Bell Canada Bombshell Hits Hedge Funds

Date: Thursday, November 27, 2008
Author: Zachery Kouwe, The New York Times

Some event-driven hedge funds won’t have much to be thankful for tomorrow. Wednesday’s news that Bell Canada’s $50 billion leveraged buyout — the largest in history — is in jeopardy will likely hammer several big funds that were gaining confidence the deal would close on Dec. 11.

Among the big names that owned Bell Canada shares are hedge funds Paulson & Company, D.E. Shaw and S.A.C. Capital. An arbitrage fund run by BNP Paribas also held about $129 million worth of Bell Canada stock at the end of September, according to public filings.

Other funds that held a substantial amount of shares as of Sept. 30 included Chesapeake Partners, Mason Capital Management, York Capital Management and Highbridge Capital Management.

Bell Canada shares were down as much as 40 percent in premarket trading after the telecom giant said Wednesday that a preliminary report by the auditor KPMG found that “given current market conditions,” it would not remain solvent once it took on the $33 billion in debt needed to take it private.

Providence Equity Partners, Madison Dearborn Partners, the Ontario Teachers Pension Plan and Merrill Lynch agreed to buy Bell Canada last year for $42.75 Canadian dollars a share.

A failure of the Bell Canada deal would be the latest in a string of hits this year for hedge funds that bet on takeover deals. Across the globe, 297 deals were shelved in the third quarter, according to Dealogic.

As early as last week, investors were snapping up shares of Bell Canada, narrowing the gap between the stock price and takeover price to less than 10 percent. That gap was once as wide as 30 percent as investors grew fearful of deals falling apart.

Confidence that Bell Canada would close on time was bolstered last week after Providence Equity and Madison Dearborn made “capital calls” to their investors, signaling they were readying their checks to finance the deal. The government’s bailout of Citigroup, one of the lead lenders on the deal, also reassured investors that the deal would close.

– Zachery Kouwe