Ottawa rattles conversion candidates
T R A D I N G D E S K TRUST PREMIUM VANISHES Precision Drilling, CI, BCE, Cinram among stocks hit
Investors bailed on several income trust candidates yesterday following Ottawa’s announcement that it will, at least for the time being, stop issuing advance tax rulings for potential trusts.
Some of the high-profile stocks that got hurt included mutual fund giant
and oilfield mammoth both of which had asked for an advance tax ruling. CI lost $2.85 or 11% to close at $22.85 and Precision shed $2.23 or 4% to $57.63 yesterday.
Stocks such as
and
fell also. Although both companies have shown a distinct preference not to convert, investors had been pushing the stocks up on hopes that conversion would happen anyway. BCE
fell $1.70 or 5% to $31.25, while TSX fell $5 or 11% to $40.05.
“It was a wild day for some names with a trust premium built in,” said Leslie Lundquist, a fund manager at Bissett Investment Management.
Enough stocks fell on Ottawa’s tax ruling announcement that it helped drive the S&P/TSX composite index lower on the day. The index fell 121 points, or 1% to 10,903.
BCE had the biggest effect on the index on the day, moving the index 16 points lower on its own.
Others that were hit included which had asked for an advance tax ruling, shed $2.31 or 8% to close at $26.
Cinram, however, is undeterred by Ottawa’s freeze on advance tax rulings.
“Cinram does not view receipt of a favourable ruling as a prerequisite to proceeding with a conversion,” the company said in a statement. “If Cinram determines that a conversion is in the best interests of its shareholders it may proceed with a conversion proposal without a ruling.”
also fell 63¢ or 4.4% to close at $13.60. The media company has issued a prospectus to spin off its Canadian newspapers into a new trust called the CanWest MediaWorks Income Fund.
“ The proposed transaction is not predicated on receiving an advance income tax ruling, nor has one been requested. The prospectus offering is proceeding as planned,” CanWest said in a statement yesterday. Shopping spree?
Gutsy investors may want to go bargain shopping today, picking up stocks that dropped yesterday.
“ If all you’re buying them for is the thought that they will go ahead with conversion and they will get the juicy income trust valuation, then go for it,” Ms. Lundquist said.
“But that’s a pretty aggressive way of investing and we saw [yesterday] what can happen if you choose to take that path.”
That said, if you’re drawn toward these companies based on their merits — regardless of the odds that they will turn into trusts — they’re suddenly much cheaper today, Ms. Lundquist noted.
While speculators felt the pinch yesterday, those invested in companies that have already converted breathed easy. The S&P/TSX capped income trust index fell 0.9% yesterday, as it was dragged down by the price of falling crude oil. About half of the trust index is made up of oil trusts.
“ The trust market is not really effected,” said Sandy McIntyre, a senior portfolio manager at Sentry Select Capital. “Indeed, it is positively affected because existing [income trusts] acquire a higher value.” Assumptions As investors shied away from potential income trust candidates yesterday, a handful of analysts were forced to backpeddle. No longer is it a given that companies can covert into trusts just because they want to. Take CI Fund Management Inc. as an example.
Doug Young, a TD Newcrest analyst, cut his target on CI to $26 from $28 and downgraded the company to “hold” from “buy” yesterday. “Our upgrade and price target increase on September 9, 2005, assumed a 100% probability of CIX converting to an income trust within the next 12 months,” Mr. Young said in a research note.
His new target now assumes a 75% probability of conversion. Without conversion, he says CI is worth $20. More assumptions Corporations that want to become trusts weren’t the only ones tripped up by Ottawa’s announcement. Existing trusts wanting to change their structure into even more tax-efficient structures also came under fire yesterday.
Aleem Israel, an analyst at Sprott Securities, kept his target on at $37.50, but downgraded it to “market perform” from “buy.” It fell 18¢ to $34.35 yesterday.
“Ultimately, we do believe that CCS will be successful at moving to a more tax efficient structure; however, with the total return now sitting at 13.5%, we believe that the risk/ reward is balanced,” the analyst said in a note. a trust that sells food, clothes and other goods in remote communities, also wants to revamp its trust structure. That restructuring will likely be put on ice — at least for now, according to National Bank analyst Jim Durran.
He believes a new trust structure would have added 18¢ per unit in distributions per year on top of the $1.80 currently. Despite the setback, Mr. Durran still believes North West will be able to increase distributions from operations anyway.
Mr. Durran kept his $34.50 target and “outperform” rating unchanged. The units rose 39¢ to $31.80 yesterday. And the banks?
While the Big Five Canadian banks escaped yesterday’s selloff unscathed, the fallout from Ottawa’s ruling may still hurt the banks and their brokerages.
“Investment banks catering to trust conversions won’t have much business this quarter,” said Chris Rankin, an analyst at Canaccord Capital. “The impact on the new issue market remains to be seen.”
But the bankers may not be left to twiddle their thumbs because conversions are halted. Existing trusts may take their premium valuations and make acquisitions.
“ The most likely near-term beneficiary in this environment is the established trusts in a position to consolidate while corporate entities are trapped as corporations,” Mr. Rankin said.
Financial Post catait@ nationalpost. com