TORONTO - THE largest leveraged buyout in history is unlikely to close after Canadian telecom company BCE said on Wednesday a preliminary review has found the proposed US$35 billion (S$53 billion) privatisation deal may not meet solvency requirements.

BCE, the parent of Bell Canada, is being privatised by an investment group led by the Ontario Teachers Pension Plan Board and several US partners.

The deal, which had been set to close on Dec 11, would also be the biggest takeover in Canadian history.

A review by accounting firm KPMG found that BCE would not meet the solvency tests of the privatisation agreement, partly due to the amount of debt involved in the transaction and current market conditions, BCE said. The company must meet the solvency requirements for the acquisition to be completed.

BCE spokesman Mark Langton said if KPMG doesn't change its mind, the deal is unlikely to proceed because it is a condition of closing.

'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.'

'The company disagrees that the addition of the (leveraged buyout) debt would result in BCE not meeting the technical solvency definition,' BCE Chief Financial Officer Siim Vanaselja said in a statement.

BCE said it is working with KPMG and the proposed buyers to meet the closing requirements.

Shareholders overwhelmingly approved the buyout group's offer of C$42.75 per share (S$52.40) in September of 2007.

The deal was agreed to in June 2007, just before credit markets began to unravel in North America.

US-listed shares of BCE plunged US$11.40, or 36.5 per cent, to US$19.88 in midday trading. The stock has ranged from US$25 to $40.44 over the past year.

If the deal doesn't proceed, the banks that agreed to finance the deal would be off the hook for what could have been billions of losses.

Citigroup is directly on the hook for at least US$11 billion of the US$35 billion in loans backing the deal.

The Royal Bank of Scotland, Toronto-Dominion Bank and Deutsche Bank were to provide the rest. The inability for the banks to sell the debt in debt markets could have meant billions of losses for the banks.

Some analysts speculated the banks would try to get out of the deal because of the credit crisis. A spokesman for Citigroup didn't immediately return a message seeking comment.

Mr Jeffrey Fan, an analyst with UBS, said in a report that an underfunded pension at BCE might have been one of the reasons for KPMG's decision.

Mr Michael Hlinka, an independent financial analyst and business commentator with CBC radio, said the economic outlook looks fundamentally different than when the deal was agreed to in 2007.

US-listed shares of Telus, one of BCE's competitor's in Canada, have fallen below US$28 from a high of over US$61 in June 2007.

'When the deal was originally struck the valuations for all publicly traded companies was fundamentally different than what it is now,' Mr Hlinka said.

'I would be stunned if it goes ahead at this point. The market is voting with its feet right now about the likelihood of the deal. This was supposed to close in two weeks. The financiers are breathing a huge sigh of relief and I think they are in no hurry to come back and get this deal done.'

Mr Hlinka said it would have taken 'a miracle' for the banks to sell the debt in debt markets.

'Citigroup, for all intents and purposes, is a liability of the US taxpayer. The Royal Bank of Scotland, for all intents and purposes, is a liability of the taxpayers of Great Britain. It's so bizarre that its come to this but it has,'Mr Hlinka said.

The Toronto-based Ontario Teachers' Pension Plan - with assets of US$85 billion in 2007 - invests and administers the retirement funds for Ontario's 353,000 active, inactive, and retired teachers. US-based Providence Equity Partners and Madison Dearborn Partners LLC are also involved in the proposed buyout. Teachers' spokesman Deborah Allan declined to comment.

BCE, which has more than 54,000 employees, had annual revenue of US$14.1 billion) in 2007. It had 5.8 million wireless subscribers, 8.64 million phone lines, 1.94 million Internet subscribers and 1.82 million satellite television subscribers in 2006. It is Canada's largest communications company.

New Chief Executive George Cope took over on July 11 despite the deal not closing yet. Cope has refocused the Montreal telecom operator as it faces more intense competition in its wireless and Internet data businesses.

Mr Langton couldn't say what a failed deal would mean for Cope and the new management.

Mr Randal Rudniski, an analyst with Credit Suisse, said in a report that if the deal doesn't close he expects BCE to reinstate its dividend and buy back stock.

The deal has been in some doubt for a year for a variety of reasons, including the credit crisis and because a court ruling temporally put it in jeopardy.

Earlier this year, Canada's Supreme Court overturned a lower court ruling that said the sale of BCE didn't adequately consider bondholders' interests.

Canadian regulators also ordered some of aspects of the deal to change. BCE, the buyers and the banks also re-negotiated the deal in July so that the dividend would be eliminated and the close would be put off until December. -- AP