Thursday, July 31, 2008

Another Canadian company goes up in smoke.

......this is becoming a bad habit

Rothmans to be swallowed by Philip Morris

42 minutes ago

TORONTO — Rothmans Inc. (TSX:ROC) has announced a deal to be taken over by Philip Morris International Inc. in a transaction that values Canada's last publicly traded cigarette company at $2 billion.

Rothmans said Thursday the offer of $30 per share in cash has been endorsed by the Toronto-headquartered company's board of directors.

The bid follows the resolution of smuggling charges against Rothmans, Benson & Hedges Inc., which is owned 60 per cent by Rothmans and 40 per cent by Philip Morris.

The offer from the maker of Marlboro cigarettes, spun off in March as a separate company from Altria Group, represents a premium of almost 15 per cent over Wednesday's closing price of $26.17 for Rothmans shares on the Toronto Stock Exchange.

Rothmans investors have also consistently reaped a hearty dividend, yielding 5.4 per cent at Wednesday's price. The company said the second-quarter dividend, normally paid in September, will be suspended while the takeover proceeds.

The transaction is conditional on acceptance by two-thirds of Rothmans stockholders, along with Competition Act and Investment Canada approval.

The deal is expected to close by the end of October, making Rothmans a wholly owned subsidiary of Philip Morris.

The Rothmans board has undertaken to pay a termination fee of $40.9 million if an outside party prevails with a better offer.

Philip Morris will pay $81.7 million to Rothmans is the offer is not completed.

Canada's other major cigarette maker, Montreal-based Imperial Tobacco, is part of the British American Tobacco conglomerate based in London.

Donate your BCE Shares to The Conservative Party of Canada..

....hey we authorized this stinking deal!

Help feed The Lies and Deception about tax leakage that made this deal possible

Do You Own BCE Inc. Shares? Then you owe us:

Did you know that Bell Canada Enterprises (BCE) will cease to be a publicly traded company sometime before December 11, 2008? Meanwhile you aren’t even getting paid dividends. The game’s over. Our Party saw to it. As Stephen Harper said on November 1, 2006: “ We can’t be a nation of coupon clippers”. He wasn’t kidding. BCE took him to heart.

BCE Inc. shareholders will not have the option to keep their shares and will be subject to a forced sale. Click here to read articles from the Financial Post on the BCE Inc. takeover and its implications.

Save By Donating Securities

Due to recent changes in Canada Revenue Agency guidelines, you can create a huge tax savings opportunity by donating your BCE Inc. shares, or any other securities, to a registered charitable non-profit like The Conservative Party of Canada. With a donation of stock to The Conservative Party of Canada you can:

Avoid paying capital gains tax;

Get a charitable tax receipt for the full value of your shares;
Help sustain Stephen Harper’s Ongoing Lies and Deception

It's a win-win situation for everyone involved. Screw the taxpayers of Canada, they will only lose $800 million a year from this LBO that we authorized. We were only thinking of the Party fundraising opportunities.

How do I save by donating BCE Inc. shares?

The privatization of BCE Inc. will have tax consequences for many shareholders. Since cash consideration is being offered by the group led by the Ontario Teachers' Pension Plan, the exchange of cash for shares will result in a taxable event unless those shares are held in a registered (tax deferred) account such as a RRIF or RRSP.

Shareholders will realize either a capital gain or loss on their shares depending on the adjusted cost base (ACB) of their shares, which will need to be calculated by every shareholder. That ACB is based on the original purchase price of the shares (cash cost or dividend reinvestment value), but may be affected by how long the shares have been owned, and whether a capital gains exemption was claimed at February 22, 1994.

The May 2, 2006 federal budget included provisions that resulted in donations of publicly traded securities to registered charities being 100% free of capital gains tax. Many charities such as The Conservative Party of Canada have set-up brokerage accounts which will allow them to receive donations of securities such as these BCE Inc. shares in exchange for charitable tax receipts for the full market value of the shares at the time of the donation. As long as the shares are donated before the privatization takes place (predicted to be during early 2008 by analysts) the donor not only saves any tax on the accumulated gains, but is allowed to claim the charitable donation for the full value of the donated shares.

If instead the shareholder waited until after the privatization, they would have to report any capital gain on their tax return and make the donation out of after-tax funds ? generally resulting in less cash to their charity of choice. Please contact your financial advisor for further information.

When to Donate

Now! Once the BCE Inc. sale takes place, its shares will be de-listed and will no longer qualify for the capital gains exemption. So don't wait ? donate your shares of BCE Inc. to the Conservative Party of Canada. One hundred percent (100%) of all donations will go towards funding The Conservative Party of Canada, our mandate of Lies and Deception on matters vital to Canadians, and to support our ongoing lawsuits.

How to Donate

It's as easy as 1, 2, 3!
To donate your BCE Inc. shares, or any other securities, simply fill out a Securities donation form, which you can download by clicking here You can also find more information on our website

2 Provide this form to your broker to initiate the transfer of donated shares with The Conservative Party's broker. Your broker should be instructed to call our Broker of Record of Goldman Sachs at (212) 861-1242 or (212)365-6007 (fax), and ask them to transfer your publicly traded securities to the Conservative Party of Canada

3. Or contact me, Doug Finlay. Chief Bag Man and Backroom Operative of the Conservative Party of Canada, to ensure quick processing of your gift of shares. A tax receipt for the full value of your shares will be issued.

Remember we can not receive cash donations by way of fax.

Please give generously.

Yours faithfully,

Conservative Party of Canada
1204-130 Albert Street,
Ottawa, ON
K1P 5G4


Fax your form to: (613)755-2001

Prentice confirms "photo op" nature of BCE meeting.

Meeting's all for show, as Prentice won't discuss 2500 laid off BCE workers or actually deal with 15 cent text messaging issue

Prentice Signals No New Text-Message Rules After BCE Meeting

By Theophilos Argitis and Greg Quinn

July 31 (Bloomberg) -- Canadian Industry Minister Jim Prentice indicated he won't impose new regulations on the cost of text messages after he met with executives from BCE Inc. to discuss new fees that he has said may hurt consumers.

Prentice said he wasn't ``hinting'' at new regulations when asked about the subject by reporters today at a meeting of Conservative Party lawmakers in Levis, Quebec.

Prentice said he has met with BCE President George Cope and plans to meet with Telus Corp. to discuss the issue. The minister said he wants the companies to consider alternatives to their plan to start charging wireless customers 15 cents for each text message they receive.

To contact the reporter on this story: Greg Quinn in Ottawa at; Theophilos Argitis in Levis, Quebec, at
Last Updated: July 31, 2008 08:51 EDT

John Manley is absolutely correct.....well, sort of.

Actually, not at all.

In its never ending quest to dredge up new (and spurious) arguments to justify Jim Flaherty’s income trust tax, the Globe and Mail sought out the views of John Manley. John Manley?

John Manley’s finely honed argument in favour of Jim Flaherty’s regressive tax measure was that: "I don't think you can run an economy where you have different kinds of business vehicles that are taxed totally differently."

This despite the fact that John Manley is employed by McCarthy Tetrault, which is a tax flow through limited partnership which following Flaherty’s taxation of publicly traded income trusts will remain unscathed as a “different kind of business vehicle that is taxed totally differently”.

Well, so much for that self contradictory, and hence hypocritical, argument of John Manley’s. Obviously John’s comments of a singular business model were intended solely for the plebes. The public market plebes.

John Manley missed his brief opportunity in the sun to be the honest elder statesman, instead he used it to promote self interests and those of McCarthy Tetrault’s corporate client base who dreaded the income trust model for personal reasons and not legitimate public policy reasons.

No, what John Manley could have easily said to the Globe and Mail, had he wanted to advance this debate and have played the role of honest elder statesman, was:

"I don't think you can run a government where you have different kinds of business vehicles that are evaluated for tax purposes totally differently."

This would have been an insightful and edifying comment from an insider on how the Department of Finance runs, in effect, two sets of books.

One set of books is based on the “budget based” approach, and the other is based on the “full life cycle” based approach.

The “budget based” approach is the means by which the green eye shades in the Department of Finance manufacture their tax leakage argument, in order to post-rationalize the income trust tax, a policy whose real purposes have never been disclosed or acknowledged. Neither has the work of the green eye shades in Ottawa been made public. Officially that is.

Their is however one individual with first hand knowledge of these two sets of books, namely Dennis Bruce of HLB Decision Economics, who worked collaboratively with the Department of Finance to create the tax leakage model during the Ralph Goodale PUBLIC CONSULTATION round of 2005.

Why does the Globe gravitate to bystanders like John Manley for their “news”, rather than report on the known facts, as can be uniquely provided by Dennis Bruce? Maybe the Globe is part of the problem? Some would say a huge part of the problem as they selectively report on this topic. Perhaps that might have something to do with the fact that the Globe is owned by three parties who benefit from the trust tax policy: BCE, Teachers’ and Torstar. Their fourth owner, Woodbridge owned by the Thomson's isn’t exactly indifferent either, as they don’t pay a cent of taxes in Canada. At least that’s my understanding given that dividends can flow free of taxes as between operating companies (Thomson Corp.) and holding compnanies (Woodbridge). Funny, we don’t hear John Manley commenting on that disparity do we? But then, Lord Thomson of Fleet is no plebe and hence is the beneficiary of bespoke tax policies assiduously safeguarded by the likes of John Manley and Jim Flaherty.

In a press release following the Public Hearings on Income Trusts issued on February 1, 2007, that was entitled “Independent Economists dispute government’s tax leakage claims” here’s what Dennis had to say:

OTTAWA, Feb. 1 /CNW Telbec/ - In remarks delivered to the House of
Commons Finance Committee Thursday, Dennis Bruce, Vice President of HLB
Decision Economics Inc., provided data and supporting documentation to
discredit the Department of Finance's tax leakage claims.
"The department is sharply overstating tax leakage," said Mr. Bruce, who
added that there would be minimal costs associated with a 10 year phase-in of
the new tax on income trust distribution payments.
HLB Decision Economics, an Ottawa-based independent consulting firm that
provides analytical consulting services to industry and governments worldwide,
has been working on behalf of the income trust sector to develop a comparative
analysis of taxes generated under the income trust structure versus the
corporate structure.
Mr. Bruce told committee members that his firm worked with the Department
of Finance as it prepared the federal government's 2005 consultation paper on
the tax effects of income trusts. Specifically, HLB was asked by the
department to develop a common methodology and assumptions for deriving tax
leakage estimates.
Mr. Bruce said that HLB and the Finance Department achieved consensus on
the methodology with one exception - they disagreed on whether to include
deferred taxes. Deferred taxes are derived from distributions, capital gains,
and dividends received in tax exempt accounts. While they are not immediately
taxable, they are taxable upon withdrawal from such accounts.
"The discussions that you are hearing about deferred taxes reflect
confusion about budgeting convention versus policy analysis," said Mr. Bruce.
"While federal budgeting is done on a current basis, federal policy analysis
is done on a life-cycle basis. Accounting for the life-cycle effects of tax
changes, namely deferred taxes, is appropriate in the consideration of tax
Mr. Bruce went on to outline the factors that resulted in the differences
between HLB's tax leakage estimates and the tax leakage figures put forward by
Finance Minister Jim Flaherty. These factors include:

1) The Department's assumed effective corporate tax rate for energy
trusts fails to reflect the reductions in the tax rates for resource
corporations from 2004 through 2006, from 27.12% to 24.12%. This
results in an overstatement of tax leakage of $84 million;
2) The Department's figure for income trust units held in tax exempt
accounts is overstated. Derived from data from surveys, Statistics
Canada, interviews and Scotia Capital Markets data, the percentage of
units held in tax exempt accounts is 31 percent, less than the
Department's 38 percent estimate. This results in an overstatement of
tax leakage of $125 million;
3) The value of deferred taxes is excluded from the Department of Finance
analysis. This results in an overstatement of tax leakage of
$80 million; and,
4) The Finance Department's atypical inclusion of the impact of limited
partnerships, which reduces the tax leakage to $45 million.
5) The impact of future legislated tax changes post 2010 has not been
accounted for. Doing so reduces the ongoing federal tax leakage after
2010 by $232 million.

Mr. Bruce stressed that the discrepancies between HLB and the Finance
Department led his firm to conclude that the Finance Department is "sharply
overstating tax leakage."

Specifically, HLB concluded that:

- Federal tax leakage for 2006 was $164 million, not the
half billion dollars stated by the Department; and,
- Ongoing tax leakage, post 2010, after taking into account legislated
tax changes, is $32 million per year, about five percent of the
Department's figures.

For further information: Dennis Bruce, Vice President, HDR - HLB
Decision Economics Inc. (613) 234-0080; Cell: (709) 632-1708

Fish or cut bait, the sequel

Once again we have headlines that read: “Harper to Dion: 'Fish or cut bait’ ”.

Haven’t we been to this movie before? It didn’t work for Stephen Harper the first time, so in his great wisdom he thought it would be sure to work a second time?

Isn’t that the definition of insanity? To do something repeatedly in the exact same fashion and to expect a different result?

Why would Stephane Dion fall for the rancid bait of “fish or cut bait”?

Harper is desperate for an election of his own timing so that he can go before the electorate with three wheels on his happy wagon, as opposed to one or two, if Stephane Dion wisely decides to call an election at the time of his optimal choosing.

The other movie that we’ve also been to before , also has a sequel, that in today’s article goes by the name of “But I give you my word: As long as I will be prime minister ... there will be no new taxes."

Huh? Surely he isn’t going to try this election trick/fraud again.

Stephen Harper’s word is worthless, after all, who didn’t see the blockbuster film from Election 2006 entitled:

"When Ralph Goodale tried to tax Income Trusts ... don't forget, don't forget this ...they showed us where they stood. They showed us about their attitudes towards raiding seniors hard earned assets and a Conservative government will never allow either of these parties to get away with that"

Wednesday, July 30, 2008

Today, Moody's confirms Canada's largest telco is a Junk Bond Credit

Moody's has updated its guidance in light of the BCE acquisition news - they view the New BCE as having a family rating of B1, with existing senior unsecured debt (representing the majority of bonds & coupons) rated Ba1, and subordinate notes rated B3.

Moody's Debt rating categories:

Moody's long-term debt ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and the probability of a financial loss suffered in the event of default.

Investment grade


Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

Aa1, Aa2, Aa3

Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

A1, A2, A3

Obligations rated A are considered upper-medium grade and are subject to low credit risk.

Baa1, Baa2, Baa3

Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.

Speculative grade (Also known as High Yield or 'Junk')

Ba1, Ba2, Ba3

Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

B1, B2, B3

Obligations rated B are considered speculative and are subject to high credit risk.

Caa1, Caa2, Caa3

Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.


Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

Canadian taxpayers to fund of 10% of BCE purchase price, each and every year

Don’t be fooled. The purchase price of BCE is not $52 billion, it is $8 billion.

Ontario Teachers’ and its three US partners are acquiring BCE in a “leveraged buyout”. This means using other people’s money to acquire BCE. There are three sources of other people’s money being used in this instance, as follows:

= BCE itself
= BCE common shareholders
= Canadian Taxpayers

The whole scheme is very easy to understand. A necessary ingredient is to have a compliant board of directors who are willing to agree to allow BCE to borrow $32 billion in new debt on top of BCE’s existing $12 billion in debt. such that the company becomes a junk bond credit. This reduces the equity value of the company down to $8 billion. Which ostensibly is being funded by the Purchasers.

Roughly $1 billion of the $8 billion ends up coming from BCE shareholders themselves, as the compliant board agreed to modify the terms of the deal, such that the Purchasers’ receive the last six months of accrued and unpaid dividends, rather than BCE common shareholders. This foregone dividend has a value of $1 billion. It is “found money” for the purchasers.

Lastly, there are Canadian taxpayers. A large portion of the value of BCE in the hands of the purchasers is that the company can be structure so as to pay no Canadian taxes. This is achieved by the massive interest payments that are required to service $44 billion in debt . These interest payments are tax deductible, and therefore shelter BCE from paying taxes. This has a cost to Canadian taxpayers of $800 million a year versus alternative transactions that were presented to BCE’s board.

So ignoring the dividend heist of $1 billion, this $800 million per year in foregone taxes, means that Canadian taxpayers are paying the equivalent of 10% of the purchase price of BCE, each and every year. In ten years, the purchase price will have been fully paid for by Canadian taxpayers. The beneficiaries of this tax scheme are:

Ontario Teachers’ Pension Plan
Providence Capital of the US
Madison Dearborn Capital of the US
Merrill Lynch Capital Partners of the US

Don’t expect a thank you note.

Instead, expect more permanent layoffs ( beyond the 2.500 announced yesterday) and higher service costs (beyond the 15 cent text messaging increase announced last week).

Time for a few answers from Canada’s “leadership”.

Where is the PM on this”? The Finance Minister? The Industry Minister? The Labour Minister?

Tuesday, July 29, 2008

Harper makes Canada a safe haven for unwelcome private equity

Other first world cointries are wise to the unwelcome ways of private equity, England is, Canada is not. Harper's actions have been designed to favour investment by private equity and disfavour investment by average Canadians.

Buy-out firms are told that

By Martin Arnold, Private Equity Correspondent
The Financial Times Limited

Published: July 29 2008

Sir Michael Rake, the man charged with policing private equity's new transparency rules, has secured the commitment of 32 buy-out groups and 55 of their portfolio companies to comply with the industry's voluntary guidelines.

Yet, while the British Telecom chairman is encouraged by the response to the new code, he warns that last year's political firestorm over private equity could reignite quickly if a big buy-out collapsed.

Private equity faced a barrage of accusations last year - from job-cutting and asset-stripping, to tax avoidance and excessive use of debt - after bidding for several FTSE 100 companies, such as Alliance Boots and J. Sainsbury, the high-street retailers.

Sir Michael told the Financial Times that, even though the credit crunch had triggered a drop in the size and number of buy-outs, the pressure was still on buy-out firms to prove their value to the economy.

"It has gone quiet for the moment," says Sir Michael, in his first interview since being named chairman of the guidelines monitoring group for the new private equity rules in November. "But those who know understand it could easily come back.

"If there were to be a major failure in a private equity-financed vehicle, then for sure there would be political attention," he says. "This industry isn't stupid and is fully aware this is something we need to do."

With the European parliament debating measures to clamp down on private equity, he warns that some European countries are making "ill-informed assumptions" about the industry. "That is a very dangerous place from which to make policy."

He is encouraged by the enthusiastic response eight months after Sir David Walker, the City grandee, unveiled the voluntary guidelines he drew up for the British Private Equity and Venture Capital Association (BVCA).

Since then, about a dozen private equity firms - including Apax Partners, Terra Firma, Permira and Cinven - have published annual reviews, giving details of their senior managers, investors, strategies and portfolio companies.

"The reports are worth looking at," says Sir Michael. "They see the business benefits of doing it. There is nothing to fear from transparency and the story they have to tell is generally a good one; therefore why not tell it?"

In addition, large portfolio companies, such as Alliance Boots, the pharmacy chain, and Gala Coral, the betting and casinos group, have published public company-style annual reports. By the end of the year, Sir Michael plans to report back on how the rules have been adopted by relevant portfolio companies - any listed companies acquired for more than £300m or unlisted companies for £500m-plus with more than 1,000 staff and generating at least half their revenues in the UK.

By then he also expects to have held talks with a number of Middle Eastern and Asian sovereign wealth funds about complying with the guidelines.

So far only Arcapita, the Bahrain-based Islamic bank, and Dubai International Capital, the Gulf investment fund, have signed up to the guidelines after acquiring large UK companies and becoming members of the BVCA. Both DIC and Arcapita raise money from private investors, so consider themselves more private equity than sovereign wealth funds. Yet other groups with closer government links, such as the Qatar Investment Authority, have not signed up, even though the QIA owns Four Seasons, the troubled UK nursing home operator.

"I was in the Gulf a few weeks ago and the couple of people I spoke to informally indicated they were absolutely willing to go along with what everyone else does," says Sir Michael. His group has appointed PwC to advise it on monitoring the compliance of portfolio companies and Ernst & Young to collate and publish "attribution analysis" data on how private equity groups make their profits.

"To remove this from being a political and fiscal issue to more of a factual issue around where private equity sits in relation to the economy, the creation of jobs and long-term investment, the most important thing to is to get some clarity rather than noise around the facts," says Sir Michael.

His group has the power to expel any funds that do not comply with the guidelines from the BVCA. Yet, he says: "I think that is a real long backstop, but it is perhaps important to have it."

With the UK economy slowing and the financial system in difficulties, private equity's new policeman sees as many opportunities as challenges for the industry. "We do need to understand that companies do go bust from time to time," he says.

"But the ability of private equity to manage through and create more value out of these assets when companies get into difficult situations is a big part of what they do."

Copyright The Financial Times Limited 2008

Jack Mintz says Flaherty's tax leakage numbers have a "serious flaw"

From: Jack Mintz
Date: Tue, 28 Nov 2006 09:00:16 -0500

"I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero." wrote Jack Mintz

So does Dennis Bruce, who is free of the many conflicts that prevent Jack Mintz from making the above private statement into a public declaration:

Independent economists discredit govt tax leakage claims -

OTTAWA, Feb. 1 /CNW Telbec/ - In remarks delivered to the House of Commons Finance Committee Thursday, Dennis Bruce, Vice President of HLB Decision Economics Inc., provided data and supporting documentation to discredit the Department of Finance's tax leakage claims.
"The department is sharply overstating tax leakage," said Mr. Bruce

HLB Decision Economics, an Ottawa-based independent consulting firm that
provides analytical consulting services to industry and governments worldwide,has been working on behalf of the income trust sector to develop a comparative analysis of taxes generated under the income trust structure versus the corporate structure.

Mr. Bruce told committee members that his firm worked with the Department of Finance as it prepared the federal government's 2005 consultation paper on the tax effects of income trusts. Specifically, HLB was asked by the department to develop a common methodology and assumptions for deriving tax leakage estimates.

Mr. Bruce said that HLB and the Finance Department achieved consensus on the methodology with one exception - they disagreed on whether to include deferred taxes. Deferred taxes are derived from distributions, capital gains, and dividends received in tax exempt accounts. While they are not immediately taxable, they are taxable upon withdrawal from such accounts.

"The discussions that you are hearing about deferred taxes reflect confusion about budgeting convention versus policy analysis," said Mr. Bruce."While federal budgeting is done on a current basis, federal policy analysis is done on a life-cycle basis. Accounting for the life-cycle effects of tax changes, namely deferred taxes, is appropriate in the consideration of tax policy."

Mr. Bruce went on to outline the factors that resulted in the differences between HLB's tax leakage estimates and the tax leakage figures put forward by Finance Minister Jim Flaherty. These factors include:

1) The Department's assumed effective corporate tax rate for energy
trusts fails to reflect the reductions in the tax rates for resource
corporations from 2004 through 2006, from 27.12% to 24.12%. This
results in an overstatement of tax leakage of $84 million;

2) The Department's figure for income trust units held in tax exempt
accounts is overstated. Derived from data from surveys, Statistics
Canada, interviews and Scotia Capital Markets data, the percentage of
units held in tax exempt accounts is 31 percent, less than the
Department's 38 percent estimate. This results in an overstatement of
tax leakage of $125 million;

3) The value of deferred taxes is excluded from the Department of Finance
analysis. This results in an overstatement of tax leakage of
$80 million; and,

4) The Finance Department's atypical inclusion of the impact of limited
partnerships, which reduces the tax leakage to $45 million.

5) The impact of future legislated tax changes post 2010 has not been
accounted for. Doing so reduces the ongoing federal tax leakage after
2010 by $232 million.

Mr. Bruce stressed that the discrepancies between HLB and the Finance
Department led his firm to conclude that the Finance Department is "sharply
overstating tax leakage."

Specifically, HLB concluded that:

- Federal tax leakage for 2006 was $164 million, not the
half billion dollars stated by the Department; and,

- Ongoing tax leakage, post 2010, after taking into account legislated
tax changes, is $32 million per year, about five percent of the
Department's figures.

For further information: Dennis Bruce, Vice President, HDR - HLB
Decision Economics Inc. (613) 234-0080; Cell: (709) 632-1708

Jim Flaherty: Our backyard "global phenomenon"

In every possible respect, leveraged buyouts are much worse than income trusts (could ever be accused of being).

Anyone with knowledge of capital markets would have told you that the income trust tax would lead to a rash of takeovers of Canadian companies by foreign private equity.

Diane Francis wrote about in on December 3, 2006:

"The biggest blunder of all is that this policy announcement has discounted the income trust sector by $30 billion which represents a huge whack of the economic base of Canada"

"the resulting leverage buyout of the income trust sector will cost Ottawa dearly, thus putting more pressure on taxes from ordinary Canadians"

"Why wouldn't the Department of Finance, the Minister and Prime Minister understand this?"

It took Bay Street about a nano-second to realize it. Two nano-seconds later Wall Street realizes it. They thought Canadians were idiots. They were right.

As such, on November 3, 2006 there were rumors in the marketplace that New York based leveraged buyout firm KKR was going to take a run at government policy devalued BCE. So what did BCE do? Michael Sabia called KKR on November 3, 3006 and subsequently met with Henry Kravis in New York on November 15, 2006, which began a serious of events that made the obvious happen: BCE was acquired by foreign and domestic private equity in a leveraged buyout. Teachers’ only played a role because of the Canadian ownership hurdle that had to be overcome.

BCE is the perfect case study of why leveraged buyouts are much much worse than income trusts could ever be accused of being, on every conceivable government policy level.

Tax Loss:
A business creates a finite amount of earnings before tax, and after necessary capital reinvestment. These excess earnings paid to unit holders under the income trust model are free of taxation and are instead taxed immediately in the hands of the unitholders. In the case of BCE these unitholders under an income trust would have been predominantly taxable investors and would have been taxed at the average rate of 38% (according to DoF). Meanwhile US investors would have paid a 15% withholding tax plus taxes in the US. Alternatively these pre-tax earnings are used to service the various security holders under the corporate model. In the case of the BCE leveraged buyout, the following is the capital structure

Equity from Teachers’ $4 billion
Equity from 3 US investors: $4 billion
Existing Debt: $12 billion
New Junk Bond Debt: $32 billion

As you can see, 85% of BCE’s new capitalization is debt, which causes BCE’s credit rating and credit worthiness to tank, thereby dramatically raising its cost of borrowing and overall cost of capital.

Under the corporate model, the interest used to service this debt is fully tax deductible. This is an indirect way of saying that these security holders receive the pretax earnings of BCE, just as is the case with income trust distributions. There are, however two very profound differences. First, these interest payments do not attract the 15% withholding tax, as with income trust distributions. Flaherty reduced the withholding tax on interest to ZERO in Budget 2007. Second ( as with BCE) this debt is being provided in large part by foreign lenders, meaning the earnings of BCE that are required to service it are being taxed in Canada at the rate of ZERO. This represents massive tax leakage. Under the trust model these earnings would be taxed at either 38% (if paid to Canadians) or 15% (if paid to foreigners) and would flow predominantly (greater than 85%) to Canadians and taxed at the rate of 38%.

Note to Ottawa and Canadian media: Both 38% and 15% are larger numbers than 0

Foreign Takeover Risk:
Ottawa knew full well about the inherent takeover risk that would ensue if an income trust tax were to be imposed and they knew damn well where that risk would emanate from, namely leveraged buyout takeovers from foreign private equity. Meanwhile Flaherty tried to mislead Canadians about this hazard by saying private equity was a “global phenomenon”. Two points. Yes, I guess it is, just like the sub-prime mess is also a global phenomenon. And second, unlike other countries he had put the honey out for the bees, with his ill-conceived trust tax. Which is also rather “phenomenal” when you think about it. As in phenomenally stupid.

An internal Department of Finance memo warned senior officials who were directly responsible for the income trust tax policy about this risk, namely Mark Carney and Bob Hamilton and others. See Globe article entitled Trust tax linked to equity buyouts at

Higher Cost of Capital:
As perverse as this sounds, income trusts were feared by people like Dominic D’Alessandro of Manulife Financial and Paul Desmarais Jr. of Power Corporation for the very fact that they represented a lower cost form of capital. Lower cost of capital ,ergo a higher valuation. This created pressure on them to convert, in order to attain these higher valuations. Here was the Globe’s account of November 2, 2006:

“High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico, and told him he should act quickly to stop the raft of conversions, according to sources.”

Here was the central preoccupation of D’Alesssandro’s testimony at the Public Hearings:

“In June of last year, CI Financial converted to trust status”.

Why would he have cared what CI Financial did in the previous year? Because it gave CI Financial a lower cost of capital. Who provided CI Financial with a lower cost of capital? Investors or taxpayers? In order for taxpayers to be the ones providing the lower cost of capital would require that Ottawa have foregone tax revenue from CI becoming an income trust. Such is not the case, and we can prove it. Has the government proven their case that income trusts result in less taxes than as corporations? No they have not. We look forward to being proven wrong on this point, in which case we will concede defeat.

In terms of BCE’s LBO, the leveraged buyout has burdened BCE with the highest cost of capital imaginable. BCE’s cost of debt has increased by at least 240 baisis points (2.40%) and their cost of equity matches the return expectations of its new owners, which means a number north of 30%. As a trust, BCE’s all-in cost of capital would have been 10-12% overall, with a cash cost of capital of 6.00%, which would have been the yield on the trust units.

You also have to ask yourself what these corporate self interests who lobbies Flaherty meant by “misgivings about the structure”. No reason to speculate, since it was obvious. They have all successfully learned how to “game” the corporate model through stock options and share buybacks. To make that scam possible means that they have to retain earnings for stock buybacks at times of maximum personal gain, rather than paying these earnings to the owners at regular monthly intervals at no personal gain.

Note to Ottawa and Canadian Media: Even lab mice will prefer more gain over less gain.

Lessened Competitiveness: Higher cost of capital translates into lowered competitiveness. Nowhere is this truer than in a higher capital intensive and rapidly changing business like telecommunications. The LBO of BCE is totally counter to this outcome> meanwhile one of the four policy objectives of Canada’s Telecommunications Act is to promote the competitiveness of Canadian telecom. One of the other four is to promote Canadian ownership of Canadian telecom. The LBO of BCE takes us in the complete opposite direction, not supported by the remaining two policy objectives of the Telecommunications Act.

Job Layoffs: One of the common themes of leverage buyouts is job layoffs. We witnessed this yesterday with the announcement of 2500 layoff of knowledge based workers at BCE. This is being driven by the need for higher returns that are required by the new owners and that are mandated by the massive new levels of debt. This is an observable reality around the world, which is why the global labour movement had called upon governments to halt this abusive tactic

See: Union spotlight at Davos on private equity raiders:
See: Union bosses want action over the 'rodeo capitalism' of private equity:

Systemic Risk to Canada’s fiscal health and the Economy: There is no greater risk to a financial market than too much debt. Debt represents one of the highest forms of risk for a financial system. Simply look at the situation involving the sub prime mortgage market or the somewhat analogous Asset Backed Commercial Paper Market in Canada. Too much debt is what causes bankruptcies. Nothing else causes bankruptcies. How is capitalizing BCE with 85% debt and only 15% of equity a prudent thing when no other peer phone company in the world has this kind of balance sheet risk. Are we as Canadians to take comfort when BCE’s lead financial advisor, Goldman Sachs writes to the company on June 29, 2007 , immediately after the leveraged buyout was announced that:

“We express no opinion as to the impact of the transaction on the solvency or viability of BCE or the ability of BCE to pay its obligations when they become due.”

Meanwhile the distributions paid on income trusts are not obligatory in nature. The opponents of income trusts try to portray this in a negative light. How can something as subject to business cycles and the risk of business be obligatory? Income trust distributions are subject to change in both the upward and downward direction. That is a good thing. As an income trust, BCE could never go insolvent. Just ask Goldman Sachs. As a debt leveraged buyout, BCE could very well go bankrupt. You don’t need to ask Goldman Sachs about tha one, as they already anticipated that question and that possible outcome.

Investor Demographics: We know who the investors in income trusts are. They are predominantly taxable Canadians who wish to prudently provide for their retirement income and to save for retirement. They also include pension fund investors and foreign individual investors. It takes no more than $1,000 for an investor to participate in the income trust market. No special membership in a pension plan is required. Meanwhile who are the private equity investors who are government is favouring with tax loss inducing policies. Truth is we don’t know. These private equity firms like Providence capital who bought a chunk of BCE are black boxes. Who knows whose capital they manage. Some of it is endowment money for wealthy US universities like Harvard and Yale. Some of it is money from Canadian pension funds. Much of it is from uber wealthy US citizens. And a good deal is from all four corners of the world, including the wealth of sovereign nations. One thing is for sure. 99.9% of income trust investors are precluded from investing in private equity leveraged buyouts. It takes a minimum of $5 million to participate in any of these name brand private equity funds. As a result the income trust tax is just another way to make Canadians squatters in their own country and subservient to foreigners at the hands of their own elected government.

Bottom Line:

So why would any sane and rational country want to introduce a tax policy that induces leveraged buyouts, that results in:

(1) Net loss of taxes. $800 million a year in the case of BCE, relative to an income trust. See
(2) Displacement of workers. 2500 so far in the case of BCE
(3) Introduction of systemic risk into the country’s economic well being: $34 billion new debt, displacing $34 billion of equity in the case of BCR
(4) increased cost of capital and resultant lessening of competitiveness. Immeasurable in the case of BCE, although they have already moved to increase phone service costs
(5) Displacement of Canadian investors in favour of foreign investors whose actual identity is not known

Again to quote Diane Francis: “Prove the case or drop the tax”

"A few crazy ones still linger" take Derek DeCloet for example

Truly pathetic journalism. Aimed to mislead and not to inform.

Jim Flaherty, trust investors' best friend. Seriously
Globe and Mail
July 29, 2008

Leslie Lundquist has been an Albertan since birth, a Calgarian since the age of two and a Conservative for as long as she can remember. Or at least she was until the Tories put a chokehold on income trusts. Would she ever vote for them again? "Not as long as Harper and Flaherty are there," says Ms. Lundquist, who runs the Bissett Income Fund, one of the largest mutual funds devoted to - you guessed it - Canadian income trusts.

We say "largest," but in the shrinking trust sector that isn't saying much any more. Money has been pouring out of all kinds of assets since the credit crunch began - hedge funds, emerging markets, U.S. stocks - but for trusts, it merely opened the wound a bit wider. Investors have pulled more than $2-billion out of trust-related funds since the end of 2006, and that's just what we see from the industry's public data.

In Ms. Lundquist's case, what was a $1.1-billion fund two years ago was down to $810-million by the end of March, through no fault of her own, because the returns have still been good. So, yeah, it's no wonder she's still furious. But even angry people can see the silver lining, and it's this: At a time when no politician wants to talk about them and few investors want to touch them, income trusts are - dare we say it? - due for a comeback.

Actually, while the investing public has been running from trusts, in fear of the Terrible Mr. Flaherty and his new tax, most trusts have been doing just fine all along. True, they got absolutely crushed on Nov. 1, 2006, after his shock announcement. But what if you'd invested at the close of business that day? The S&P/TSX income trust index has returned 26 per cent, including all distributions. That beat the TSX composite (up 15.3 per cent), the Dow Jones industrials (down 13 per cent in Canadian dollars) and just about any other stock index that matters.

That's right. When the grinning Finance gnome was on CBC Newsworld justifying his decision, that was the moment to buy. Of course, it's partly a matter of rising oil prices, because the trust index is even more heavily exposed to energy than the TSX composite. Leaving that aside, though, the feds' crackdown did have some useful, albeit unintended, consequences, Ms. Lundquist says. It also served to flush out some of the low-quality junk (and, as importantly, prevented investment bankers from flogging more of it).

There were about 40 takeover offers for trusts in the year after the Halloween surprise but not very many of the targets will be missed, despite all the gnashing of teeth. Is it really a tragedy that Spinrite Income Fund, a yarn factory, is no longer publicly traded? Granby Industries? Associated Brands? Osprey Media? Some of these companies were wealth-destruction machines almost from the day they went public. Now they're in private hands, where they belong.

A few crazy ones still linger - the income trust that's based on a hydroponic vegetable-growing operation comes to mind - and a few others are too toxic for even private equity to touch. But for the most part, the trust market now looks much more like it was always intended to: a place for real estate, energy, and a small number of decent businesses like Yellow Pages whose need for capital reinvestment is small.

Come 2011, the roster will shrink some more, but maybe not as much as you think. In the oil patch, there's still lots of talk about finding ways to slide around, or at least soften the impact of, the trust tax. "I wouldn't be surprised if they're the last to say die. They're the most angry and they probably feel the most betrayed," Ms. Lundquist says. (Mike Tims, chairman of Peters & Co., a Calgary investment bank, confirms this: "I think we're going to see a bunch of innovations between now and 2011.")

And here's the kicker: Many trusts are far cheaper now than when everybody loved them and Bay Street was pumping them out as fast as it could. Take Yellow Pages. Pre-2006, it was an acquisition-mad company that issued billions of dollars in new units to buy stuff, and investors just couldn't get enough, even if it traded at 13 times EBITDA (earnings before interest, taxes, depreciation and amortization). Now it doesn't make the front page any more; all it does is make money and the multiple has shrunk to 8∏ times, using Bloomberg data. Yet nobody cares.

Who'd have thunk it? By attacking income trusts, Jim Flaherty may have created a once-in-a-generation investment opportunity in ... income trusts.

Monday, July 28, 2008

MP Garth Turner gets it. When will Canada's journalists catch up?

Could it have something to do with the fact that they’re “owned” by Teachers and BCE?


On October 31, 2006, Jim Flaherty shocked a couple of million investors out of their shorts by dumping a 31% tax on income trusts. This was ten months after the Harper Conservatives won office by promising they’d never do such a thing. The reason given: If income trusts were not slapped down then giant companies like Bell would convert to trusts, and Ottawa would be out hundreds of millions in tax dollars.

As a result of that move, Bell was prevented from converting, which would have seen dividends paid to investors, who would have then paid income tax. About $800 million a year. Instead, Bell went shopping for new shareholders, leading to the takeover – about to happen – by the Ontario Teachers pension guys. To pull this off, BCE will be burdened with $32 billion in debt.

So, here’s the outrage: BCE will not be paying any corporate income tax this year or next year or the one after. Not a cent. Jim Flaherty just blew his foot off. Worse, a grossly-indebted company is now struggling, and on Monday laid off 2,500 people. There are thousands more to follow, I’m told.

This is another example of a government that has absolutely no idea of the consequences of its actions. Income trusts. Over-spending. Forty-year mortgages. Bragging the dollar up. And mighty Bell, now a mess of wires and junk bonds.

More editorial hypocrisy from the Globe

The Globe’s editorial of today is entitled “Enough with the 'surprises'” and deals with budget surpluses. It calls upon Harper to “live up to past promises”.

A little bit late don’t you think? The problem has self corrected, as there won’t be any surpluses for some time.

Meanwhile, on the question of "surprises" how cataclysmic of an issue are budget surprises? You want to talk about surprises, did someone lose $35 billion of their life savings from any budget surprise? No, but income trust investors did.

Does this practice benefit one group of Canadians at the expense of the other? No, but the income trust issue did.

And here we have the Globe calling upon Harper to honour some obscure past promise.

What about Harper's solemn promise not to raid seniors nest eggs that were invested in income trusts? Votes actually turned on that promise. This budget promise that the Globe is fixated on, played no role in the last election.

The Globe supports the income trust broken promise because it serves the interests of its owners.

The Globe has zero credibility by being 100% hypocritical in its contradictory editorial positions.

The Globe is more concerned about issues of semantics and ignores the complete abuse of our democracy arising from 18 pages of blacked out documents as “proof” of alleged tax leakage.

Enough with the 'surprises'

July 28, 2008

Renewed criticism of the federal government's continuing practice of underestimating annual revenues, particularly where it appears to be a deliberate political strategy, should compel the Conservatives to live up to past promises.

Hmm.....maybe Jim Prentice needs to invite Jim Leech to his August photo op meeting as well?

Jim Prentice had himself all all tied up in a knot over the fact that BCE and Telus were going to start charging 15 cents for income text messages.

Jim was so tied up (in political self interest), that he demanded a meeting with the CEOs of Telus and BCE.

Just how did our Apprentice Minister of Industry exactly think that BCE was going to service the interest on $44 billion of junl bond debt? By defaulting?

Of course not, they will do it the old fashioned way: raise prices and lay off workers.

Maybe Jim Prentice needs to invite the CEO of Teachers’(Jim Leech) to his photo op meeting in August with the CEO’s of Telus and BCE.

Prentice has much bigger egg on his face for approving the LBO of BCE than text messaging fees, How about the little matter of 2500 knowledge sector jobs:

BCE to cut 2,500 management jobs

Jamie Sturgeon, Financial Post Published: Monday, July 28, 2008

A pair of Bell Canada's repair and installation vehicles are parked outside one of the company's downtown offices in Toronto, Ont. BCE Inc. announced Monday it was cutting 2,500 management jobs.Norm Betts/Bloomberg NewsA pair of Bell Canada's repair and installation vehicles are parked outside one of the company's downtown offices in Toronto, Ont. BCE Inc. announced Monday it was cutting 2,500 management jobs.

BCE Inc. said on Monday it plans to cut 2,500 management jobs at Bell Canada as part of a massive restructuring plan announced on July 11. The cuts at the telecommunication giant's main division will represent about 6% of Bell's total workforce and 15% of its management.

BCE's massive layoffs and how Jack Layton is out of touch with the global labour movement

Union bosses want action over the 'rodeo capitalism' of private equity

By Susie Mesure,
February 9, 2007

"Rodeo capitalism" was the blunt verdict of the takeover frenzy gripping J Sainsbury from a global workers' movement yesterday. Trade unionists have been tripping over themselves this week to denounce a potential £10bn-plus bid for the supermarket chain by a quartet of private-equity firms.

The GMB wants MPs to "rein in" the industry, amid fears that Sainsbury's will be the next victim of a private-equity boom that the union believes is "destroying household-name companies by saddling them with massive debts".

It blames the UK's tax code, which lets the industry heap up debt to fund its deals cheaply and then claim tax relief on the interest payments on loans. This starves the Exchequer of cash, so its argument goes, although this fails to recognise the tax that does make its way back to Gordon Brown via, for example, the pay cheques of staff employed by private equity-owned firms.

Philip Jennings, general secretary of United Network International (UNI), a global union that speaks for 15 million workers in 150 countries, said yesterday: "How long does a cowboy stay on a bucking bronco? A minute and a half. It's the same deal with private-equity owners of companies. Rodeo capitalism rewards the speculators and punishes decent companies and their workers with uncertainty." He added: "The Sainsbury's sweepstake should stop right now."

Mr Jennings' great fear is the one outlined by the City's very own watchdog just weeks ago. The Financial Services Authority, which has placed the private-equity industry under its magnifying glass, warned that the collapse of a private equity-backed company was "inevitable" due to the mountains of debt their acquisitions are forced to carry on their balance sheets.

To be clear, the debt in question is not your ordinary "oh-whoops-I'm-in-the-red-this-month variety". It's barely even the equivalent of your average mortgage. Rather, to the private-equity industry, debt is the equivalent of a magician's wand. It lets the private-equity boys - those infamous Barbarians of the corporate world - buy companies for their equivalent of petty cash, borrow stacks more money from the bank, and then use the cash generated by their new purchases to pay back their loans, thus leaving them owning something that is worth vastly more than they paid in the first place.

Analysts estimate that the CVC, Kohlberg Kravis Roberts, Blackstone and Texas Pacific consortium stalking Sainsbury's would barely need to put in £3bn of equity to buy a group that is valued at £9.5bn by the stock market. The rest they would borrow from a mixture of banks and hedge funds. After a semi-decent length of time has passed - private-equity firms tend to own businesses for between three and five years - Sainsbury's private-equity owners would either sell the business on or try to refloat it on the stock market, pocketing vast sums in the process.
Or so the theory goes. And it is that theory that has so enraged trade unionists, fearful for the job security of tens of thousands of Sainsbury's staff, particularly if in practice the business ends up struggling under the weight of its new debts.
"Is this business model too short term?" Mr Jennings asked a panel of private-equity heavyweights including Blackstone's chairman and chief executive Stephen Schwarzman at the World Economic Forum in Davos last month. "'Buy it, strip it, flip it' seems to be the motto."
The UNI is worried about the potential threat to the trillions of dollars tied up in pension funds that are swelling private-equity warchests around the world in the event that one of their investments goes wrong.
It also laments the lack of regulation forcing the industry to be accountable. With the exception of private equity-owned companies that have issued bonds, the industry is not required to dish the dirt on its investments. It doesn't even have to reveal how well (or badly) its investments have performed, although some firms do indeed choose to do so.
Mr Jennings wants other national regulators as well as the FSA to investigate what he dubbed a "feeding frenzy" sparked by the $500bn (£255bn) of cash that the global private-equity industry has burning a hole in its pocket. He is hopeful that a private-equity debate will be on the agenda for the G8 at its June meeting in Berlin; the German chancellor, Angela Merkel, has already let slip that she feels little sympathy for the industry.
Closer to home, the Transport and General Workers' Union, which has 25,000 members at Sainsbury's, has said it plans to write to the Department of Trade and Industry to express growing fears on the shopfloor about the potential £10bn takeover.
And last month, the Prime Minister himself was asked by Barry Sheerman, the Labour MP for Huddersfield, whether he was worried that private-equity companies starve firms of investment and "asset-strip ... in pursuit of a quick buck and quick profit". (Tony Blair, on the whole, wasn't. Yet even this only added grist to the mill of conspiracy theorists who think the Government is tucked up so snug in bed with the industry that any tax perks are here to stay.)
The attack from trade unionists has not gone unnoticed by private-equity insiders. Many are furious at what they perceive as underhand tactics to criticise an industry that more than pulls its economic weight. The British Venture Capitalists Association, a lobbying group, has figures showing that companies backed by private-equity firms created jobs at a rate way in advance of their FTSE 250 peers.
"Trade unionists have skipped the debate. They have decided they don't like private equity and they are not even interested in discussing whether it brings any benefits to the economy," said one industry insider. Regarding the GMB's tax attack, he added: "Trade unions have not historically been concerned about the tax regime per se. They have identified this as a potential vulnerability, rightly or wrongly. Yet debt is a legitimate business expense. Pretty much every company uses it to finance its business."
A 3i spokesman concedes that the industry hasn't invested much time in letting the outside world know what it is up to. But he says investors get all the information - and more - that they require.
Perhaps the greatest defence of the tactics used by the industry came from Donald Gogel, president and chief executive of Clayton, Dubilier & Rice, a big US player, out in Davos. "We all have children. Do you think we'd go home and say: 'We flip, we dip, we strip'."
As for what this all means for Sainsbury's, well right now it's anyone's guess. Although the founding Sainsbury family no longer has a controlling stake, their views still count, and from later this month Lord Sainsbury of Turville, the former Science minister, will be able to make his known.
Mr Jennings said: "Now he is free of his political responsibilities, as a true lord he should ride to the rescue and calm speculation about what he will do with his shares. He should issue a statement saying that the Sainsbury family is happy with the situation as it is."
As a flip side, he hopes that the spotlight on Sainsbury's will thrust the darker side of private equity into the open. "People have to wake up to the reality. Maybe this is the tipping point in the public's acceptance of these deals and the public's understanding of the downside of the private-equity business model."
The darker side of private equity
The AA, Roadside Assistance Group
* Was bought from Centrica by CVC Partners;
* Was geared up with £1.9bn of debt yet has virtually no assets; has sacked 4,000 of 10,000 staff; response times have since plunged, according to 'Which?';
* Will lose the Volkswagen contract to its rival, the RAC, from April.
Hertz, Car Rental
* Was bought by a private- equity consortium in early 2006 from the ailing Ford for $14bn (£7.15bn);
* Less than 11 months later, it was "flipped" in the form of a stock market flotation;
* Clayton, Dubilier & Rice, Carlyle Group and Merrill Lynch Global Private Equity pocketed millions of dollars from the deal.
Gate Gourmet, Catering Company
* Owned by the US private-equity firm, Texas Pacific Group;
* Was embroiled in one of the worst labour disputes in recent decades
* Was accused of sacking staff to bring in cheaper seasonal - and non-unionised - workers.

2500 layoffs brought to you by Jack Layton.......just in time for 2 Montreal by-elections

Bell Canada to cut 2,500 jobs to lower operating costs ahead of takeover

The Canadian Press
July 28, 2008 - 10:01 a.m.

MONTREAL - Bell Canada (TSX:BCE) plans to cut 2,500 jobs, or six per cent of its workforce, as the telecom giant streamlines management to lower operating costs just ahead of its impending takeover by a private equity consortium.

Jack Layton’s pivotal complicity in these layoffs explained here

BCE/Jim Flaherty to lay off 2500 knowledge workers

Bell streamlines management structure to improve competitiveness

BCE Inc. (TSX, NYSE: BCE) today announced it will reduce the size of the Bell management team as part of an organizational realignment focused on achieving a competitive cost structure.

MONTREAL, Quebec, July 28 2008 -- BCE Inc. (TSX, NYSE: BCE) today announced it will reduce the size of the Bell management team as part of an organizational realignment focused on achieving a competitive cost structure.
The number of management departures at Bell will total approximately 2,500, representing approximately 6% of the total Bell workforce or about 15% of management. These changes include the 30% reduction in executive positions announced on July 11. Combined with other reductions undertaken earlier this year, the changes announced today are expected to provide annualized savings of approximately $300 million.

Jim’s standard answer: ”it’s not my fault”

BCE: A simple IQ test for Jim Flaherty

Jim Flaherty likes to portray himself as the all knowing, all seeing Minister of Finance.

For example, he would like us to believe that he foresaw the downturn in the US economy and that he took measures in the last budget which anticipated that event. For example he lowered the GST?

Here is a direct quote:

"We knew that there would be an economic slowdown in the United States, and we took the steps in terms of making sure we in Canada were prepared for this economic slowdown,"

It’s easy to say that you foresaw something AFTER it has occurred, quite another to foresee something BEFORE it has occurred.

Flaherty’s income trust tax provides a simple IQ test for Jim Flaherty’s capabilities as a Finance Minister and his true abilities to look into the future and predict the consequences of his actions:

Here was his rationale for the income trust tax on November 1, 2006 as quoted in the Globe:

“You have to either leave it alone or fix it,” Mr. Flaherty shrugged Wednesday. “We were going to see the two largest telecommunications companies in the country not pay corporate taxes. That's a clear and present danger to fairness in the Canadian tax system. I thought we had to act.”

Evaluating Jim Flaherty’s IQ and acumen as Canada’s Finance Minister can be easily determined by how well this statement predicted future events.

It must first be pointed out that at the time of this statement, neither BCE nor Telus was paying any corporate taxes as a corporation, as the following statements from those two companies attest to:

BCE forward looking statement of December 12, 2006:
Bell expects it will have no significant federal cash taxes through 2010,”

Telus forward looking statement of December 14, 2006:
“Based on a an updated review of the company's tax loss position, TELUS now expects minimal cash tax payments in 2007, a preliminary estimate ofapproximately $100 million in 2008 with the payment of significant cash taxes largely deferred to 2009, rather than 2008 as previously anticipated.”

So the question becomes, how could the government lose taxes that it wasn’t even collecting at the time?

Perhaps Jim Flaherty was referring to a longer time frame when he made that statement to rationalize his policy.

In that case we only need to look at the events of the next six months following the date of this statement by Flaherty.

According to BCE’s takeover bid circular, we learn that the private equity leveraged buyout of BCE was precipitated by the events of Halloween.

That is revealed by the fact that BCE’s circular provides a history to their proposed transaction. The first four events recounted are:

October 11, 2006:
BCE announces its intent to convert to an income trust

October 31, 2006:
Jim Flaherty shuts down income trust market

November 3, 2006:
KKR rumoured to be considering a takeover bid for BCE in the aftermath of its devaluation following Flaherty’s Halloween announcement. BCE CEO calls KKR that day.

November 15, 2006: BCE CEO Michael Sabia meets with Henry Kravis of KKR. Teachers’ catches wind of these discussions, which precipitates an auction of BCE to private equity firms by way of a leveraged buyout

As for Flaherty’s IQ test. How well did he do? How well did he predict the future? Did he even portray the present circumstances honestly and correctly? Did he ensure that Canada’s two largest telecommunications companies would pay taxes? Here’s the answer to that:

Flaherty's tax conundrum

BCE Privatization could cost him $800-million

Paul Vieira, Financial Post Published: Wednesday, April 18, 2007

OTTAWA - Jim Flaherty, the Minister of Finance, could face another major tax loss headache --on the scale of income trusts -- should a buyout deal be reached between BCE Inc. and a consortium of private-equity investors.

Financing experts say a buyout of BCE -- led by tax-exempt pension funds Caisse de depot et placement du Quebec and the Canadian Pension Plan Investment Board -- would produce virtually the same results, taxwise, had the Montreal-based company converted to an income trust as planned.

"It is basically income trusts revisited," said Laurence Booth, an expert in structured finance at Toronto's Rotman School of Management. "And the implications for Ottawa are pretty much the same."

Yesterday, BCE confirmed it was in talks with the Caisse and CPPIB about taking the publicly traded company private. If successful, it would result in the largest buyout in Canadian corporate history.

It has been estimated the conversions of BCE and competitor Telus Corp. would, collectively, shrink corporate tax revenue by $800-million a year. David Lambert, a telecom analyst at Canaccord Adams, said yesterday he estimates that BCE alone pays, on a per-share basis, about $1 per share from its free cash flow toward taxes.

BCE has 808 million shares outstanding, which would translate into an annual $808-million tax bill under Mr. Lambert's calculations.

Last year, BCE had announced its intentions to convert to an income trust. But those plans were killed when Mr. Flaherty slapped a tax on income trust distributions to put an end to the popular corporate structure that allowed companies to avoid tax by dishing out most of the cash flow to investors.

Mr. Flaherty said he decided to act because the investment vehicles were costing Ottawa $500-million in lost revenue annually, and warned that planned conversions would further threaten federal finances.

Under private-equity transactions, or leveraged buyouts, the investors finance the acquisition mostly with debt and a small equity component. The interest payments on that debt allow the investors to avoid, or greatly reduce, the amount of tax paid.

Further compounding possible problems for Mr. Flaherty is that pension funds can defer taxes owed. So if they own equity, dividends from those shares flow through without facing a tax hit.

"Financial markets are getting more innovative and you are getting some very low-risk businesses that can support more debt, and [investors] are finding ways of having them carry more debt in order to avoid the corporate income tax," Mr. Booth said.

He likened the Finance Minister's efforts to stem tax leakage to the title character in a Dutch legend. "[He] is a bit like the Dutch boy who has his finger in the dyke. He plugs one hole but then, bingo, another hole pops up."

Mr. Flaherty yesterday declined to comment on developments at BCE, or even mentioning the company's name. "I am not going to talk about anything that is subject to current market activity," he said.

But he dismissed suggestions that private-equity investors are, as Mr. Booth suggested, converting to a trust through the back door.

"That is nonsense," he said. "When you are talking about a company becoming an income trust under the old rules, you are talking about a company getting a preferred tax rate. When you are talking about a corporation continuing as a corporation but under different ownership, it is still taxable--at the same rate."

Mr. Flaherty has come under pressure, from corporate Canada and the Liberal party, for handicapping the business community with the trust tax and recent changes to interest deductibility of foreign financings. These moves, his critics argue, will leave Canadian firms ripe for foreign takeovers and make them less competitive on a global scale.

John McCallum, the Liberal finance critic, said Canadians are starting to see the consequences of the trust tax.

"The effect of what he is doing is exactly the opposite of what he intended, because the holders of income trusts pay lots of tax," Mr. McCallum said. "All of these trusts are now being taken over in such a way so that the new owners will pay no tax.

"So, instead of a situation where a lot of personal taxes were being paid, you are having these induced takeovers by highly leveraged private-equity companies that will pay no tax."

Sunday, July 27, 2008

Gitmo north

The issue involved in Omar Khadr’s incarceration at US military prison Gitmo, isn’t whether he is guilty or not, the issue is whether he will be given a fair trial in accordance with Canadian standards of justice.

Without due process, justice is just another word in the English language.

One need only learn that the Gitmo military version of justice, involves the accused not having the opportunity to see, and therefore challenge, the evidence that is being used against him.

It’s no wonder that Stephen Harper is in favour of this form of justice, as he has used it to good effect in the matter involving income trusts.

Harper has accused income trusts as being responsible for causing tax leakage. Jim Flaherty even tries to cast the matter into military type terms by saying that income trusts represented “ a clear and present danger to fairness in the Canadian tax system.”

On this basis he claims: “I thought we had to act.”

So where’s the proof of tax leakage and the calamitous “clear and present dange”r that it represented? After all the allegation of alleged tax leakage is an infinitely provable construct or it is not.

Again Flaherty resorts to military type language to defend the release of 18 pages of blacked documents as his “proof” of tax leakage. He claims that it was a matter of national security to have disclosed this information.

Yeah, right.

So there you have it. Law abiding tax paying Canadians have experience a $35 billion loss in their lifetime savings based and the loss of an essential investment choice, on evidence they never get to see.

Welcome to Gitmo North.

Complacent Canadians, especially those in the press, should be very careful of what they have wished upon themselves in their blind acceptance of allegations by Stephen Harper as being anything remotely similar to the truth.

Our brave new world of multiple truths..... brought to you by the Globe and Mail

As with the speed of gravity or the boiling point of water, there only is one truth. It also holds that there is only one truth insofar as one’s bank statement is concerned.

Why then is the issue of alleged tax leakage from income trusts so nebulous and vague? Why has there never been a proper accounting and reckoning of this issue?

If the local bank can go to the trouble of issuing monthly statements concerning the $321.17 that I have on deposit , then why can the Government of Canada not go to the trouble of ascertaining with some measure of precision and methodological rigor the true tax leakage that they allege arises from income trusts?

How credible is that? Perhaps more a case of being incredible, as in astonishing and not credible.

People are being asked to forego an essential investment choice that provides needed income for their retirement. People have lost $35 billion of their hard earned life savings.

What’s the big secret?

Was this policy enacted on facts or was it enacted on whim? Perhaps Ministerial naiveté. had a big role to play? That alone calls for full transparency, as who benefits from incompetents in office and possible manipulators in the bureaucracy?

The question of tax leakage has a single answer. Presently we have no answer. Those who favour this tax and who benefit commercially from it have a good reason to promote confusion and to believe in the world of multiple truths. Take for example this beliver inmultiple truths, John Stackhouse, editor of the Report on Business at the Globe and Mail. This was from November 7, 2006. All I can say is it’s a good thing this guy isn’t responsible for my $321.17 bank account, for which he would only be able to provide me with a "reasonable range of estimates", which of course "depends greatly on the assumptions":

Is it safe to assume that this individual and the commercial interests he represents are well served by the world of multiple truths?

Dear Mr. Fullard

Ira [Gluskin] forwarded your piece to me. It's interesting, but I think most of your points have actually been well covered in our pages. And as for the "tax leakage" calculations, it depends greatly on assumptions -- but there is a reasonable range of forecasts that we have, I believe, published.

That said, I am copying your piece to my deputy editor Cathryn Motherwell, who oversees -- among many other things -- our new online trusts page. She may want to post it there.

Thanks again, and regards

John Stackhouse
Editor, Report on Business

To which I responded:

Dear Mr. Stackhouse:

Thank you for your prompt reply.

Let me start off by saying that I am not an advocate of tax leakage policies. I am, however, a strong advocate of public policies being founded on fact-based analysis and public input.

This whole income trust issue turns on the question of tax leakage.

I rely exclusively on the ROB and to a lesser extent ROB TV for my Canadian business news, and yes the ROB has published a range of "reasonable"(your term) estimates. The key issue is what constitutes "reasonable".

By reasonable I assume that you mean that these estimates are based on sound methodological frameworks and are performed on a rigorous basis. I am only aware of two studies that meet this latter test....the study performed by the Department of Finance and the work undertaken by HDR/HLB Decision Economics.

These two studies do however differ fundamentally as to their methodological framework, in that the Department of Finance (incredulously) chooses to ignore the tax it receives on the distributions paid on no less than 31% of all outstanding income trusts. i.e those trusts held in RRSPs/Pension plans. As I stated in my earlier letter, the $390 billion that Canadians have saved in RRSPs as their retirement nest eggs is nothing more than a nest egg for the government, as all monies withdrawn from RRSPs are taxed, and yet Finance ignores it.

This difference in analytical approach is not some esoteric concept that is above Canadian's heads, afterall, if this were a divorce court, the judge would chastise the Department of Finance for attempting to conceal communal assets for its personal gain.

The issue of tax leakage turns on this very central point.

Unlike the Liberal Government, who under Ralph Goodale, began a formal process of public input, that was abandoned mid way through the process in the Liberal's haste to prepare for last years election (following a non -confidence vote), the Conservatives after campaigning on a pro-income trust platform, reversed their course 180 degrees and did not see fit to at least finish the consultative process that the Liberals began.

Rather than discussing this issue in a fact based way with public input, it is being dealt with through a process of political expediency. No doubt the average Canadian intuitively thinks trusts are "tax dodge" designed to avoid paying corporate taxes at the statutory rates of 21% for non-resource companies and 25% for resource companies.

Do you not think that the average Canadian would be surprised to learn that (according to Statistics Canada), corporations on average pay only 6.2% of earnings in taxes? Are Canadians aware that two-thirds of trust distributions are interest which is taxed at the full personal income tax rates, in contrast to the 72% of corporate income which is taxed at half the personal tax rates. Would Canadians be surprised to learn that even if they were to accept the Department of Finance's flawed analytical methodology, that the "tax leakage" numbers they are promulgating in the public, have only a 9% chance of occurring and that there is a 91% chance that they will actually be materially less?

Perhaps you are aware of the "Downing Street Memo Affair" in the UK where Tony Blair's government was accused of "sexing up" (not my term) the intelligence reports to justify the ill-fated invasion of IRAQ? This revelation undercovered by the British press severely diminished Tony Blair's standing, and is widely attributed as being the reason he will not seek another term.

What does this have to do with Income Trusts? Based on the observations I made above, is it not possible that Finance, if not guilty of "sexing up" the data, is at least participating in "massaging" the data to assist in making the case that happens to resonate with the average Canadians' intuition , notwithstanding the fundamentally flawed analytical framework and notwithstanding the negative economic repercussions it will induce?

There are a whole host of secondary considerations/repercussions that arise from such a change in tax policy, some of which I attempted to address in my letter, such as limiting the investment choices of Canadians as they face the difficult task of providing for their retirement and the potential "hollowing out" effect of Canadian business, just to name the ones I am most concerned about.

Unlike our elected politicians, all of whom have Government indexed pension plans (actually, three in the Flaherty household), most Canadians have no such pension plan and many of those that are privileged to have company pension plans need to concern themselves with a serious level of under funding which from time to time Ottawa voices concern about.

There is a very perplexing circularity of injustice in what is going on here. By virtue of the fact that so many Canadians do not participate in a formal pension plan, they have to participate in the difficult task of making their own investment choices...meanwhile Income Trusts emerged as a prudent and sought after investment alternative that many Canadians have chosen for inclusion in their RRSPs as they plan for retirement, and now we have the Government taking this very investment choice away from Canadians because the Governments analysis that supports the notion of tax leakage ignores the taxes on the very place where most Canadians hold these securities, namely their RRSPs. Circular logic or circular injustice?

Very little of this has been reported on in the ROB. All of my observations are fact-based. Given that the Government has not seen fit to provide a formal process of public input on this important economic issue, the press becomes the only means for doing so.

Thank you

Brent Fullard

Saturday, July 26, 2008

Harper's idea of transparency

Show us the numbers, income trusts demand

Globe and Mail
December 7, 2006

Ottawa — The embattled income trust sector is demanding that federal Finance Minister Jim Flaherty release calculations justifying his claim that trusts are costing Ottawa half a billion dollars in lost tax revenue each year.

Private sector analysts have questioned Ottawa's figures and suggested the revenue bleed has been significantly overstated.

When he slapped a surprise tax on income trusts on Halloween, Mr. Flaherty justified it by saying the investment vehicles were costing Ottawa $500-million annually in lost tax revenue and warned this hemorrhaging could grow to threaten federal finances.

He also said that annual losses would have climbed to $800-million annually if Telus Corp. and BCE Inc. converted to trusts.

Trusts say they've yet to receive details from the Finance Department on how mandarins got the loss estimate.

"There's nothing backing up these numbers that Jim Flaherty has been throwing out," said George Kesteven, president of the Canadian Association of Income Funds.

"It's never been analytically substantiated."

The Globe and Mail has also requested the data from Finance.

Mr. Kesteven said work by some other analysts has contradicted Ottawa and concluded that income trusts are tax neutral, meaning they cost the federal government nothing in lost tax revenue.

One Calgary royalty and income trust analyst is trying to use the federal Access to Information Act to prompt Finance to release the detailed analysis it conducted to derive its tax loss estimates.

Gordon Tait of BMO Nesbitt Burns says his own work concludes that Ottawa reaped more, not less, tax revenue after firms converted to income trusts.

"We looked at 126 businesses that converted from equities to trusts between 2001 and 2005 to prove that," Mr. Tait said in a study.

"We found that on average the government stood to collect 2.2 times more in taxes by taxing the distributions of the trust than had been paid by the corporations prior to their conversion."

The Tories broke a campaign promise by slapping a levy on trusts, which pay few or no corporate taxes. They said this would apply immediately to new trusts but that existing trusts would be exempt from the levy for four years.

Separately, a move is afoot by the Bloc Québécois to try to extend the grace period for existing trusts to 10 years from four.

The Bloc has written Mr. Flaherty asking for the amendment when he introduces legislation to support the levy. The Bloc backs the trust tax, however, and say they do not plan to withdraw this support if the grace period is not extended.

The Bloc is also lobbying other parties to support the grace-period extension. The minority government situation means the Bloc and Liberals have the power to rewrite the trust bill in committee to extend the grace period to 10 years. The Liberals say they've not yet decided what they will do.

What does Stephen Jarislowsky know about corporate governance?

Buying BCE

By: Stephen Jarislowsky

Financial Post
July 26, 2008

The Board of Directors of BCE met to consider an offer from the Ontario Teachers Pension fund, and others, to make a leveraged buyout. The board was fully aware that if it sold BCE, the buyer would issue new bonds and borrow from banks, in addition to the already outstanding bonds and preferred shares issued at the time. The board also knew that these bonds and preferred shares would not rank ahead of the new debt. Old bonds issued in this situation totaled some $5-billion, plus the preferred shares. These bonds were all rated 'A' or better, which means "investment grade." The board also knew that bonds under 'BBB' (one grade lower than 'A-') would be 'junk' bonds and that most pension funds prohibited owning such bonds (many funds do not allow 'BBB' bonds, or if so, only in small amounts). The company had originally sold the bonds to investors on an 'A' or over rating.

When the board meeting ended, the board had accepted the offer from Teachers and, though its action in one meeting created a loss for the bondholders of $1-billion, i. e. it had destroyed unilaterally, without change in the company's pre-meeting risk, the value of these bonds by $1-billion, with the sole objective being to get a higher price per share. The board members had a conflict of interest as all were BCE shareholders. As fiduciaries for the company (and that was their status under Canadian law) they had betrayed the interest of the bondholders by $1-billion. Was this legal? Was it ethical? Was it good governance as fiduciaries?

The trial judge said yes it was legal, citing U. S. Delaware Law. All five judges of the Appeal Court said no. The Supreme Court, allowing the case to take precedence (why?) over all others on its docket, after a very cursory hearing, allowing only a minimum of testimony, and after only a few days of thinking and deliberation, unanimously said it was legal. It would give its reason later (?)! The haste is surprising, and so is the willingness to give preference to this case. Obviously when five Appeal Court judges are unanimous, one may wonder why seven Supreme Court judges came to the exact opposite conclusion in no time flat? The case is murky at best. Moreover, in another case, the Supreme Court had ruled that directors have an obligation to other stakeholders, not only the shareholders. A contradiction?

Few judges are experts in corporate matters of this type or in modern governance. Clearly that would seem to apply here. Why else would there be a total contradiction of the Appeal Court by the Supreme Court?

Jarislowsky Fraser Limited does not hold BCE shares or BCE bonds for its clients, nor does the writer own any. Some years ago, we decided not to invest in this company after the board did not honour a Letter of Comfort to Teleglobe bondholders. Neither the firm nor I have a conflict of interest in my writing this letter.

However, being a co-founder of the Canadian Coalition for Good Governance, the founder of the Institut sur la Gouvernance du Quebec, and after 53 years in business defending shareholders, I believe I have a fair grasp of both ethics and governance. To be allowed to legally alienate $1-billion of market value in a short board meeting does not meet my criteria.

If indeed the Supreme Court acted correctly, I am shocked that a unanimous Appeal Court ruling was so summarily overruled in insufficient time. Does it mean that Canadian laws need to change to protect against this type of alienation? Does it mean that the law is not clear? Does it raise other suspicions and questions?

I would like to go on record saying that I am very uncomfortable. Both Canadian Law and our process are flawed at best.

Stephen Jarislowsky, Chairman & Director, Jarislowsky Fraser, Montreal.