Thursday, August 21, 2008

ROB learns a hard lesson others in a position of trust may wish to avoid

RE: Globe's ROB article of today: BFI learns a hard lesson other trusts may wish to avoid

The Globe and Mail has so many intersecting concepts that it conjures up at any given time to makes its “point du jour”. None of their arguments run in parallel or coherent lines.

Take for example the Glib’s reporting of the BCE situation. The Glib is owned by BCE. Endless amounts if ink were spilt by the Glib making the point about “the primacy of shareholders”. This was the guiding light argument as to why the BCE bondholders were being asked to take a $1 billion hit, despite representations by the company about the essential nature of preserving investment grade credit ratings.

As such, the Glib would have us believe that shareholders, as owners of BCE’s equity are sacrosanct

Now we have this statement in today’s ROB about the nosedive that BFO took:

“What's playing out at BFI is a classic tension between a management team and board that wants to plow cash back into the company and shareholders who want the cash their company generates to be handed over to its owners.”

Tension? What tension? If the owners want the cash, they are entitled to the cash. Much in the same way that BCE had no right to suspend dividends pending Teachers’ yard sale exercise in raising $34 billion in debt.

However in making the above observation the Glib has accidentally revealed what this whole Tax Failure Plan is about........a contrivance that allows Management to assert its “rights’ to determine how excess earnings are deployed as opposed to the Owners.

It only stands to reason that a company that follows the wishes of its Owners as opposed to the whims of its Management is WORTH MORE.

This “worth more” concept is what provided the impetus for companies to convert to trusts.

Conversion to a trust also imposes the legal and tax discipline on management that obligates them to adhere to a payout model of the trust. This is mandated under tax law. Some 95% of excess earnings must be pad out pronto.

MANAGERS like Dominc D’Allesandro loathed such a concept....... he and other CEO’s who were like minded.

They were faced with the inexorable pressure to convert to payout model companies to attain higher values (whilst maximizing tax collection to Ottawa)

They were the people who wanted to kill the trust model. They were only interested in the Primacy of Managers and not the Primacy of Shareholders,

So what did this cabal-at-large do with the help of Mark Carney and Jim Flaherty? They created the canard argument of tax leakage.

Canard: An unfounded rumour.

The other casualty of this cabal was honest insightful business news reporting in Canada....with a few limited exceptions......but no exceptions presently in the Globe and Mail since Steven Chase was reassigned.

The hard lesson for the ROB: The Globe and Mail has lost all credibility and reason on the topic of Flaherty’s Tax Failure Plan


Truth in Trusts said...

BFI lost $550,000,000 in capitalization from Flaherty's Hallowe'en massacre announcement up until Monday. After they announced they were effectively being forced to convert to a corporation by the clever Finance minister, they lost an additional $275,000,000 in capitalization. But Andrew Willis of the Glib thinks that this "Conversion should mean moving back to a position of strength."

That's $825,000,000 in lost capitalization and let's not forget the $125,000,000 that BFI paid annually as distributions when they were a trust. Where are the annual taxes on those distributions gone Andrew?

The executives in a trust model have their performance measured on a monthly basis by the owners/unitholders of the company.
The executives in a corporate model do not have or want that same pressure. This is one of the primary reasons why the big corporate executives pushed Flaherty to destroy the trust model.

Robert Gibbs said...

BFI Income Fund (BFC.UN):

Closing Price on Oct 31, 2006: $30.41
Closing Price on Aug 20, 2008: $18.42

Percentage Loss: 39.4%

Great work Harper and Flaherty.


Income trust investors have been sodomized.

Dr Mike said...

In the corporate structure , mom & pop little guy investor mean absolutely nothing.

In the trust model , they mean everything.

For me , the choice is easy.

Dr Mike.