TORONTO (AP) — The largest leveraged buyout in history is officially dead.

Arguments over a billion-dollar break fee have erupted after an investment group said an audit found its proposed $35 billion deal to take Canadian telecom company BCE Inc. private did not meet solvency requirements.

A group led by the Ontario Teachers Pension Plan Board and several US partners had expected to complete its deal for BCE, the parent of Bell Canada, on December 11. It also would have been the biggest takeover in Canadian history.

But a review by accounting firm KPMG found that BCE would not meet required solvency tests of the privatisation agreement, partly due to the amount of debt involved in the transaction and current market conditions.

The buyers announced the decision early yesterday.

"Because KPMG has concluded that a required test for the solvency opinion was not met, this mutual condition to completion of the acquisition could not be, and was not, satisfied," said yesterday's statement. "Accordingly, the purchaser terminated the agreement in accordance with its terms."

Shareholders overwhelmingly approved the buyout group's offer of CA$42.75 per share in September of 2007. The stock traded down 92 Canadian cents, or four percent, to CA$22.10 in morning trading yesterday on the Toronto Stock Exchange.

BCE management had agreed to the deal in June 2007, just before credit markets began to unravel in North America.

The buyers group said in the statement that no break-up fee will be paid, but BCE said in a separate statement it will demand payment of a break-up fee of CA$1.2 billion ($970 million).

"It is very clear that neither party has a right to a termination fee in these circumstances," the buyers group said in a second statement. "Should BCE commence such baseless litigation, we are confident that it would not succeed."

The banks that agreed to finance the deal will now be off the hook for billions of loans. Citigroup was directly on the hook for at least $11 billion of the $35 billion in loans backing the deal. The Royal Bank of Scotland, Toronto-Dominion Bank and Deutsche Bank were to provide the rest. It could have meant billions of losses for the banks.

Some analysts speculated the banks would try to get out of the deal. The banks declined to comment on the dispute between BCE and the purchaser.

The Toronto-based Ontario Teachers' Pension Plan — with assets of CA$108 billion ($87 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.

BCE, which has more than 54,000 employees, had annual revenue of CA$17.8 billion ($14.4 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.