Does the fact that Greg Sorbara was proven dead wrong, count for anything?

The following is an excerpt from Greg Sorbara’s letter of support to Jim Flaherty of January 23, 2007, at which point in time Greg Sorbara was Ontario’s Minister of Finance:

“I would like the Committee to know that, in principle, the Government of Ontario supports the federal government's efforts to ensure fair taxation through changes to the tax treatment of income trusts. We believe that these changes will protect federal and provincial revenue from significant tax leakage.”

We believe that these changes will protect federal and provincial revenue from significant tax leakage? This raises two questions:

(1) Where is the proof the tax leakage existed in the first place, from either Jim Flaherty or Greg Sorbara? You know, facts and figures. Numbers. Something. Something as opposed to nothing?

(2) And what about this, from Global accounting firm, Deloitte, concerning the REAL tax leakage that is occurring as a sole result of the takeover of trusts that ensued. This sure doesn’t sound as if things turned out the way that Greg Sorbara “believed” they would, does it?


Income trust buyouts: Lots of activity, little tax revenue

Since the fateful announcement on October 31, 2006, there have been 40 announced or completed trust buyouts versus 14 deals over the equivalent year-ago period. We have seen the trust population of 256 shrink by more than 15% to 215. Market conditions such as foreign exchange fluctuations and commodity prices also had an impact on this decline, but the trust tax announcement was certainly the catalyst for the sell-off.

In December 2006, Deloitte hosted an event titled New realities for income trusts for trustees and management of income trusts, and their investors, bankers and advisors. The participants were asked to estimate the number of trusts that would still exist at the end of 2010 – and 87% responded “fewer than 100.” A decline of this magnitude translates to almost 40 trusts per year – closely in line with current reality.

Of the 40 deals that originated since October 31, 2006, 31 have closed and 9 are pending completion. Many other trusts have been targeted during this period, with at least one publicly disclosing a takeover attempt that was subsequently terminated.


What sectors were targets?

Following the trust tax announcement, the increase in buyout activity was concentrated in the business trust sector, spread across 10 subsectors. The generally smaller size (average transaction enterprise value of $430 million) of business trusts may have motivated trustees to sell – but performance may have been a contributing factor. Twelve of the business trusts acquired were bought for less than or equal to their $10 initial public offering (IPO) price.


Energy trust activity remained consistent year over year, although there were two foreign buyouts as opposed to exclusively trust mergers prior to the announcement.

The REIT and Power & pipelines sectors experienced an increase in interest by foreign buyers and Canadian pension funds. The characteristics of both of these sectors lend well to the infrastructure-based investing that many pension funds and foreign buyers are looking for, and should result in continued buyout activity.

Buyers are largely tax-exempt

Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.

What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust.

Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.