Shares in Bell Canada tumbled Thursday after a court ruled that its $35 billion sale to the Ontario Teachers Pension fund and others was unfair to bondholders.
The Quebec Court of Appeal sided Wednesday evening with debt holders of BCE Inc., also known as Bell Canada, reversing a lower-court decision.
The latest ruling threatens the largest leveraged buyout in history.
BCE is appealing to the Supreme Court of Canada and hopes to get a hearing before a June 30 deadline to complete the transaction.
Its shares fell $4.73, or 12.5 percent, to $33.10 on the New York Stock Exchange.
Bondholders want to block the sale of Canada's largest telecom company because they say the deal loads the corporation with debt and makes the bonds much riskier.
Shareholders overwhelmingly approved the buyout group's offer of 42.75 Canadian ($43.12) per share in September.
Despite the ruling, the pension fund said it remains committed to the deal.
"We're reviewing the ruling and evaluating our options with respect to the bondholder claims," Ontario Teachers Pension Fund spokeswoman Deborah Allan said in an e-mail.
The buyout group also includes Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity as well as Toronto-Dominion Bank.
Martine Turcotte, chief legal officer of BCE, said the judgment rewrites Canadian law covering the duty of boards to maximize shareholder value. BCE is confident the Supreme Court will reverse the decision.
Mark Meland, one of the lead lawyers for bondholders, said his clients were pleased.
"We always believed we had a good case," he said in a statement.
Shares of BCE fell earlier in the week on reports that the banks funding buyout _ including Citigroup Inc., Deutsche Bank AG and Royal Bank of Scotland Group PLC _ were looking to amend financing because of uncertainty over the deal.
Speculation that the value of the deal could fall grew after the price to take U.S. radio industry giant Clear Channel Communications Inc. private was reduced last week by about 8 percent, to $17.9 billion.
The Toronto-based Ontario Teachers Pension Plan _ with assets of 108 billion Canadian dollars in 2007 _ invests and administers the retirement funds for Ontario's 353,000 active, inactive, and retired teachers.
Bell Canada, which has more than 54,000 employees, had annual revenue of 17.8 billion Canadian in 2007. It had 5.8 million wireless subscribers, 8.64 million phone lines, 1.94 million internet subscribers and 1.82 million satellite television subscribers in 2006.
The deal was agreed to last June, just days before credit markets began to unravel in North America.
The group led by the Ontario Teachers Pension Plan beat out several other bidders including New York-based Cerberus Capital Management LP with billionaire Hong Kong-based Canadian citizen Richard Li's Pacific Century Group, and the Canada Pension Plan Investment Board with backing from American buyout firm Kohlberg Kravis Roberts & Co.
David Denison, the chief executive of the Canada Pension Plan Investment Board, said they would not be interested if BCE became available again. He said it would be impossible in this credit environment.
"It's just not even feasible. We make sure we're focused on things that are possible," Denison said.
"The world has changed dramatically since June, 2007," he added. "The ability to do a leveraged buyout on that scale or anywhere close to the scale in today's environment is just impossible. It was the last big leveraged buyout that was announced and there's been nothing anywhere near that scale since, and that's because financing markets are not there to support a transaction of that size and scale."
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