The massive $52-billion privatization of BCE Inc. has come into limbo after the telecommunications giant failed a preliminary solvency test conducted by independent auditing firm KPMG, BCE announced on Wednesday.

The takeover deal, led by the Ontario Teachers Pension Plan, was scheduled to close Dec. 11.

In a preliminary view released to BCE, KPMG said that based on current market conditions, its analysis to date and the amount of debt involved in the leveraged buyout financing, it did not expect that BCE would meet the solvency tests by the closing date.

Passing the solvency test is a condition to the closing of the deal, as defined in the definitive agreement.

One area that could be a solvency concern is BCE’s pension deficit, which some analysts say has grown drastically as deteriorating markets erode its portfolio value.

But BCE indicated that it disagrees with the analysis on more than one front.

“We are disappointed with KPMG’s preliminary view of post-transaction solvency, which is based on numerous assumptions and methodologies that we are currently reviewing,” BCE’s chief financial officer, Siim Vanaselja, said in a release.

“The company disagrees that the addition of the LBO debt would result in BCE not meeting the technical solvency definition.”

BCE is working with KPMG and the Ontario Teachers Pension Plan to meet all closing conditions. If KPMG does not deliver a “favourable opinion” by the closing date, the transaction is unlikely to proceed, BCE said.

“The delivery of the solvency opinion is a condition to the completion of the acquisition of BCE,” said Teachers Private Capital, the private investment arm of the Ontario Teachers Pension Plan, and the other purchasing parties in a statement on Wednesday.

“The purchaser has been working closely with BCE to take the actions required by the definitive agreement in connection with the transaction and will continue to fulfill its obligations under the terms of the agreement.”

George Cope, president and CEO of BCE and Bell, stressed the company’s healthy financial position. “BCE today enjoys solid investment grade credit ratings, has $2.8 billion of cash on hand, a low level of mid-term debt maturities, and continues to deliver solid operating results,” he said in BCE’s release.

A failure of the deal could have a “material impact on the company’s valuation,” according to UBS Investment Research. Considering that BCE is the most widely held stock in Canada, according to CDS Clearing and Depository Services Inc., the drop in valuation could have a hefty impact on Canadian portfolios. The stock makes up 4.26% of the S&P/TSX 60.

BCE shares closed at $38.35 on Tuesday on the TSX. The shares opened at $23.80 on Wednesday, down more than $15.

At 10:44 am Wednesday, BCE’s stock was trading at $24.32, down $14.03, or 36.58%.

The takeover deal by Teachers Private Capital, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC, was announced in June 2007.

The purchasers agreed to pay $42.75 per common share, for a total transaction value of $51.7 billion.

IE