Agencies Opine on Telus / BCE

As briefly noted yesterday, Telus has thrown its hat in the BCE takeover ring:

“TELUS believes the combination of the two businesses would represent a compelling strategic and financial opportunity for all BCE and TELUS stakeholders. It would be an all Canadian solution for both immediate and long-term value creation, whilst ensuring a vibrant player continues in this increasingly competitive industry,” said Darren Entwistle, President and CEO, TELUS. “TELUS has a unique opportunity to create a truly national Canadian enterprise with the requisite balance sheet strength as well as scale and scope to continue TELUS’ development as a global leader in the deployment of state of the art technology and innovative new services for customers.”

S&P has placed Telus on Credit Watch Negative:

Standard & Poor’s Ratings Services today said it placed its ratings, including the ‘BBB+’ long-term corporate credit rating, on Vancouver, B.C.-based communication services provider Telus Corp. on CreditWatch with negative implications.The action reflects the company’s announcement that it has entered into nonexclusive discussions to acquire BCE Inc. (A-/Watch Neg/A-2). We expect the transaction, if completed, will be funded by a combination of Telus’ shares and new debt, which would lead to pro forma debt leverage (including operating synergies) and corresponding credit metrics that would weaken the current “modest” levels. However, Telus’ management has publicly indicated its desire to maintain investment-grade ratings.

… while DBRS takes a more relaxed view:

DBRS has today placed the A (low)/R-1 (low) ratings of TELUS Corporation (TELUS or the Company) and the A (low) rating of TELUS Communications Inc. Under Review with Developing Implications. This follows the Company’s announcement that it has entered into an agreement with BCE Inc. (BCE) to discuss a possible business combination.DBRS notes that TELUS has put forth some compelling arguments for such a combination. These include significant synergies; a combined entity that would retain investment-grade ratings; a Canadian investment vehicle; and the potential for a tax deferral for BCE shareholders

Oddly, neither agency considered the campaign for par redemption worthy of ink!  

So, let’s think about S&P: the BCE credit rating A-/Watch Neg/A-2, while the Preferred Stock is P-2/Watch Neg/– on the Canadian scale, while the Telus credit rating is BBB+/Watch Neg/NR with no preferred share rating (since it has no preferreds). Therefore, if Telus becomes responsible for the BCE preferreds while at the same time being downgraded, a very major downgrade to the preferred share rating may be expected.

The situation is not quite so clear with DBRS: BCE’s unsecured debentures are A(low) and preferred stock Pfd-2(low), both on Review-Negative, and Telus is now also A(low), Review-Negative, but it still doesn’t look all that rosy for a continued Pfd-2(low) rating on the prefs.

Barring an all-stock transaction (or cash with an equity issue immediately thereafter, netting to the same thing) it would appear that the preferreds are at high risk of being downgraded … the same as current expectations have it given a private equity deal. So … not much comfort here, at least as far as preferred shareholders are concerned!

BCE has the following preferred shares outstanding: BCE.PR.A, BCE.PR.C, BCE.PR.E, BCE.PR.F, BCE.PR.G, BCE.PR.H, BCE.PR.I, BCE.PR.R, BCE.PR.S, BCE.PR.T, BCE.PR.Y & BCE.PR.Z

One Response to “Agencies Opine on Telus / BCE”

  1. […] I continue to think that BCE prefs are a crapshoot on credit right now and don’t want anything to do with them! There are, as yet, no words of wisdom from the ratings agencies. […]

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