Could this have anything to do with BCE? Nah

It’s a good thing Bob Hamilton recently got promoted. Obviously he’s paid to ignore warnings like this.

After all, the private leveraged buyout of BCE will only result in $800 million less taxes to Ottawa, PER ANNUM, relative to an income trust:

Trust tax linked to private equity buyouts
STEVEN CHASE
Globe and Mail
June 13, 2007

OTTAWA -- The income trust structure was a major impediment to private equity firms buying up pieces of Corporate Canada, the Finance Department was told one day before Ottawa slapped a crippling tax on the sector.

"Private equity firms generally find it difficult to compete against the income trust alternative, said an Oct. 30, 2006, memo sent to Bob Hamilton, senior assistant deputy minister of tax policy at the Finance Department.

The memo was obtained by The Globe and Mail under access to information law.

For anyone at Finance who knew the trust tax was imminent, one conclusion that's easily drawn from the memo is that taxing trusts out of existence would likely usher in even more private equity buyouts by Canadian and foreign investors, which is what happened.




The levy, which applies to new trusts immediately, has killed the formation of new trusts and removed an option for companies that are being targeted for takeover by private equity.

That's meant a jump in private equity interest in bids for companies such as BCE Inc. that had previously considered converting to trusts.

Finance Department censors have blacked out portions of the briefing note -- which has a security classification of "protected" -- but it was sent to Mr. Hamilton because, as the author said, it contained "key highlights relevant to tax policy analysis [that] are worth mentioning."

The memo, sent by Paul Berg-Dick, a director at Finance Canada, summarized a Toronto symposium on buyouts attended by a department research chief that forecast a continued hike in private equity investments.

"It is expected that large pension fund allocations to private equity will continue to increase and that small pension funds, which have shown some reservation so far, will start participating in that market as they learn from the experiences of large funds," the memo said.

Foreign buyouts of Canadian firms were also expected to remain strong, the note said.

The only obstacle to private equity buyouts of companies that was highlighted in the memo was income trusts.

It told Mr. Hamilton that trusts are considered a "serious competitor" by private equity firms because management at companies targeted for takeover prefer converting to a trust instead of succumbing to private ownership.

"When bidding for the acquisition or takeover of a Canadian company, private equity firms have to deal with the income trust factor," it said.

"Very often, and for obvious reasons, managers will prefer the freedom of action typically associated with widely held, publicly traded entities such as trusts, as opposed to the close supervision exercised by private equity firms," it said.

"Income trusts provide managers with a certain control over business decisions, while offering attractive valuation multiples to equity holders."

The memo also suggested that foreign participation in the leveraged buyout market in Canada was here to stay. "The factors behind this upsurge are likely not cyclical."

The memo stated a "further concentration of ... portfolio" in private equity was expected for major pension funds and the cost of increasingly large buyouts in Canada will require equally large partners "which may not be found in our domestic market."

Finance Canada spokesman David Gamble played down the memo, saying it's merely a summary of one of many conferences attended by his department. "Finance officials attend these kind of meetings to develop the best policies, to make the best recommendations to their minister," he said. "They go to events like this all of the time."

Critics of Finance Minister Jim Flaherty blame the trust tax for a rash of takeovers of trusts and would-be trusts in the wake of the levy. But he has dismissed that notion, saying capital is globally on the prowl for better returns and Canada, like other markets, is simply feeling the impact.