Actividad 10.2 BCE Inc.

The biggest
corporate buyout that never happened

IMPORTANCE OF
FINANCIAL ANALYSIS
Leveraged buyouts are best suited to mature, stable, non-cyclical,
predictable companies.

As a business strapped with a lot of debt, it's crucial that cash flows
are predictable, with high margins and low capital expenditures.
This steady cash flow is what enables the company to pay off its
debt.

An LBO analysis begins with the development of a standalone

financial model for the operating company. Calculating a terminal
value for the final period involves building a forecast five years in the
future (on average).

LEVERAGE IMPACT

The leverage effect shows the effect of debt upon the return on
equity. The leverage effect upon projects can be negative or positive.

BCE was planned to be financed, for the $52 billion needed for the
deal, with a debt of $34 Billion. Borrowers wanted debt to be
covered with the assets, even if it was needed to sell them below
market value, that instituted the solvency clause. Therefore, the
higher the leverage, the higher the risk to default and not cover the
debt with the assets. The solution, reducing the leverage and
augmenting the amount of equity in the deal.

CREDIT RATINGS

The debt used to buy BCE was “investment grade” or rated as “triple-
B (low)” according to the Canadian debt rating agency DBRS.

BCE had a bad credit rating and a low post-transaction solvency

which was said to be based on assumptions and bad calculations.

A credit rating determines not only whether or not a borrower will

be approved for a loan but also the interest rate at which the loan
will need to be repaid, the better the rating, the better the
conditions of the debt.

MAXIMIZING SHAREHOLDER VALUE

BCE had suspended twice its share quarterly dividend, because of

this, shareholders were asking for the reinstatement of the dividend
and at a higher price to compensate for the previous suspensions of
the dividends.

BCE incorporated changes within the company in favour of

shareholder wealth maximization in terms of the control context. It´s
important to give the shareholders value since they´re the voice and
backup of the company.

ECONOMIC FACTORS

BCE had navigated the deal through a global economic and financial
crisis, which had caused the complete demise or near collapse of
some of the largest financial services institutions.

DIVIDEND POLICY

In the scenario where a deal was not made, BCE executive team
would have to think about how to recover the costs associated with
the planned LBO. Along with cutting workforce, BCE would have to
go a little bit further in order to recover the lost money, and it could
mean cutting or even suspending dividends that their investors so
much wanted.

Elizabeth Alvarez Partida A01632860

Lilian Méndez Bolaños Cacho A01706015
Matías Michelena A01702062
Eduardo Herrera A01701706
Eliot Bustillos A01700479