Wednesday, April 25, 2007

Harper's Blockbusting

There's an old technique in real estate called "block-busting." Here's how it works. You buy the cheapest house on a street and allow it to become run-down. In fact you actually help it to deteriorate. Get the worst possible tenants you can find, fill it with low-lifes, cockroaches, repair nothing, all for the purpose of a) destroying its value; and more importantly b) destroying the value of all the neighbouring homes.

Once that happens you buy up these neighbouring homes, one by one at bargain prices and gradually acquire the whole block for development.

Does that remind you of anything? The systematic destruction of the value of income trusts maybe?

Now that income trusts have been devalued by the punitive 31.5% tax and limits on all future growth they are ready for the "developers" to move in.

Developers like the government's own pension fund.

Yes, you read that right. The Public Sector Pension Investment Board is buying out an income trust called Thunder Energy at a real bargain. The reason it's such a bargain of course, is because of the government's own policy. The same government whose pension plan will now profit from this policy.

Starting with their purchase of Telesat from BCE, which they will own as the economic equivalent of an income trust, to their anointed role as an “eligible” member of the consortium bidding for BCE (anointed by former Director General of Tax Policy and current CEO of BCE, Michael Sabia) to their purchase yesterday of “on the ropes” energy trust Thunder Energy.

Conflict of interest?

Oh, no - not according to Public Sector Pension Investment. "Of course, as investors we are not called upon to formulate government policy...but we do have to make assessments of the potential impact of these various forces and factor those assessments into our investment decisions....The government is also formulating exceptions for PSP Investments from certain provisions of the Access to Information Act."*

It's all very arm's length we're assured. Except that on the end of that arm, is a finger... and the finger is dipping into the pie.

What kind of democracy do we live in, when Canadian investors are robbed of $35 Billion in assets which are then transferred to US private equity or private and government pension plans?

Mr. Harper, we all remember your election advertising. It wasn't all that long ago. Just when were you actually planning to "stand up for Canada"?

*Risk and Inequity: Canada's Largest Pension Plans and the Future of Income Trusts

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Randy Meyer said...

Below is a link to an article that talks about how leveraged buy-outs work in a very simple way that the average person can follow. (Maybe even Flaherty!)

It's very relevant to the hollowing out of Canada.'s trust sector in particular. The term "RFP" is novel but accurate. I'll leave you to read what that means. I'd appreciate feedback on this article.

Anonymous said...

...but the trust index trades at a P/E multiple that is far greater than the multiple assigned to after-tax earnings of the TSX60 index.

This is prima facie proof that trusts are overvalued in the marketplace, and takeovers and LBO's are to the benefit, not the detriment, of existing unitholders.

cousin it said...

Dear Anonymous:

Re: “This is prima facie proof that trusts are overvalued in the marketplace”

I hate to be the one to tell you, but this comment of yours is prima facie proof that you have been successfully bamboozled by the alchemy arguments of our snake oil salesman of a Finance Minister. No doubt you believe in monsters under your bed and income trust tax loopholes. The higher values that average Canadians (like you and me) place on businesses structured as income trusts relative to the value that we would assign to the same business structured as a common share entity is a simple function of supply and demand. Don’t seek more complicated answers when the simple ones are obvious for all to see. Who needs CEOs making reinvestment decisions? They should spend their time running their company’s operations., unless they think they are Warren Buffetts. How successfully did the litany of losers who ran BCE for the past 20 years fair? BCE has been the biggest destroyer of wealth on a consistent basis that this country has seen ( before Flaherty that is ).

Structured as an income trust, BCE would attain a higher value in the market. We observed that happen this past fall when it went from below $30.00 to $34.25 on the announcement of the conversion to a trust. That’s simply because as an income trust BCE would have conducted itself in a manner that aligns with wealth creation, namely it would pay 95% of its discretionary pre tax cash flow to its investors, who in turn would pay taxes at an average blended rate of 38% for a total tax bill of $800 a year. That’s about $800 million more than BCE currently pays and about $800 million more than it will pay after its leveraged buyout by US dominated capital with a few pension plans thrown in for good measure. That’s your tax loophole. Think of it as a tax subsidy that the government introduced to promote that’s ale of Canadian iconic businesses to foreigners. Sounds like a Tax Fairness Plan to me.

Rather than argue this point, better that our government give us some PRIMA FACIE evidence of that monster under the bed called tax leakage. Prove the case or drop the tax. What part of that don’t these neo-con demagogues understand? What part of not getting re-elected don’t they understand. In retrospect we will all come to appreciate this sordid mess created by the world’s most incompetent arrogant and mindless Finance Minister, since it will have spared us from granting his government “four more years”.

Randy Meyer said...

Dear Anonymus:

Gee I think "cousin it" said it all but just in case you missed it, here's a link to the April 16 debate in the House where Mr. Paul Szabo explains the situation quite clearly.

By the way, I understand Mr. Faherty stormed out of the house that day as the facts were getting in the way of his prima facie opinion.

Rockford1 said...

Excellent article by Rob Peebles!

The concept of "Return on Pillage"
describes the process perfectly!

So...basically for private equity owners, it is all about monster fees and continuous dividends from borrowed debt. As long a the company pays it's minimal "credit card" payment...private equity onwers are happy. If the company gets in trouble down the road, just
do an IPO to an unsuspecting public
and rake in more monster fees!

Talk about a Ponzi scheme, where is
Al Rosen on this?

Anonymous said...

Flaherty said tax our company said buy..By the 15th of Nov the company accumulated $32 million in income trusts. Now at the end of April the position has been sold..Net result. Capital gain 21.4%. Plus income of 6.3%. Good example of how the minority profit from the misfortunes of the majority. Job well done Mr. Flaherty.