Ottawa has created an irrational market fuelled by uncertainty, where income trust investors are acting out of fear, Yellow Pages Group head Marc Tellier says.
His company has seen $850-million of market value lost over the past few weeks, because Ottawa has put a chill on the trust sector while it tries to figure out what to do.
"I say this out of sorrow rather than out of spite," Mr. Tellier, the chief executive officer, said in a telephone interview yesterday after the company met with analysts at an investor presentation in Montreal. "The lack of certainty has put a level of volatility into the market that is somewhat irrational."
Yellow Pages has been among the hardest hit in recent weeks since the government announced it would not provide advance tax rulings for companies contemplating becoming a trust.
While the advance rulings aren't a requirement for conversions, the move sent a message to Bay Street that Ottawa felt the trust boom needed to slow down. The government has said it missed out on more than $300-million in corporate taxes last year, and is concerned about the mounting cost to the federal treasury. Trusts don't pay taxes, but instead pass their profits on to unitholders who are taxed individually.
Ottawa has also raised concerns that Canada's growing trust sector is hurting productivity in the belief that companies aren't reinvesting in their operations.
Mr. Tellier took issue with that notion, saying investors use that money to reinvest in the country's economy.
"Investors should choose how they redeploy their capital," Mr. Tellier said. "If these investors are savvy enough to elect their public officials, surely these same investors are savvy enough to reinvest their earnings in growth and distributions."
Yellow Pages, once Canada's second-biggest income trust, has seen its market capitalization fall to $6.7-billion over the past month. The phonebook and Internet directory giant now trails Canadian Oil Sands Trust at $10.8-billion and Fording Canadian Coal Trust at $7.4-billion.
The average Yellow Pages investor holds 1,500 units in the trust and has lost nearly $2,700 over the past month.
Many of those unitholders are retired investors who rely on the returns from trusts, Yellow Pages chief financial officer Christian Paupe told analysts in Montreal.
The trust is "disappointed" by the uncertainty Ottawa has created in the trust market, Mr. Paupe said.
"We're a large Canadian company with more than 100,000 unitholders that are retail investors and are poorly equipped to deal in these type of capital markets where there is increased uncertainty."
In addition to Montreal-based Yellow Pages, a growing number of trusts are becoming frustrated over the knocks the sector is taking in government circles for dampening competition and being an overall drain on growth.
Mike Cordoba, CEO of Boston Pizza Royalty Fund, said that trust will create as many as 2,400 jobs this year with the opening of 30 locations in Canada.
"This view that entrepreneurialism is not going on, that isn't happening. Income funds continue to add jobs to the Canadian economy," said Mr. Cordoba, who met recently with groups of retired income trust investors who are worried about the uncertainty.
"It's amazing the look on their faces, how scared they are," Mr. Cordoba said. "They keep asking us, because they believe we're the income trust experts, what's going on?"
A spokesman for Finance Minister Ralph Goodale wouldn't comment on the issue.
The federal government is keeping quiet on the income trust debate until its review of the sector is complete. Ottawa is collecting input until the end of December and is expected to decide how it will deal with trusts early in 2006, possibly in the next federal budget.
Mr. Tellier said the impact of trusts on the economy, in particular the calculations of lost corporate taxes, has been exaggerated. The sector remains largely misunderstood, he added.
"No one's professing to say the entire capital markets in Canada should convert to income trusts. That was never the intention," Mr. Tellier said. "But if you look back, high-paying dividend companies over the last 10, 50, 80 or 100 years have outperformed the market."
Yellow Pages units closed yesterday at $14.10, down 36 cents, on the Toronto Stock Exchange.
© The Globe and Mail
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