Wednesday, December 23, 2009

McGuinty shoots himself in the foot

This week we learned that Dalton McGuinty retained CIBC and Goldman Sachs to explore the possibility of selling a number of prime Ontario Government holdings to help pay down the province's massive budgetary shortfall. Possible assets on the block include, the LCBO, Hydro One, and the Ontario Lottery and Gaming Corporation (OLG). The common feature being that these are all are cash flow rich companies and operate pretty much like the equivalent of toll roads, reaching into the pocjet books of Ontario residents on a daily and weekly basis.

Apart from maximizing the value form the sale of these businesses, Dalton McGuinty should be sensitive to maximizing the opportunity for Ontario residents to participate in these businesses future ownership as well.

It is in both of these senses that Dalton McGuinty has shot himself in the foot. Had Dalton McGuinty not been so quick to jump on Jim Flaherty’s tax leakage bandwagon, as the false rationale for Flaherty’s knee jerk income trust tax, he would have been able to accomplish both of these goals at the same time, through an IPO of these businesses via income trusts. Now that option is gone. Gone for reasons that were completely false and erroneous. Gone through the direct involvement of the McGuinty government

Back in 2001, when I worked at BMO Capital Markets as the head of Equity Capital Markets, I was involved in the aborted sale of Hydro One, attempted by Ernie Eves. BMO was one of three co-leads who were mandated to execute the sale of Hydro One, the other two being RBC and Goldman Sachs. That’s where I first met Mark Carney. You should have seen how ballistic the guys from Goldman went, when there was a move made suggesting Ontario Hydro be sold by way of an income trust. An Income trust of Ontario Hydro would have meant the whole company likely would be sold to residents of Ontario, as there probably wouldn’t have been enough to go around, even with a deal of $2-3 billion in size.

Now that exit option is gone, and so too, the benefits it carries for Ontario in terms of maximizing proceeds and maximizing the ongoing ownership of these businesses by (taxpaying) residents of Ontario. Dalton has only himself to blame.

This is exactly the approach that I advocated within BMO Capital Markets and how we at BMO Capital Markets pitched the IPO of Hydro One to the Ontario Government, all under the banner of an “Ontario First” logo, lapel pins and all. We even produced a 60 second commercial that was ready to be aired at a moments notice. I recall telling the senior people at the Ontario Government at the time that they should not be at all concerned about whether we, as underwriters, could sell Hydro One to investors successfully, but whether they, as the government, could sell the idea of privatizing Hydro One to the voting public. My advice to them in addressing this matter, was for them to tell the public from the very outset in a highly visible way, that Ontario residents would be given a priority option to invest in the Hydro One IPO, hence the Ontario First branding and messaging.

This is not the route the Government chose to adopt, and indeed it was public backlash and backlash from the union that prevented the deal from proceeding. much as I had cautioned them about.

The same dynamic for public backlash exists today, and more than ever, cash flow rich assets like the LCBO, OLG and Hydro One are sought after by investors. But will Ontario residents get a chance to own any of these provincial crown jewels or will groups like Ontario Teachers get a first crack at owning them as they are lobbying for? Meanwhile what possible purpose is served by Goldman Scahs advising the Ontario Government, as they wouldn’t know an Ontario retail investor if they saw one. No doubt the advice coming from Goldman Sachs this time will be no different than the advice rendered by Goldman Sachs the last time, which was for the Ontario Government to turns their back on Ontario residents and make a bee line to Wall Street. Mark Carney’s adverse and self serving reaction to the idea of selling Hydro One via an income trust offering was just a preview of the infamous role he was to play in Ottawa to shut down the income trust concept, except this time across the board.

Shortly after the Hydro One deal went no where, Mark Carney found himself out of a job at Goldman Sachs and wound up in Ottawa. I actually felt some pity for the guy when I learned of his fate, But pity turned to disdain when I learned it was Mark Carney who was the architect of Jim Flaherty’s income trust Halloween Massacre and the incredibly dishonest person in Ottawa responsible for Flaherty’s bogus tax leakage argument, that was completely fictitious, and which formed the fraudulent basis on which Mark Carney, Jim Flaherty, Stephen Harper et al, destroyed $35 billion in Canadian’s investment savings and took from them an essential investment option.

And to think, Flaherty’s income trust prohibition would never have happened without the letters of support sent in from the 10 dutiful Provincial Ministers of Finance, one of whom was Greg Sorbara of Ontario, Dalton McGuinty’s hand picked Minister of Finance. Little did Dalton even know about the falsehood behind tax leakage and little did Dalton realize that he would be shooting himself in the foot some three years later when it came time to sell assets like the LCBO, OLG and Hydro One, in the same way that Ontario was able to sell Teranet.

So I guess this is a case of what goes around, comes around. Dalton McGuinty has seen to it that whatever option he pursues with respect to the sale of the LCBO, OLG or Hydro One, will be options that fall short of what could have been achieved under the income trust option, in terms of maximizing value and maximizing the ongoing ownership of Ontario businesses by Ontario residents.

Maybe Dalton will have now have some inkling what it means to have one’s investment options limited by the tax leakage falsehoods of Jim Flaherty, or to be one of the 1 million Ontario residents who lost $15 billion of their hard earned retirement savings, because of a government policy that whose very foundations were never proven, but just taken for granted. 40% of all income trust investors reside in Ontario and 40% of trust businesses are headquartered in Ontario.

Way to go Dalton! You have only succeeded in shooting yourself in the foot, along with all Ontario taxpayers.


Anonymous said...

I heard that the visigoths are invading rome.

If only Flaherty hadn't lied about tax leakage, the Empire would still stand strong!

Anonymous said...

And the logical buyer of the liquor stores is a Trust, LIQ.UN, although the SIFT growth limits may make it stop being a trust to do a deal (and perhaps as a SIFT-free trust could have paid Ontario more money).

Unless the Ontario Teachers or other vulture Pension Fund tries to buy it, thanks to the limitations imposed by the Flaherty-Harper gang.


Anonymous said...

Interesting background. Thanks!

Doug Alexander

CAITI said...


Concerning a possible purchase of LCBO by OTPP.

Talk about incestuous: The Province of Ontario sells LCBO to OTPP, whose plan sponsor is.....The Province of Ontario

Brent Fullard

Anonymous said...


Thanks for the comment Mr. Carney . . .


Anonymous said...

I guess Goldman Sachs is going to get the pound of flesh out of the taxpayers of Ontario . . just as planned so many years ago . . helping to sell our own assets back to ourselves . . nice job Carney. I'm sure your father would be proud if he were still with us . . do us a favour and go finish his research.


Dr Mike said...

What does this say about the quality of our politicians---not much I am afraid.

When it takes so little for big business & special interest pension funds to pull-off manipulations that only have their interests at heart , it must mean these guys in power are totally clueless or they are working on behalf of these two groups.

Neither option is a good one & either leaves us screwed again.

Dr Mike Popovich

Anonymous said...

McGuinty is getting his tax increase courtesy of Jim Flaherty's HST. Jim has promised him a one time cash transfer to implement the HST so McGuinty won't require a firesale of Ontario's assets. Of course, we know McGuinty's fondness for wasting taxpayer's money on consultants (eg. e-Health) so Goldman Sachs will be well paid even if their advice is worthless.

Anonymous said...

McGuinty coulnd't find his ass with two hands.

The people of Ontario will once again get the shaft. Brent is totally right regarding the obvious place for these entities is a trust.

But thatmks to Flaherty and McGuinty, these options are no longer there.