Finance Minister Ralph Goodale's decision to cut dividend taxes late last year was supposed to take some steam out of the runaway income trust sector, but the wildly popular investment vehicles show no signs of slowing down after enjoying a record year of initial public offerings in 2005.
It's only January, but investment bankers are already working on two dozen potential trust IPOs that could be worth as much as $5.5-billion, according to sources on Bay Street. If all of the deals in this pipeline are brought to market, they would exceed the trust IPO activity for all of last year, when trusts accounted for nearly three-quarters of the offerings on the Toronto Stock Exchange.
In a study published yesterday, PricewaterhouseCoopers LLP said new trust IPOs on the TSX fetched just over $5-billion from investors in 2005, representing 74 per cent of the $6.8-billion worth of offerings on Canada's largest equity market. The value of trust IPOs is up 61 per cent from 2004, while the number of deals -- 40 -- is up 54 per cent.
Perhaps most remarkably, this surge in activity came despite Ottawa's decision to launch a consultation process on the income trust file in the fall, a move that essentially paralyzed the sector for a couple of months and temporarily erased more than $20-billion worth of market value.
"I would expect the majority of IPOs [in 2006] to be some form of trust structure, because it's a more efficient capital structure," said Chris Rankin, a trust analyst with Canaccord Capital Corp. in Toronto.
"I would definitely expect people to get higher valuations in a trust structure, hands down."
Mr. Goodale's decision to effectively reduce dividend taxes was supposed to accomplish two things: Appease voters before the election and at the same time stem the parade of companies moving to take advantage of the tax-friendly trust structure. It's still early, but it's hard to see how the Liberals are succeeding on either count.
Any political capital may have evaporated after the RCMP began investigating whether news of the planned tax cut leaked into the markets before Ottawa announced the measure. The economic motivation -- levelling the playing field between trusts and corporations -- doesn't appear to have worked any better, considering the amount of pending trust activity.
Three years ago, when the market was struggling, trusts accounted for the lion's share of the IPO market, and managed to raise more than $5-billion. The difference this time is that the activity is much more broadly based: Instead of one or two billion-dollar deals driving up the numbers, there are now more trusts sprouting up, across many more sectors.
"What's really happened in 2005 is that the average size of income trust IPOs is a lot smaller, and the breadth of the industries they're involved in is much greater," said Ross Sinclair, who heads PwC's IPO and income trust services group. "[This], to me, was the breakout year for the volume of more diverse business trusts."
Between $1-billion and $2-billion worth of planned trust IPOs were shelved amid the uncertainty last fall, but these are expected to be dusted off early this year, which should contribute to a strong first quarter, Mr. Sinclair predicted. But he cautioned that some large investors are still wary of wading too far into the trust sector because they believe the Liberals could revisit the trust file if they are re-elected.
"I do not believe that the announcement that was made has closed the book on the federal government's concerns," Mr. Sinclair said, adding that trusts continue to hold a "tremendous advantage" for tax-exempt investors, such as pension funds. "I don't believe the debate is completely over."
Mr. Rankin echoed these remarks, and said the trust market would benefit if the Prime Minister told Canadian investors where he stands on the issue. "It would be constructive if Paul Martin were to speak on this topic and share his views like the other leaders have."
The total value of publicly traded trusts in Canada was about $185-billion at the end of 2005, or more than 10 per cent of the country's entire equity market.
This number should continue to grow this year, although, with the recent scrutiny on trusts, investors have become more discerning in terms of which companies they are willing to buy, bankers say.
Running on trusts
Income trusts again dominated the underwriting market for new issues coming to the TSX last year. More than half of 2005's IPOs were trusts, accounting for just shy of three-quarter of the total value of new issues
2002:
$5.8-billion TOTAL IPOs (69)
$5-billion TRUST IPOs (35)
2003:
$4.6-billion TOTAL IPOs (56)
$4-billion TRUST IPOs (22)
2004:
$5.9-billion TOTAL IPOs (56)
$4-billion TRUST IPOs (26)
2005:
$6.8-billion TOTAL IPOs (74)
$5-billion TRUST IPOs (40)
Top 10 stock in IPOs in 2005
| SYNENCO ENERGY | $275-MILLION |
| MIRANDA TECHNOLOGIES | $141-MILLION |
| ASPREVA PHARMACEUTICALS | $112-MILLION |
| SAXON FINANCIAL | $108-MILLION |
| TURNKEY E&P | $100-MILLION |
| URANIUM PARTICIPATION | $90-MILLION |
| CLARINGTON | $81-MILLION |
| GREY WOLF EXPLORATION | $75-MILLION |
| ATRIUM BIOTECHNOLOGIES | $75-MILLION |
| HIGHPINE OIL & GAS | $72-MILLION |
Top 10 income trust IPOs in 2005
| CANWEST MEDIAWORKS | $550-MILLION |
| ROYSTER-CLARK (IPS) | $325-MILLION |
| CANEXUS | $300-MILLION |
| PRIMARY ENERGY RECYCLING (IPS) | $285-MILLION |
| AEROPLAN INCOME FUND | $250-MILLION |
| NEWPORT PARTNERS | $213-MILLION |
| SPINRITE INCOME FUND | $203-MILLION |
| NEW FLYER INDUSTRIES (IPS) | $200-MILLION |
| MORNEAU SOBECO | $200-MILLION |
| FMF CAPITAL GROUP (IPS) | $198-MILLION |
SOURCE: PRICEWATERHOUSECOOPERS
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.
