Once upon a time, BCE (NYSE: BCE, TSX: BCE) reluctantly assumed the lead role in the largest potential income trust conversion ever. Now, in a demonstration of ubiquity redolent of Woody Allen’s Zelig, it’s the star of the biggest potential leveraged buyout (LBO) in history.

In December 2005, responding to a shareholder proposal to consider conversion, BCE CEO Michael Sabia said the trust format wouldn’t serve the best interests of the company, citing competition, the pace of technological change and the capital intensity of the telecommunications business.

But on Sept. 11, 2006, chief rival Telus Corp (NYSE: TU, TSX: T) declared it would turn into an income trust. A month later, on Oct. 11, 2006, BCE announced its intention to convert into an income trust. BCE essentially admitted it had no choice in the wake of Telus’ announcement, noting at the time that Bell Canada Income Fund “is designed to create value for shareholders through increased cash distributions and to ensure there will continue to be competitive parity in the capital markets within the telecom sector.”

BCE as an income trust—much like BCE, the company--wasn’t as compelling an investment story as a Telus trust. Bell Canada, the company’s operating arm, had been (and still is) losing traditional residential customers to cable firms offering Internet phone service at a fast rate, and it lagged (and still is) in wireless phone service.

Those questions became moot on Oct. 31, 2006.

Sabia’s efforts to “maximize shareholder value,” crystallized in a strategic review announced April 17, 2007, turned to a potential merger with Telus. Those discussions died June 27, 2007, when Telus executives withdrew from the BCE bidding, citing “inadequacies of BCE’s bid process.”

A couple days later, BCE accepted a CAD42.75-per-share, all-cash bid from Teachers’ Private Capital, the Ontario Teachers’ Pension Plan’s private investment firm, and US-based private equity firms Providence Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity. The offer values BCE at CAD52 billion.

In late May, a Canadian court of appeals ruled that BCE hadn’t properly considered its bondholders’ interests when it accepted the buyout offer. Last week, Canada’s Supreme Court overturned that decision—which could have relieved the bank lenders of their commitments to finance the deal—and said the deal could proceed. Final regulatory approvals came Monday, and now it’s a matter of negotiation.

Now, the four main banks financing the deal—the latest “Biggest LBO in History”—are negotiating to change the terms of the deal in their favor, reports the Financial Times.

The takeover was scheduled to be completed by the end of this month, but the private equity buyers and the banks are locked in “intense” talks over financing terms.  

Reuters reported yesterday that people close to the negotiations have said the banks funding the deal—Citigroup (NYSE: C), Deutsche Bank (NYSE: DB), Royal Bank of Scotland (NYSE: RBS, RBS) and Toronto-Dominion Bank (NYSE: TD, TSX: TD, TD)—have asked for significant financial concessions, including the addition of safeguards on the debt agreements or more lucrative terms on lending the money. The banks also have actively considered walking away from the deal.

A lot’s changed in the 12 months since BCE accepted the CAD42.75-per-share offer, and the banks are pushing for a range of concessions that could make their financing commitments more palatable in a difficult market. Those could involve the rate at which the banks agree to lend, the amount of equity the buyers would invest or lending covenants to which BCE could be subjected.

Three of the four banks—Citigroup, Deutsche Bank and RBS—were involved in the public relations nightmare that became the deal to buy broadcaster Clear Channel Communications (NYSE: CCU). The Clear Channel deal was later renegotiated--at a lower price and with higher interest rates.

Citigroup, Deutsche Bank, RBS and TD issued a statement Friday affirming their interest in completing the deal, but similar statements were made in the Clear Channel transaction.

BCE is still trading well below the CAD42.75-per-share offer, reflecting investor uncertainty whether the deal will be consummated at that price. Canada’s Supreme Court removed one hurdle, but the buyout consortium still must come to terms with the banks providing the CAD32 billion in debt financing.

But those details seem irrelevant in light of the fact that, during 2006 and 2007, Rogers Communications (NYSE: RCI, TSX: RCI.B) added nearly 1.2 million new wireless subscribers, Telus gained 1.05 million and Bell Canada added just 775,000. And the numbers could get worse in the next couple years: Rogers gets to sell Apple’s (NSDQ: AAPL) iPhone, but Telus and Bell Canada can’t. And BCE continues to lose home-phone customers—a growing problem for Telus, too.

The possibilities appear to break down as follows. It’s likely that, if the LBO is consummated, it’ll happen at a lower share price. Should negotiations break down (and skipping over the part about the inevitable lawsuits), a consolidated telecommunications space (once credit conditions settle) may include BCE/Telus redux. And a bolder move, suggested by Dan Fuss of Loomis Sayles Bond Fund, would be for BCE to partner up with a US-based telecom such as Qwest Communications (NYSE: Q).

However it finally plays out, Ontario Teachers’—which holds a 6 percent stake in BCE, the largest position in its CAD108 billion fund—and its backers may look back at the Supreme Court decision as a Pyrrhic victory.

Speaking Engagements

“The coldest winter I ever spent was a summer in San Francisco,” a saying that’s almost a San Francisco cliche, turns out to be an invention of unknown origin, the coolest thing Mark Twain never said.

The natural setting is, however, among the most exciting in the US. Venture west for the San Francisco Money Show Aug. 7-10, 2008, and conduct your own field study.

Neil George, Elliott Gue and I will discuss infrastructure, partnerships, utilities, resources and energy, and tell you what to buy and what to sell in 2008.

Click here or call 800-970-4355 and refer to priority code 011362 to attend as our guest.

I also have a special invitation for readers to join me and my colleagues Elliott Gue, Gregg Early and Neil George aboard an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please call 800-832-2330.