Professional Documents
Culture Documents
www.bellboyd.com
2006 Bell, Boyd & Lloyd LLC. All rights reserved.
Opening Remarks
Peter Gaines
Partner, Bell, Boyd & Lloyd LLC
Elian Terner
Associate Director, Investment Banking, Scotia Capital - How we got to where we are - Recent tax changes - The impact of the changes - What the future holds
www.bellboyd.com
2006 Bell, Boyd & Lloyd LLC. All rights reserved.
Introduction
The Scotia Capital professionals present today are: Peter Slan Managing Director, Equity Capital Markets and Private Equity Sponsor Coverage Elian Terner Associate Director, Investment Banking
Agenda
1. Income Trusts 101 2. Tax Fairness Plan 3. Market Outlook 4. Scotia Capital Qualifications
www.bellboyd.com
2006 Bell, Boyd & Lloyd LLC. All rights reserved.
Yield structured investment vehicles Low cost of capital relative to corporations Competitive growth vehicles Little or no corporate tax with tax burden shifted to investors Majority of cash flow distributed to investors Yield generally a function of risk profile, growth prospects, sponsorship, and interest rate environment
MLPs invest in qualifying sources of income Income Trust structure adopted by range of businesses outside of energy sector Sponsors typically hold meaningful interest in fund (30 70%); unlike the MLP model Issuers can raise equity within 3 weeks through bought deal process, no market risk MLPs have traditionally had limited institutional investor following
Market History
Structure emerged in Canada in the 1980s Widespread popularity began in the 1990s in the REITs, Natural Resources and Power sectors
Income Trust IPO Issuance
(1995 2006 YTD) Predominantly Oil & Gas, Real Estate and Power Emergence of the business income trust
$10 $8
$6.7 (C$ Billions) $6 $4 $2.7 $2 $0.6 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 YTD
9
$5.1 $3.2
$0.7
Market Capitalization
Popularity driven by benefits to:
Issuers: higher valuations than common equity; widely accepted structure; readily available acquisition financing; greater liquidity for smaller businesses Investors: attractive yields from operating business; tax-deferred income; liquidity of public security
Income Trust Market Capitalization
(2000 December 6, 2006)
$250 $225 $200 (C$ billions) $175 $150 $125 $100 $75 $50 $25 $0 2000 2001 2002 2003 2004 2005 2006 CAGR from 2000 to 2006 YTD = 47%
10
Relative Performance
Income Trusts significantly outpaced the broader equity market
Relative Performance
(2000 December 6, 2006 YTD)
500 450
(Indexed to 100 at January 3, 2000)
400 350 300 250 200 150 100 50 0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
298%
73%
Oct-31
S&P/TSX Composite Total Return Index Scotia Capital Income Trust Total Return Index ("SCITI")
11
Energy $65.7
Industrials $33.2
12
15%
10%
0%
13
Current Situation
On October 31, 2006 the Canadian Government announced a Tax Fairness Plan aimed at eliminating the tax advantages enjoyed by income trusts
Before Trust market capitalization of $226 billion 11% of the TSX Fastest growing segment of the Canadian capital markets Growth accelerating with several recent, large Telecom deals along with other sizeable conversions expected in the Oil & Gas sector No double-taxation on corporate profits After Steep decline in valuations Short-term investors have moved money out of the sector Investor demand for yield remains strong, forcing investors to look for alternative investments Trusts are evaluating alternatives (converting to corporate structure; going private; divestitures and defense strategies) Corporate profits potentially subject to double-taxation
14
Index Level
2,280 2,230 2,180 2,130 2,080 2,030 1,980 1-Nov 6-Nov 11-Nov 16-Nov 21-Nov 26-Nov 1-Dec 6-Dec
15
16
www.bellboyd.com
2006 Bell, Boyd & Lloyd LLC. All rights reserved.
Political Landscape
Canadian Government has examined the income trust structure several times in the past Tax Fairness Plan definitively halted any planned income trust IPOs and conversions
2003
2004
2005
2006
March 23, 2004 Budget tabled with proposals which were later rescinded
Fall, 2005 Formal consultation process resulted in status quo for trusts
18
19
Timeline
Immediate Implementation Measures effective 2007, but are implemented immediately Four-Year Transition Period Government proposing four-year transition period for publiclytraded trusts and limited partnerships existing on October 31, 2006 For income trusts or publicly-traded flow-through entities that begin trading after October 31, 2006, these measures will apply starting in the 2007 taxation year Compliance The government will monitor existing trusts during transition period to assess new avoidance techniques and undue expansion
20
21
Market Outlook
www.bellboyd.com
2006 Bell, Boyd & Lloyd LLC. All rights reserved.
Market Outlook
23
Market Outlook
Transaction Alternatives
Trusts convert back to corporate structure With or without four year grandfathering Mergers/Acquisitions Private equity and financial buyers pursue targets as valuations have declined Strategic buyers see new / more opportunities given overall decline in valuation
24
Market Outlook
M&A Landscape
Many trusts lack the size or liquidity to benefit from remaining public Corporations will be better positioned to complete strategic acquisitions of income trusts
Income trusts cost of capital advantage has eroded
Private equity sponsors are showing increased interest in going private transactions
Record levels of private equity capital raised Robust leverage market with historically low interest rates
25
Market Outlook
26
Market Outlook
Consumer Products
LTM EV/EBITDA 12/6/2006 E.D. Smith Income Fund Clearwater Seafoods Income Fund The Brick Group Income Fund VOXCOM Income Fund Stephenson's Rental Services Income Fund Keystone North America Inc. Ag Growth Income Fund UE Waterheater Income Fund Golf Town Income Fund Sterling Shoes Income Fund 6.2x 6.3x 6.3x 6.6x 6.7x 7.2x 7.2x 7.2x 7.2x 7.6x Change in Multiple Since 10/31/2006 -3.0x -0.5x -1.3x -0.5x -0.6x -0.6x -1.7x -0.8x 0.9x -0.5x EV as of: 12/6/06 $188 $418 $497 $132 $117 $200 $170 $1,060 $177 $101
Utilities
LTM EV/EBITDA 12/6/2006 Parkland Income Fund Gaz Metro LP Superior Plus Income Fund Fort Chicago Energy Partners L.P. Taylor NGL LP Enbridge Income Fund AltaGas Income Trust Keyera Facilities Income Fund Inter Pipeline Income Fund Pembina Pipeline Income Fund 4.9x 8.3x 8.4x 8.9x 10.0x 10.1x 10.5x 10.9x 10.9x 13.6x Change in Multiple Since 10/31/2006 -0.6x -0.8x -1.0x -0.4x -0.9x -0.9x -0.6x -2.1x -1.5x -1.2x EV as of: 12/6/06 $350 $3,069 $1,598 $2,901 $501 $1,896 $1,775 $1,374 $2,343 $2,477
27
Market Outlook
IPOs in Canada
We believe a mid-cap high yield common equity market will likely develop in Canada
Greater transparency with specific policies on dividends and payout ratios Yields of 4-6% versus 1-3% for Corporates and 8-10% for Income Trusts Higher leverage Larger offerings
S&P/TSX Composite Dividend Paying Stocks
$400 $350 Market Capitalization (C$ billions) $300 $250 $200 $150 $100 $50 $0
0.0% - 0.5% - 1.0% - 1.5% - 2.0% - 2.5% - 3.0% - 3.5% - 4.0% - 4.5% - 5.0% - 5.5% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%
28
www.bellboyd.com
2006 Bell, Boyd & Lloyd LLC. All rights reserved.
30
Mergers & Acquisitions Oil & Gas M&A (Scotia Waterous) Equity Capital Markets Canadian Relationship Management Loan Portfolio Management
Foreign Exchange Precious Metals (ScotiaMocatta) Institutional Equity Equity & Debt Research
31
Were not just picking the biggest banks, we are choosing the best, based on profitability, financial strength, as well as quality of staff dedicated to investment banking - Global Finance Magazine
32
Bridge financing of $770 million Equity component of US$650 million to be injected by KKR Scotia Capital underwrote 100% of the total debt requirement Scotia Capital acted as lead arranger for the revolver and Term B facility Scotia Capital acted as the co-bookrunner and co-lead on the high yield financing
33
Financial Sponsor(s)
$70.1
$41.9
Co-Lead Manager on IPO $77.0 Lead Commercial Bank Co-Led Corporate Borrowing
$54.6
$187.7
$202.9
34
Financial Sponsor(s)
$73.8
Lead Commercial Bank Hedging Instruments M&A Advisory Lead Manager on IPO
$90.2
$74.0
Co-Lead Manager on IPO $204.0 Senior Corporate Lender M&A Advisory Co-Lead Manager on IPO $194.0 Co-Led Secondary Offering Co-Led Corporate Lending M&A Advisory Co-Lead Manager on IPO $1000.0 Co-Led MTN Offering Corporate Lender Co-Led Multiple Follow-On Offerings
35
Financial Sponsor(s)
$135.2
$105.7
$164.4
$102.0
$89.5
36
Deal Size
(C$ mm)
Financial Sponsor(s)
$1,000.0
Financial Advisor to CPP Exclusive Financial Advisor to KKR Exclusive Financial Advisor to United Exclusive Financial Advisor to United Exclusive Financial Advisor to PNG
$3,200.0
n/a
$75.0
Formerly 843504 Alberta Ltd.
and
$19.0
$193.5
$25.0
$220.0
37
Peter Slan, Managing Director, Equity Capital Markets and Private Equity Sponsor Coverage
Peter joined Scotia Capital in 1997 and has a wide range of investment banking experience across different industry groups and product areas, with a particular focus on income trusts. He has advised several entrepreneurs and private equity firms on initial public offerings and other equity financings, and many public companies on acquisitions, divestitures and financing transactions.
Prior to joining Scotia he practiced for several years with Ernst & Young LLP in Toronto. He is a Chartered Accountant and holds an MBA degree from the Rotman School of Management at the University of Toronto.
38
Prior to joining Scotia Capital, Elian practiced law with Weil Gotshal & Manges in New York City, where he specialized in structured finance securities offerings in the U.S. and abroad. Elian received his Bachelor of Commerce (Distinction) from the University of Toronto, and his Bachelor of Laws degree from Osgoode Hall Law School of York University.
39
40
Canadian Income Trusts: Some Non-Tax Legal Considerations for U.S. Acquirers
A. What is this thing Canadians call an income trust? B. Rights, Remedies and other Legal Considerations a) Requisitioning a Unitholder Meeting b) Obtaining a List of Unitholders c) Compulsory Acquisitions: 90% Squeeze Out d) Other Corporate Acquisitions Methods e) Oppression and Other Statutory Rights and Remedies f) Underlying Entity Considerations g) Income Trust Governance Project of the Canadian Coalition for Good Governance
41
Canadian Income Trusts: Some Non-Tax Legal Considerations for U.S. Acquirers
C. Acquisition Techniques a) Hostile Acquisitions b) Friendly Acquisitions D. Conclusion
Stephen I. Erlichman (LL.M. (New York), M.B.A. (Harvard)) is a senior partner at Fasken Martineau DuMoulin LLP in Toronto with a broad corporate and securities practice. He can be reached at 416-865-4552 or by email at serlichman@tor.fasken.com.
42
Ron Choudhury
Associate, Fasken Martineau DuMoulin LLP - Assets vs. units - Resident, non-resident and tax-exempt Unit holders - Tax-effective acquisition strategies
43
Overview
Typical income trust structures Changes to tax treatment of income trusts Purchase of income trust Purchase of operating assets Reverse hybrid acquisition structure
45
Fund
Common Shares
Subordinated Notes Senior Debt Canco acquired assets at historical tax basis
Canco
Exchangeable Shares Operations
46
47
48
New income trust subject to these rules in 2007 (effectively eliminating new income trusts)
49
Exceptions
Portfolio investment funds not affected REITs not subject to new tax regime but REIT narrowly defined
Must meet Canadian content and passive investment requirements Hotel and retirement REITS do not qualify
50
Asset purchase more attractive to Buyer from nontax perspective because no contingent liabilities
52
Purchase of Fund
Buyer Unitholders Fund Buyer acquires Units from Unitholders for cash Canco Sub-Trust
Cash
Limited Partnership
53
54
55
Purchase of Fund means Buyer assumes contingent and other liabilities, including those relating to taxes
E.g. interest rate on internal debt in Canco structure
57
Fund
Sub-Trust
Canco Operating Assets Buyer acquires operating assets for cash Cash
Limited Partnership
Cash
58
Canadian taxable investor pays tax on dividend and has capital gain equal to rest of proceeds received on wind-up of Fund less tax basis of Units
59
60
62
64
65
Next Canada-US protocol may deny treaty benefits to US investors in reverse hybrid
Need to invest e.g. through Luxco see Article 1(6) of US model convention
67
NSULC = flow-through entity for US tax purposes, corporation for Canadian tax purposes
Fund
Maximize internal leverage within 2/1 debt/equity thin cap restrictions Leveraged equity
68
Speakers
Kathleen Hanly Tax Partner, Director of Toronto Tax Group Board of Governors, Canadian Tax Foundation Hons. B.Sc. Physics, University of Toronto LL.B., University of Toronto
69
Speakers (contd)
Ron Choudhury Tax Associate B.A. Economics, University of Toronto and Hons. B.A. English, University of Calcutta LL.B., Osgoode Hall Law School LL.M., New York University
70
- Canadian Economy - Canadian Private Equity Landscape - Scotiabank Private Equity Sponsor Coverage Group
72
Introduction
Michael Locke
74
Agenda
Canadian Economy Canadian Private Equity Landscape Leveraged Buyout Market Scotiabank Private Equity Sponsor Coverage Group (PESCG) Questions and Answers
75
Canadian Economy
Canadian Economy
Interest Rates %
forecast
forecast forecast
-4.0 1987
1989
1992
1994
1997
1999
2002
2004
2007
1997
1999
2002
2004
2007
Canadian GDP
US GDP
77
Canadian Economy
USD/ CAD 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 1987 1989 1992 1994 1997 1999 2002 2004 2007
USD/CAD forecast
78
Market Overview
Canadian private equity and venture capital provides a vital source of finance for growing
The PE industry has a strong network of professional advisors to support its increasingly
important role in the Canadian economy.
Source:CVCA
80
Market Overview
The Canadian private equity market has continued to mature following a proliferation of new
funds established during the last five years
A majority of the funds raised during the last five years are now nearing the end of their lives Virtually all of the funds have been fully invested Many funds have been able to realize significant returns:
The lack of competition in the Canadian market during the early years of the funds led to several
companies being acquired at low multiples
Strong public markets has led to increased valuations upon the exit of businesses
The income trust market in particular provided an effective vehicle for exiting businesses at
unexpectedly high multiples, including: Torquests IPO of Granby Industries (EV/EBITDA 8.7x) Imperial Capitals IPO of E.D. Smith (EV/EBITDA 9.8x) Edgestone Capitals IPO of BFI (EV/EBITDA 7.0x) Clairvests IPO of Gateway Casinos (EV/EBITDA 8.6x) ONCAPs IPO of FutureMed (EV/EBITDA 9.4x) Tricor Pacifics IPO of Tree Island Wire (EV/EBITDA 7.6x) Private Equity market is maturing
Source: Scotia Capital
81
Mezzanine 11%
Retail 20%
Venture 37%
Buyout 52%
Institutional 30%
Private Equity capital under management reached $56 billion in 2005 in Canada
Source: Thomson MacDonald
82
PE Funds Raised
Many private equity firms have raised new funds in the last 12 months Significant investment returns have permitted many private equity firms to substantially
increase the size of their funds:
Fund Name Torquest ONCAP Tricor Pacific CAI Kilmer Birch Hill Previous Fund (mm) $180 $400 $235 $195 $115 n/a New Fund (mm) $550 $575 $490 $375 $250 (target) $850 % Increase 206% 44% 109% 92% 117% nmf
Furthermore, the high returns have attracted several new private equity firms into the
market:
Fund Name Canterbury Park Whitecastle Perseis Fund Size (mm) $150 $55 $375
Large pension funds are allocating more funds to direct private equity investments (OMERS,
Teachers, CPP)
83
PE Funds Raised
$8,000
$6,000
$4,000
$2,000
$0 2002
CAN $, billions
Q3 2006 Total
84
PE Funds Raised
Other 0%
85
Investment of PE Capital
7 6 5 4 3 3 2 1 0 2001
CAN $, billions
6.4
4.3
2.3 0.9 1
2002
2003 Buyout
2004 Mezzanine
2005
86
Investment of PE Capital
Acquisition 47%
MBO 28%
100% = CAN $7.63 billion
87
PE Activity
Intrawest Corp
88
Investment Activity
Hamilton steelmaker Dofasco is bought for $4.7 billion by Luxembourg-based Arcelor SA Graphics chip-maker ATI Technologies of Markham, Ont., is sold to California-based Advanced
Micro Devices Inc. for $5.34 billion US
Vincor, Canada's largest winemaker, sold to N.Y.-based Constellation Brands for $1.1 billion Sleeman Breweries of Guelph, Ont., bought by Japan's Sapporo Breweries for $400 million Nickel giant Inco bought by CVRD of Brazil for approximately $19 billion
And Montreal-based paper-maker Domtar has agreed to a $3.3-billion merger with a unit of U.S. paper giant Weyerhaeuser.
89
Mckenna Gale
Canada
90
Canadian General Insurance Shoppers Drug Mart Yellow Pages Group Masonite
91
PE Returns
21.10%
20.10%
21.50%
8.10% 3.60%
8.80%
Three Years
Ten Years
92
$1.5 to $2 trillion
Goodman and Carr LLP 2005 Private Equity Report Kensington Capital Estimate CIBC World Markets February 2005 Globe and Mail Estimate
Numbers do not support the notion that too much money is chasing too few deals
Source: Kensington Analysis, May 2006
93
Market Outlook
Private Equity firms are now finding it considerably more difficult to make purchases at
Increased competition between sponsors Public market alternatives have provided vendors with a meaningful valuation signal
Furthermore, the current liquidity in the lending markets has led to ever larger leveraged
buyouts Many new participants in the Canadian leveraged loan market are driving leverage up
Most private equity firms are, therefore, facing a particularly challenging market
Relentless focus on acquisitions
environment where valuations have risen but they have more dollars to put to work Dispositions usually only to facilitate the wind-down of a fund nearing the end of its term
Nonetheless, the elimination of the income trust market will reduce exit multiples for
sponsors Existing income trusts may have to trade at discounts to their corporate company comparables before
becoming compelling investment opportunities
94
Market Outlook
Huge Leverage Buyout opportunity more than a trillion Canadian dollars are expected to
change hands due to succession issues
Source:CVCA
95
Industry Association
Established in 1974, the CVCA is dedicated to pursing growth opportunities for the Canadian
venture capital and private equity industry
CVCA members represent over $50 billion in capital under management Over 1,100 members comprised of:
venture capitalists institutional investors corporate investors private equity investors angel investors advisory members which provide services such as law, finance, executive search, consultants investment banks insurance companies academia
Source:www.cvca.ca
96
Why Canada
US
4.80%
US
5.20%
Canada
2.00%
Canada
2.40%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
97
Why Canada
USA
UK
Australia
Canada
98
Scotiabank - PESCG
Biography
Michael Locke
Corporate Credit Department, Toronto International Project Finance, Toronto Corporate Banking, New York & San Francisco Agency Vice President and Head of Corporate Banking, Toronto Managing Director and Head of the Industrial Products Group of Scotia Capital Vice President - Commercial Banking at the flagship Scotia Plaza branch Area Vice President for the Commercial Bank's Greater Toronto Area
MBA from the Schulich School of Business at York University Graduate of the Stanford Executive Program
of the Graduate School of Business at Stanford University
100
Contact List
Name/ Designation Michael Locke Managing Director & Head Paul Hodgson Director David Torrey Director William (Nick) Dinkha Associate Director Doug Petten Associate Director Christine MacInnes Associate Jeff Snowden Associate Ashutosh Chauhan Associate
Phone/ Email (416) 866-6390 michael.locke@scotiabank.com (416) 866-6506 paul.hodgson@scotiabank.com (416) 866-6917 david.torrey@scotiabank.com (416) 866-5651 Willam.dinka@scotiabank.com (416) 866-4502 doug.petten@scotiabank.com (416) 866-3369 christine.macinnes@scotiabank.com (416) 866-6420 jeff.snowden@scotiabank.com (416) 866-6499 ash.chauhan@scotiabank.com
101
Closing Remarks
Peter Gaines
Partner, Bell, Boyd & Lloyd LLC
103