Christmas Comes Early For Business Income Trusts

Private equity firms came out of the woodwork today with two takeover offers bringing the number of buyouts to three this month as the income trust sector shrinks until its ultimate demise in 2011. Most business trusts closed with positive numbers today on these announcements.

Sleep Country (Z.UN) closed up $5.83 or 36.3% to $21.88 after a $32.00 friendly takeover bid by Birch Hill Equity Partners was announced before the market opened today. Clearwater Seafoods Income Fund (CLR.UN) closed up .65 to $4.40 or 17.33% on the day. The $4.50 per unit all cash offer was made by a group of investors supposedly lead by Clarke Inc. (CKI) which already has a large position in the company.

These offers come on the heels of the ATS Andlauer deal that was announced earlier in the month at $11.75 per share. The federal government had announced back in 2006 new legislation that would halt the conversion of corporations into trusts and prevent further corporate tax leakage.

The interesting thing however is that the leakage in tax revenues that they were trying to prevent hasn’t improved. Most of the companies have either been taken over by foreign companies with preferrential rates on corporate profits or taken private (ie BCE). The companies taken private get loaded up with debt as this is how the takeover gets financed and the interest paid wipes out the profit used to pay corporate taxes.

The retail investors took a hit back in 2006 that easily rivals or exceeds the decline that we have seen in the markets over the last year due to this legislation and the government will not receive the increase in tax revenues that they sought. Do you think the government did the right thing eliminating the income trust structure?

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