a round of applause.

For us, it was pure, raw excitement. People were elated when it was announced that our clients had won. The sheer size of the deal itself was amazing, but even more so, the fact that everybody said it couldn’t get done.

HarttOnce they determined that we were friends, they worked very hard on trying to make it happen. I don’t remember Dick Currie ever saying hello to me after that. But it didn’t matter.

We hired a really good government relations guy named John Capobianco, who advanced our case that 51 percent for Teachers’ and 49 for Providence and Madison Dearborn was not American control.

I went to the July 4th celebrations at the American Embassy. It was a rainy day, and I remember being under a tent. The then-leader of the Liberal Party, Stephane Dion, came up to me and said that the principles of the Competition Act should be far more important than worrying about whether 51 percent is or isn’t control.

I don’t know if he knew who the hell I was. I don’t think he knew Citigroup had this role. I looked at him and said, “Mr. Leader, I agree with you completely.” I thought to myself: “This guy Capobianco did a good job. The leader of the opposition is telling me my own story as if it’s his.”

Market Tremors

July 2007-early 2008
In July, two Bear Stearns hedge funds that bet heavily on mortgage securities fail. By August, credit markets are in retreat, making it harder to finance leveraged buyouts. In the new year, the spreading credit crunch takes a worsening toll on banks, triggering write-downs on buyout loans the banks can't offload.

SabiaThrough that spring, it was clear the debt markets were starting to crack. Nobody knew at the time just how rocky they were going to get. Goldman [Sachs]’s advice to our board was, “You gotta go quickly.”

BourbonnaisI don’t think people realized the implication of [Bear Stearns funds]. We had a debt package where 81 percent of the financing for the transaction was coming from the banks. Throughout this transaction, I thought the whole thing was a little too much. But you sort of drink the Kool-Aid. You look at your model. You tweak it here and there and at the end, it makes sense. There was no hesitation on the part of those banks.

LeechI don’t think any of us anticipated that various banks would fail and others would be put under government trusteeship such that they wouldn’t be able to make good on their commitments. We knew this was large and we were pushing the limit.

WalshThe market started to get squeaky in August 2007, as debt prices started to trade off. I wouldn’t say anyone was ringing huge alarm bells at that time, although there was mild anxiety. I was probably in denial for the first six months. I didn’t want this amazing deal to fall apart, but then reality hit me.

It started to become apparent that if this went to the finish line, the banks would probably be selling the debt at a discount. I was also very aware of our contractual commitment to follow through. The only thing we could realistically work towards was an improvement in the terms and a slight increase in the coupon.

Hartt The trouble was the bond market fell out of bed totally, and the cost of financing skyrocketed. According to our model, the debt was financeable, even in the large amounts required to be raised. It became totally unfinanceable.

LeechAt the end of the day, what killed the deal was time. It’s easy to blame it on the financial crisis, but the deal should have closed far more expeditiously—and it would have, had it not been for [Canadian regulators’] intervention. It was on the bedpost too long. It got stale.

March 2008
BCE reports a C$850 million pension deficit at the end of 2007, a shortfall that will grow to C$2.1 billion a year later.

WalshI had run Deutsche Bank’s Canadian operations for two years, and I was aware that when a Canadian company is sold, any pension plan deficit has to be made whole so that employees aren’t hurt. This was the first time I thought the deal may not happen.

The Collapse

July 2008
BCE and Teachers’ announce an amended agreement. The deal now requires a positive solvency opinion from auditor KPMG. In September, U.S. investment bank Lehman Brothers succumbs to the biggest bankruptcy filing ever. On Dec. 10, Teachers’ will tell BCE it plans to terminate the agreement.

WalshI took a call one night. The private equity guys proposed a very different transaction, with around C$10 billion of bank debt that would be investment-grade. The sponsors would buy a minority stake in BCE, which would stay public, and BCE would pay existing shareholders a substantial dividend.

The proposal to the banks was: “You will reduce your debt exposure and avoid the risk of having to sell the debt at a discount.” They suggested this was an attractive solution for all parties. I agreed, but I’d already formed the opinion that the deal probably couldn’t close, because KPMG would not issue a favorable solvency opinion due to the pension plan deficit. The KPMG decision was expected to be released late in the evening, so we decided to wait for the announcement at the Full Shilling bar on Pearl Street.

WisemanHindsight is 20-20. As it turns out, the company could have easily supported the debt, given its outperformance. What’s missed in the middle of this is that [KPMG’s] Susan Glass helped save Citibank. If she had gone the other way on her going-concern opinion, Citi would have been on the hook for at least C$20 billion in the middle of the financial crisis. Could you imagine the loss they would have taken in trying to place that debt?


SabiaThis deal is a window into the thought processes that eventually caused the financial crisis. It’s a nice, little—well, not little—vignette about how a lot of folks in the financial sector [thought] about what risk meant, what leverage meant. People thought that leverage was a completely benign thing. They were wrong then and they’ve been proven to be wrong, and they’re still wrong.

LloydThis was the best deal that never got done in Canadian history. For everyone. With the benefit of hindsight, I think it would have gone down as a poorly conceived transaction. There was no need for BCE to end up in the hands of Canadian pension funds. That deal, in what we all went through and the stresses that were put on the system, it would have been a disaster.

HarttThis wasn’t done just because it was there—it wasn’t like climbing Mount Everest. It was done because the right thing for the company was to protect itself against some corporate raider coming at them. It wasn't “Barbarians at the Gate.”

LeechI’ve mourned it since the day it didn’t go. I’m serious. Some of the people who worked on the deal, we’d keep on the back of an envelope a running tab of the reported earnings versus the model that we had said. And they did better than what our model said.

The company is a huge success right now, but who’s running it? It’s the management team that Teachers and Providence put together. Who’s on the board? Most of the board members are people we would have put on the board.

WisemanIt would have been a home run. It didn’t beat what we projected—it crushed what we projected. A lot of people thought it was about me versus Jim [Leech], because we’d worked together at Teachers’. But behind the scenes Jim and I went out for beers. I was at his 60th birthday party. BCE at the time had those really annoying beaver commercials. I managed to find a stuffed one of those beavers, and that’s what I gave him for his birthday.

WalshIt was the most interesting, fascinating deal that never happened that I’ve ever seen. I’d say people are wistful about it. That’s how I am. We worked like dogs on it for months on end.

There’s been a big fallout from that whole era, when private equity was on fire. One major outcome is that it gave limited partners, the people who put up the money to fund buyouts, greater influence over private equity sponsors. What they effectively said was: “We’re not in favor of these big consortium deals with multiple sponsors anymore.” That’s substantially still true today, and deal sizes have shrunk.

But big deals are fun! I’m rooting for a return of the elephant deal.

Corrects the spelling of Dick Currie’s name in the Piling Up Debt and The Thrill of Victory sections.