MONTREAL – Shares in Canadian telephone giant BCE Inc. (NYSE: BCE) plunged on news that the company’s sale to Providence Equity Partners Inc., Ontario Teachers’ Pension Plan and Madison Dearborn Partners LLC might collapse.

The sale was intended to transform BCE – Canada’s most widely-held stock and parent of that nation’s largest phone company, Bell Canada – into a private company.

The cash-and-debt deal initially was valued at about $48.9 billion, which would have made it the largest leveraged buyout ever. Since then, changes in transaction terms and currency exchange rates have pared its value to $42 billion, which would make it the second-largest buyout worldwide, behind only last year’s $43.2 billion takeover of energy producer TXU Corp. by KKR & Co. LP and TPG Inc., Bloomberg News reported.

The on-again off-again transaction – announced in July 2007 – received tentative approval from Canadian regulators this April. BCE bondholders then sued to block the transaction, arguing that it would dangerously increase the telephone company’s debt. They were briefly successful. (READ MORE)

In June, the Supreme Court of Canada overturned that lower-court decision, allowing the sale to proceed. By then, however, the banks backing the deal – led by Citigroup Inc. and Deutsche Bank AG, and also including Royal Bank of Scotland plc (parent of Citizens Financial Group Inc.) and Toronto-Dominion Bank – were seeking to re-negotiate the buyers’ planned borrowing. (READ MORE)

Those financing issues eventually were resolved. But then, auditor KPMG concluded that – as the bondholders had contended – the deal involved too much debt.

The transaction would leave BCE with $39 billion in new and existing debt, putting the company in violation of solvency standards laid out in the acquisition agreement, the auditor said. Unless KPMG reverses itself, the transaction will not close as planned on Dec. 11, BCE said in a statement today.

“The chances of any deal getting done are very low now,” Sachin Shah, a merger arbitrage analyst with ICAP Corporates LLC in Jersey City, N.J., told Bloomberg News. But that’s not all bad, added Michael Smedley, of Morgan Meighen & Associates in Toronto: “In the short term it spells agony to individual [BCE] shareholders,” Smedley said. “In the long term, the company can progress under its current capable management.”

In New York trading today, BCE shares lost $10.65, or 34.05 percent to close at $20.63 – a 40.75-percent discount on the investors’ offer price of $42.75 Canadian, or about $34.82 at the current rate of exchange. Shares in Citigroup and other lenders rose today, however, because the deal’s failure would spare the cash-hungry institutions from having to fund the multibillion-dollar deal amid a global credit freeze.

Providence Equity Partners Inc. is a global private investment firm – based in Providence, with offices in Los Angeles, New York City, London, Hong Kong and New Delhi – that has about $22 billion in equity commitments. The firm has invested in more than 100 companies, operating in nearly two dozen nations, since its founding in 1989. Additional information is available at www.provequity.com.