On Wednesday the company announced its auditor, KPMG, gave the telecom giant a "preliminary view" that it "does not expect to be in a position to deliver ... Dec. 11 .. an opinion that BCE would meet the solvency tests" required as a condition of the deal.
Bell Canada is the incumbent telecom carrier in the provinces of Quebec and Ontario, which together comprise more than half the population of Canada.
The companies planning to buy BCE -- Ontario Teachers' Pension Plan, Providence Equity Partners Inc., Madison Dearborn Partners, LLC and Merrill Lynch Global Private Equity -- will need to spend about C$50 billion (US$40.5 billion) to purchase all outstanding shares of firm, in a deal initially announced in June, 2007.
Four banks -- Toronto-Dominion, Deutsche Bank, Citigroup and Royal Bank of Scotland -- agreed last June to provide US$30 billion in loans so the consortium could purchase each BCE share for $42.75.
As of Wednesday morning, none of the banks or potential buyers have announced plans to back out of the agreement.
Some pundits had their doubts when Citigroup Inc. announced it was laying off 50,000 workers but the U.S. government announced this week it would buy $20 billion worth of preferred shares.
The U.S. Treasury Department, along with the Federal Deposit Insurance Corporation, also said they would "provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets ..."
The announcement was part of the Troubled Asset Relief Program (TARP), which was started in October. TARP was a by-product of the U.S. Emergency Economic Stabilization Act, which was initially intended to give the government authority to buy mortgages but then expanded into a program to buy bank shares.
Despite news that auditor KPMG is uncertain about BCE's solvency, a Toronto-based analyst says this doesn't mean the deal will not go through.
"There's still strong interest in getting the deal done, " said Eamon Hoey, senior partner at Toronto-based telecom consultancy Hoey Associates.
But he added KPMG would have to evaluate the company's ability to pay off existing debt, plus service its defined-benefit pensions.
"The way these pension funds work is you have to maintain a certain amount of capital in order to service the debt in the future," Hoey said. "The way you operate these pension funds is you make investments in other stocks, you may buy some bonds from the Government of Canada."
He added if the value of these securities drops, then regulators will tell BCE to top of its contributions to the pension funds.
In its third-quarter financial report, the company stated it "may be required" to increase contributions to its defined benefit pension plans, "depending on future returns on pension plan assets, long-term interest rates and changes in pension regulations, which may have a negative effect on our liquidity and results of operations."
The company also has nearly $10 billion in long-term debt.
Over the past two months, the S&P/TSX composite index has dropped from about 13,000 to 8,395. Durin the same period, the Dow Jones Industrial Average plummeted from 4,000 to 3,018 while the S&P 500 dipped from 1,255 to 752.
In a report released Tuesday, Economic Outlook No. 84, the Organization for Economic Cooperation and Development predicted the gross domestic product of its 30 member nations (which include Canada, the U.S., Britain, Germany and Japan) would decrease by 1.4 per cent during the fourth quarter of 2008 and 0.4 per cent in 2009. The OECD forecasts two consecutive quarters of contraction during the first half of 2009, followed by growth.
"When KPGM looked at it within the current environment, this mega burn down that we have going on, they had to point out there's an obligation there," Hoey said. "It's not a discussion about opportunities, it's a discussion about risk."
KPMG refused to comment.
"Because of our professional obligation to maintain confidentiality concerning the affairs of our clients, KPMG cannot make any public comment on this situation," a spokesperson for the auditor said in an e-mail to Network World Canada.
Hoey said whether or not the deal goes through, the appointment of former Telus Mobility head George Cope last summer as BCE's CEO had a noticeable effect.
"It did provide Bell with a real opportunity to clean out management team and focussing on the customer rather than talking about doing it," Hoey said. "Some customers I talk to say they're getting a lot more attention from Bell these days and far better service than they have in the past, so that's good news."