XPost: ab.general, ab.politics, calgary.general   
   XPost: can.taxes, ont.politics   
   From: dave-no_spam@unixhome.net   
      
   Looks like the Halloween Trust announcement is having unintended side   
   effects....   
      
   Government think things out?  Hardly.  Was good for Canadians while it   
   lasted, but now I guess the foreigners are going to own it.  Nice go Harpo.   
      
   ---   
      
         2007 will be full of takeover and consolidation in income trust market   
         Wed Dec 27, 2:51 PM   
      
      
   By Judy Monchuk   
      
   CALGARY (CP) - Takeovers and consolidation will be common themes for income   
   trusts over the next 12 months as the industry copes with the reality of the   
   four-year phaseout of its tax-free status.   
      
   Following the Halloween bombshell dropped by Federal Finance Minister Jim   
   Flaherty that knocked trusts for a multibillion-dollar loop, the real   
   question is how many will be left standing at the end of 2007.   
      
   A lot fewer than the 256 which currently exist, says George Kesteven,   
   president of the Canadian Association of Income Funds.   
      
   "Those infrastructure assets... have been somewhat vaporized over the last   
   six or seven weeks," said Kesteven, who worries about the far-reaching   
   ramifications of American interests potentially taking over the Canadian   
   funds.   
      
   Already, private equity firms have begun to move in to pick up trust assets   
   they view as undervalued or struggling. U.S.-based Harbinger Capital   
   Partners made an $831-million hostile takeover bid for Calpine Power Income   
   Trust (CF-UN.TO) on Dec. 19.   
      
   "We appreciate their capital, but what will happen is you've essentially   
   shifted the mind and management of these entities and their assets out of   
   the country," said Kesteven.   
      
   "If that was truly the intended consequence that Minister Flaherty had in   
   mind, I'd be surprised. I suspect this was yet another one of these   
   unintended consequences (indicating) this thing was put together on the back   
   of an envelope."   
      
   The industry maintains Ottawa didn't properly investigate the ramifications   
   of its Oct. 31 decision, which sent trust values spiralling down billions of   
   dollars. Guidelines released Dec. 15 indicate the government will allow   
   individual trusts to double in size without forfeiting their tax-free status   
   and merge without penalty, but that may not provide enough access to growth   
   capital for some.   
      
   The income funds have been around since 1984, launched as a way for energy   
   companies to sell aging wells no longer growing in production to companies   
   focused on squeezing the most oil or gas out of the ground.   
      
   But the explosion in popularity of trusts as an investment vehicle has been   
   fairly recent. Trusts were worth $20 billion in capital market volume in   
   2000, an amount which had grown to $200 billion just prior to the Oct. 31   
   announcement. Planned trust conversions by Telus Corp. (T.TO), BCE Inc.   
   (BCE.TO), and EnCana Corp (ECA.TO) would have seen that value swell to $300   
   billion.   
      
   Ottawa balked as it saw the trust market poised to embrace the corporate   
   giants, worried that such moves could impact the tax system and corporate   
   competitiveness.   
      
   The biggest concentration in 2007 will likely occur in the oilpatch, where   
   energy trusts are an important link in the food chain between small junior   
   exploration companies and the major players, who are focused on developing   
   resource plays that often require billions of dollars in capital.   
      
   Although energy trust assets often complement each other, they require   
   constant growth to replenish their declining reserves. Calgary-based oil and   
   gas trusts claimed six of the Top 10 funds on the Toronto Stock Exchange -   
   all of which lost heavily in the wake of what the investment community has   
   dubbed the "Halloween massacre."   
      
   Energy officials doubt a mid-sized sector will spring up to fill the role   
   played by the trusts. That sector all but evaporated several years ago when   
   companies, for varying reasons, hit a point where they could no longer grow   
   profitably.   
      
   "Your investor base is interested in growth, they're no longer satisfied   
   with your returns and you flounder while you're trying to convert over to   
   something different," said Sue Riddell Rose of Paramount Energy Trust   
   (PMT-UN.TO), co-chair of the Coalition of Canadian Energy Trusts.   
      
   "We saw a lot of foreign companies come in and take over basically the   
   entire intermediary sector in 2000, 2001," said Rose. "We don't think the   
   intermediate sector will do any better the next time around than it did last   
   time."   
      
   Any stream of takeovers will wait until after tax lawyers have had a chance   
   to fully digest the fine print in Flaherty's proposed legislation, released   
   the evening of Dec. 21.   
      
   But portfolio manager Cecilia Mo of Fidelity Investments doubts there will   
   be a stampede of movement.   
      
   "If that's going to become reality, they're going to make the best of the   
   next four years - enjoy the next four-year tax holiday and slowly   
   transitioning," said Mo.   
      
   The trusts have refused to accept defeat and aren't going quietly.   
      
   So-called "education campaigns" will be rolled out early in the new year to   
   try and convince Canadians that the government's decision was wrong -   
   lobbying efforts estimated to cost millions. Those campaigns will focus on   
   the Harper government's minority status and hope to make it an election   
   issue.   
      
   Trust officials note that most investors only truly became aware of the   
   extent of their losses after receiving financial statements in mid December.   
      
   Still, others say it's time to accept the inevitable.   
      
   A report by accounting and consulting firm Deloitte following Flaherty's   
   original announcement found that more than half of executives surveyed   
   believe there will be fewer than 50 trusts by 2011.   
      
   "The writing is on the wall," said Andrew Dunn, co-leader of Deloitte's   
   national income fund practice. "Trust (values) are already down $35 billion   
   to $40 billion from the $200-billion high and they're just going down from   
   there."   
      
   Those values will continue to fall as a steady stream of mergers,   
   acquisitions and conversions into corporations occur in 2007 and beyond,   
   said Dunn, who also predicts far fewer initial public offerings without the   
   trusts.   
      
   Simon Romano, co-author of a book on Canadian income funds, expects the   
   industry will be largely gone before the four years are up. And he says   
   Canada's capital market will shrink dramatically with their demise.   
      
   "We had a very active capital market and I think it's going to get to be   
   decidedly sleepier," said Romano, a securities partner with Strikeman   
   Elliott of Toronto. "That's too bad in a way. It's kind of exciting and fun   
   to see all these businesses with an opportunity hit the capital markets and   
   grow and give investors a choice of what they want to invest in: good, bad   
   or indifferent."   
      
      
   [continued in next message]   
      
   --- SoupGate-Win32 v1.05   
    * Origin: you cannot sedate... all the things you hate (1:229/2)