Crunch time looms for BCE board (gam)
BCE shareholders are about to find out whether the company's directors can wield a weapon as deftly as a rubber stamp.
In the coming days, management will probably present the board with some kind of a plan on BCE's catastrophic Teleglobe unit. Speculation abounds, but the general consensus seems to be that Teleglobe's bondholders will be offered some compensation, although at a steep discount to face value.
A good possibility is that BCE will offer to exchange the $1.2-billion (U.S.) worth of debentures for BCE debt, but at a discount -- say, 50 cents on the dollar, for the sake of argument. That means BCE would issue $600-million worth of bonds -- backed by corporate assets, not just Teleglobe. BCE filed a shelf prospectus in March that would allow it to issue $1-billion in medium-term notes. Traditionally, according to debt watchers, BCE doesn't take on debt at the holding-company level. Rather, its subsidiaries -- Bell Canada for instance -- issue the debt. The inquiring mind reasonably connects the dots between the shelf and Teleglobe.
The debenture holders, of course, would have to agree to the deal, but with the debt trading at 20 cents or so on the dollar, why wouldn't they? That would leave the bank debt -- another $1.3-billion due in July. The banks are understandably not eager to roll it over. They want out. But who has more leverage in this dust up? Borrowers need creditors. But creditors need customers, and they don't come much better than BCE in this country. Banks might threaten to take their telecom business elsewhere, but BCE can threaten to take its debt business elsewhere too. It's not clear who has the upper hand.
A deal on the debentures -- which cleans up Teleglobe's finances -- and a few other concessions might persuade the banks to roll, if reluctantly. The alternative, assuming the bond holders are partially covered, is that the banks get the same treatment.
Hopefully, the board won't allow the situation to get that far. Consider the implications of the debt swap. In essence, it's tantamount to a capital injection into Teleglobe. It also implies that BCE will keep the company going. After all, how could it compensate creditors who have no recourse to the parent company, and then promptly shut the unit down? Investors would be outraged. BCE says the unit -- whose cash flow has dropped 63 per cent since 1999 -- will be free cash flow break-even next year. That's not remotely likely, and most analysts seriously doubt it will ever pay off adequately, if at all. There's simply too much capacity, and Teleglobe is burdened by competitive disadvantages.
BCE has invested $10-billion (Canadian) in Teleglobe so far. Keeping it going means more capital requirements from BCE, which according to many analysts would only postpone the inevitable.
The pressure on CEO Jean Monty to preserve his good standing in the credit markets is obviously enormous.
The pressure is on the board to act in the interests of shareholders, even if that's to the detriment of management. Teleglobe should be shut down.
Corporate governance sounds nice and neat in theory -- in practice, it's messier, especially in BCE's case.
Mr. Monty chairs the BCE board, and BCE directors are also directors of subsidiaries such as Teleglobe, points out J. Richard Finlay of the Centre for Corporate & Public Governance. "BCE's board has always accorded tremendous deference to management."
Investors hope this time is different.
vox@globeandmail.ca |
