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Msg  4888 of 57402  at  2/20/2008 6:01:46 PM  by


Trust buyouts not my fault, Flaherty says

Trust buyouts not my fault, Flaherty says
 Minister rejects criticisms new tax policy is forcing Canadian firms into
 foreign arms

TORONTO, OTTAWA, LONDON -- Income trusts are being sold at an increasing rate,  largely to foreigners and private equity players, but Finance Minister Jim Flaherty rejects the charge by critics that the Harper government's
 controversial income trust tax is in some way to blame.

 "This is not something that has to do with a particular tax policy," he said yesterday during a visit to London to promote his 2007 federal budget.

"It has to do with large pools of capital that have been accumulated and are  looking for purchases in various parts of the world."

Yesterday, KCP Income Fund revealed it is being taken out by an American private equity group for $804-million, including debt. The KCP deal marks the12th takeover that has been announced or proposed in the five months since Halloween, excluding any sales processes that were already in progress by that
 day, according to Deloitte & Touche.

 "There's no question that's an acceleration," said Andrew Dunn, the co-leader of Deloitte's trust services unit. There were nine similar announcements in the first 10 months of 2006.

 "We're going to see, in 2007, a fairly big two-digit number for sure," he added.

He has reasons to be confident about that. "We're actually working on a number  of different transactions that haven't been announced, about organizations That are exploring potential bids for income funds."

 That comment was echoed by others in the industry.

 "We know it's going to continue because we've got lots of retainers," said Mark Trachuk, a partner with Osler Hoskin & Harcourt LLP.

 Mr. Flaherty said he was aware the drive to snap up big companies comes from outside Canada.

 "We're monitoring all of these situations that involve large companies in Canada that might be the subject of private equity acquisitions," Mr. Flaherty said in an interview in London.

 "But this is something that's going on around the world."

 KCP's founder and CEO David Cynamon said it would not have put itself up for  sale if it weren't for the tax changes.

 "The process was triggered by the Halloween announcement by the government,  which forced us to look at an alternative strategic transaction of some kind knowing that there was a timeline in which not only our income trust structure  would now be taxed, but for the most part the income trust playing field would be very different," Mr. Cynamon said. The new rules would have altered the company's ability to raise equity, and changed its cash flow, he added.

 The takeovers are proof of "the unintended negative consequences" of the government's new tax on trusts, said George Kesteven, president of the Canadian Association of Income Funds. The sector predicted those consequences  when Mr. Flaherty announced the tax changes on Halloween, Mr. Kesteven added.

 Including firms already up for sale at Halloween, a total of 17 publicly traded trusts have been bought or are in the process of being bought, Sentry Select Capital Corp. portfolio manager Sandy McIntyre said in a note.

 The total value is $15.2-billion. About 45 per cent of that is foreign private equity. A further 16 per cent is foreign corporations. And there are an additional 14 business trusts, five REITs, two power funds and one oil and gas company that have announced "strategic reviews," the jargon used to say they're hunting for a buyer.

 "If 'tax fairness' was intended to accelerate the sale of Canadian companies to foreign entities, then it is a success," Mr. McIntyre wrote. "If it was intended to increase Canadian tax revenues, it is a failure."

 Access to capital has become a significant issue for trusts since the Halloween announcement, said a recent research note by Canaccord Adams.

 "Given the limited access to equity market capital for income trusts, low relative valuation, and the large amounts of low-cost capital that is available on the sidelines, we believe takeovers will continue, particularly because income trusts are cash-flowing entities which can be debt financed by the purchaser," it said.

 A source familiar with the KCP deal said all of the serious interest came from financial bidders as opposed to strategic bidders. And most were American.

 Mr. Cynamon said there are few Canadian entities with the heft to compete with  American private equity groups on a deal of this size.Before Halloween, income trusts were in a position to compete against private equity, he added. "It allowed businesses like ourselves to stay Canadian-owned, with Canadian banks and so on. And now, we can't compete with the U.S. private equity market. And, inevitably, in my prediction, a lot of business trusts will go this route."

 Other trusts, such as Boralex Power Income Fund, have also said their sales process was a direct result of the tax changes. Some, such as E.D. Smith Income Fund, suggested it was the tax change combined with other business
> Tracking the trusts
> 17
> Publicly traded trusts that have been bought or are in the process of being
> bought
> $15.2 BILLION
> Value of those trusts
> $148.7 BILLION
> Market value of the S&P/TSX capped income trust index
> -15%
> 52-week drop in the value of the S&P/TSX capped income trust index
> *****
> Target: trusts
> Announced deals
> Sunrise Seniors Living REIT
> Great Lakes Carbon Income Fund
> Norcast Income Fund
> Entertainment One Income Fund
> Lakeport Brewing Income Fund
> Associated Brands Income Fund
> Amtelecom Income Fund
> Calpine Power Income Fund
> KCP Income Fund
> *****
> Targets and possible buyers
> E.D. Smith Income Fund
> Private equity or U.S. food company
> CanWest MediaWorks Income Fund
> Parent CanWest Global
> Communications
> Custom Direct Income Fund
> Private equity
> Foremost Income Fund
> Rival oil services firm
> or private equity
> Gienow Windows & Doors
> Income Fund
> Private equity
> Specialty Foods Group Income Fund
> Private equity
> Stephenson's Rental Services
> Income Fund
> Private equity or industry rival
> Westshore Terminals Income Fund
> Fording Coal, CP Rail

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