Changing Canadian Landscape 2006
Content
Welcomes You.
The Changing Canadian Landscape: M&A and Private Equity Opportunities
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© 2006 Bell, Boyd & Lloyd LLC. All rights reserved.
Opening Remarks
Peter Gaines
Partner, Bell, Boyd & Lloyd LLC
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Canadian Income Trust Market
Peter Slan
Managing Director, Equity Capital Markets, Scotia Capital
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
2
Overview of the Canadian Income Trust Market
December 11, 2006
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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
4
Agenda
1. Income Trusts 101 2. Tax “Fairness” Plan 3. Market Outlook 4. Scotia Capital Qualifications
Note: All figures in this presentation are shown in Canadian dollars
5
Income Trusts 101
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Income Trusts 101
What is an Income Trust?
• Equity investment vehicle designed to efficiently distribute pre-tax cash flow from an underlying business to investors – Shares many of the reporting, regulatory, and governance characteristics of a common equity corporation – Income Trust IPO valuations tended to be higher relative to a: Sale to a financial or strategic buyer; and Traditional corporate IPO – Canadian tax regulations did not restrict the types of businesses that could become trusts
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Income Trusts 101
Canadian Income Trusts vs. US MLPs
Similarities Differences
• 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
8
Income Trusts 101
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
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Robust common equity market; investors focused on Tech-based opportunities
$5.3 $4.4 $3.4
$5.1 $3.2
$0.7
$1.3 $0.1 $0.0
Income Trusts 101
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%
Oct 31 Dec 6 -$26B
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Income Trusts 101
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")
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Income Trusts 101
Size and Diversity
• Currently 250 income trusts with a total market capitalization of $201 billion or 12.8% of the S&P/TSX Composite Index – Most trusts have adopted a “wait and see” attitude before committing to a structural change
Composition of Income Trust Market
(December 6, 2006)
Utilities & Infrastructure $19.5 Consumer Products $26.4 Power Generation $7.3
Energy $65.7
Real Estate $28.0 Resources $21.3
Industrials $33.2
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Income Trusts 101
Attractive Risk Return Profile
• Trusts offer higher returns with lower risk to investors
Risk vs. Return
(January 1, 1995 – December 6, 2006)
Average Daily Returns Annualized
20% Increasing Return SCITI
15%
10%
S&P/TSX Composite Index
5% Increasing Risk 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
0%
Standard Deviation of Daily Returns Annualized
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Income Trusts 101
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”
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Income Trusts 101
Market Reaction to Tax “Fairness” Plan
• There was a wholesale revaluation of the income trust sector following the announcement
Performance of Scotia Capital Income Trust Index
(November 1 – December 6, 2006)
2,430 2,380 2,330
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
Since Nov 1 -10.5%
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Income Trusts 101
Valuation Decline Varies by Sub-Sector
• Primary valuation benchmarks have become corporate multiples (e.g. EV/EBITDA, P/CF) • Valuation factors include: tax status post 2011, four year transition period, pre and post tax yield at investor level
Average Price Change by Sub-Sector
(Since November 1, 2006)
10% 5% 0% -5% -10% -15% -15.0% -20% -17.3% Energy Consumer Power Utilities and Infrastructure Industrials Resources REITs -14.2% -13.5% -13.4% -5.9% 4.3%
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Tax “Fairness” Plan
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Tax “Fairness” Plan
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
Fall, 2003 Discussions with market participants
March 23, 2004 Budget tabled with proposals which were later rescinded
Fall, 2005 Formal consultation process resulted in status quo for trusts
October 31, 2006 “Tax Fairness Plan” announced
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Tax “Fairness” Plan
Summary of Tax “Fairness” Plan
• Key Measures – Tax on distributions from publicly-traded income trusts and limited partnerships – Modest reduction in general corporate income tax rate • Simplified Explanation of Changes – Effective 2011, trusts will be taxed like corporations – Trusts will no longer be able to deduct income distributions to unitholders – Income distributions will be taxed as the unitholder level at the same rate as corporate dividends – Distributions that are classified as “return of capital” for tax purposes (i.e. distributions in excess of taxable income) will NOT to be taxed at trust or investor level
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Tax “Fairness” Plan
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”
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Tax “Fairness” Plan
Changes to Taxation of Income Trusts
• Changes are directed at: – “Tax-deferred” Canadian investors (RSP, pension funds); and – Foreign holders of income trusts These investors were not affected by the changes enacted in 2005
Comparison of Investor Tax Rates – Current vs. 2011
Taxable Canadian Income Trust Current Income Trust Level Personal Level Total Current 2011 Income Trust Level Personal Level Total 2011 Corporate Current Income Trust Level Personal Level Total Current 2011 Income Trust Level Personal Level Total 2011 0.0% 46.0% 46.0% 31.5% 14.0% 45.5% 34.0% 16.5% 50.5% 31.5% 14.0% 45.5% Tax-Deferred Canadian 0.0% 0.0% 0.0% 31.5% 0.0% 31.5% 34.0% 0.0% 34.0% 31.5% 0.0% 31.5% Taxable U.S. Investor 0.0% 15.0% 0.0% 31.5% 10.0% 41.5% 34.0% 10.0% 42.0% 31.5% 10.0% 41.5%
•
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Market Outlook
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Market Outlook
New Landscape Presents Opportunity
• Business trusts can be divided into two segments: – “Healthy” trusts Underlying business performing well; value impacted by recent Government announcement Investors are currently assessing the long term impact and considering short term opportunities – “Troubled” trusts Prior difficulties with business performance; value declines have been magnified by recent Government announcement Investors have been struggling to find value and liquidity in these trusts • Both “Healthy” and “Troubled” trusts may now be considered as acquisition targets
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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
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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
• Greater shareholder activism
– Hedge funds forcing companies to initiate sale processes
• Fewer structural take-over defenses available in Canada
– Limited life of poison pills – Limited effectiveness of “just say no” defense
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Market Outlook
Issues for Consideration
• Straight Takeover of All Units • Acquisition of Underlying Business • Review Declaration of Trust • Understand Rights of Retained Interest Holders • Potential for Hostile Transactions
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Market Outlook
Lowest Trading Multiples by Segment
Industrial Products
LTM EV/EBITDA 12/6/2006 Peak Energy Services Trust Tree Island Wire Income Fund Vicwest Income Fund TerraVest Income Fund Impax Energy Services Income Fund Total Energy Services Trust Gienow Windows & Doors Income Fund Builders Energy Services Trust Bird Construction Income Fund Trimac Income Fund 4.3x 4.7x 4.8x 5.0x 5.0x 5.2x 5.2x 5.2x 5.6x 5.6x Change in Multiple Since 10/31/2006 -1.8x -1.6x -3.2x -0.8x -0.8x -0.3x 0.0x -0.9x -0.2x -0.8x EV as of: 12/6/06 $201 $150 $203 $195 $132 $395 $172 $262 $142 $253
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
Communications, Media & Technology
LTM EV/EBITDA 12/6/2006 Entertainment One Income Fund Cinram International Income Fund Custom Direct Income Fund Bell Aliant Regional Comm. Income Fund The Data Group Income Fund Supremex Income Fund Amtelecom Income Fund FP Newspapers Income Fund Movie Distribution Income Fund Osprey Media Income Fund 4.8x 5.2x 5.5x 6.3x 6.3x 6.4x 6.6x 7.7x 7.7x 8.0x Change in Multiple Since 10/31/2006 -0.5x 0.1x -0.6x -1.0x -1.5x -0.9x -0.6x -0.1x 0.0x -1.0x EV as of: 12/6/06 $129 $1,995 $168 $9,403 $282 $320 $105 $203 $409 $421
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
For trusts with Enterprise Values greater than $100 million
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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%
Income Trust Yields by Sub-Sector
35% 30% (RunningYield) 25% 20% 15% 10% 5% 0% Power Real Estate Utilities & Resource Consumer Industrials Energy Generation Infrastructure Products
Dividend Yield Range
# Issuers 107 22 17 16 8 15 5 4 2 1 0 3
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Scotia Capital Qualifications
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Scotia Capital Qualifications
About Scotia Capital
• Wholesale division of Scotiabank: – Canada’s top performing bank in the past 10 years – Canada’s third largest public company – Canada’s most international bank - 56,000 employees in more than 50 countries • 1,200 employees in 18 offices worldwide • Two business units serving clients in Canada, the U.S., Mexico, Europe and Asia
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About Scotia Capital
Global Corporate & Investment Banking
Global Capital Markets
• Corporate Banking • Investment Banking
• Canada, U.S., Mexico
• Capital Markets Group
• Derivatives & Fixed Income • Domestic Money Market
• • • • •
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
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Scotia Capital Qualifications
Best Investment Bank in Canada
Voted Best Investment Bank in Canada for 2004, 2005 and 2006 by Global Finance
“We’re 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
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Scotia Capital Qualifications
Masonite/KKR Case Study
• • • On December 22nd, 2004, KKR announced the acquisition of Masonite for C$40.20 in cash Scotia Capital was exclusive financial advisor to KKR The transaction was financed with a combination debt and equity: – Senior debt of US$1.55 billion:
Term B facility of US$1.2 billion with a term of 8 years Revolver of US$350 million (undrawn at closing)
– Bridge financing of $770 million – Equity component of US$650 million to be injected by KKR • • • Scotia Capital underwrote 100% of the total debt requirement Scotia Capital acted as lead arranger for the revolver and Term B facility Scotia Capital acted as the co-bookrunner and co-lead on the high yield financing
33
Scotia Capital Qualifications
IPO Mandates for Financial Sponsors
Strong track record of delivering results for financial sponsors
Company IPO Size
(C$ mm)
Scotia Capital Role
Financial Sponsor(s)
$70.1
• Sole Bookrunner on IPO
$41.9
• Sole Bookrunner on IPO
• Co-Lead Manager on IPO $77.0 • Lead Commercial Bank • Co-Led Corporate Borrowing
$54.6
• Lead Bookrunner on IPO
$187.7
• Co-Lead Manager on IPO
$202.9
• Joint Bookrunner on IPO • Lead Commercial Bank
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Scotia Capital Qualifications
IPO Mandates for Financial Sponsors
Company IPO Size
(C$ mm)
Scotia Capital Role • Co-Bookrunner on IPO
Financial Sponsor(s)
$73.8
• Lead Commercial Bank • Hedging Instruments • M&A Advisory • Lead Manager on IPO
$90.2
• Corporate Lender • M&A Advisory
$74.0
• Lead Manager on IPO
• 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 $1000.0 • Co-Led MTN Offering • Corporate Lender • Co-Led Multiple Follow-On Offerings
35
Scotia Capital Qualifications
IPO Mandates for Financial Sponsors
Company IPO Size
(C$ mm)
Scotia Capital Role
Financial Sponsor(s)
$135.2
• Co-Lead Manager on IPO • Corporate Lender
$105.7
• Lead Manager on IPO • Led Secondary Offering • Co-Lead Manager on IPO
$164.4
• Co-Led Secondary Offering • Corporate Lender • Co-Lead Manager on IPO
$102.0
• Co-Led Secondary Offering • Corporate Lender
$89.5
• Co-Lead Manager on IPO
• Sole Lead Manager on IPO $151.0
Livingston International Income Fund
• Co-Led Secondary Offering • Lead Corporate Lender • M&A Advisory
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Scotia Capital Qualifications
Advisory Mandates for Financial Sponsors
Acquiror Target
11 Office Towers from
Deal Size
(C$ mm)
Scotia Capital Role
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
Community Newspaper from
$193.5
• Financial Advisor to Osprey
$25.0
• Exclusive Financial Advisor to Haley • Exclusive Financial Advisor to Osprey
$220.0
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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
Elian Terner, Associate Director, Investment Banking
• Since joining Scotia Capital in 2001, Elian has been actively involved in numerous debt and equity offerings. As a member of the Industrial Products group in Investment Banking, Elian focuses primarily on industrial equipment, transportation, and construction and engineering companies.
•
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.
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Acquiring Canadian Income Trusts or their Underlying Businesses–Legal Issues
Stephen Erlichman
Partner, Fasken Martineau Dumoulin LLP •- What is an income trust? •- Rights, remedies and other legal considerations •- Acquisition techniques
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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 [email protected].
42
Acquiring Canadian Income Trusts or their Underlying Businesses–Tax Issues
Kathleen Hanly
Partner, Fasken Martineau DuMoulin LLP
Ron Choudhury
Associate, Fasken Martineau DuMoulin LLP •- Assets vs. units •- Resident, non-resident and tax-exempt Unit holders •- Tax-effective acquisition strategies
43
Acquiring Canadian Income Trusts or the Underlying Businesses – Tax Issues
Kathleen S.M. Hanly Ron Choudhury
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
Typical Income Trust Structures – Fund on Unitholders Corporation
Fund is flow-through entity for tax purposes Retained Interest Holders Interest on Notes minimizes Canco income subject to tax – Necessary because Canco taxable entity (not flow-through)
Fund
Common Shares
Subordinated Notes Senior Debt Canco acquired assets at historical tax basis
Canco
Exchangeable Shares Operations
46
Typical Income Trust Structures – Fund on Sub-Trust on Limited Partnership
Unitholders LP acquired assets at historical tax basis Retained Interest Holders Fund Both Sub-Trust and Limited Partnership are flow-through entities – Income taxed at Unitholder level
Units and Notes
Sub-Trust Ordinary LP Units Limited Partnership Exchangeable LP Units Operations
GP Co GP Interest (0.01%) Senior Debt
47
Changes to Tax Treatment of Income Trusts
• Before new rules, income trust (Fund) treated as non-taxable flow-through vehicle • New rules treat income trusts like corporations • Tax burden on non-residents and tax-exempts investing in corporation and income trust will be the same
48
Changes to Tax Treatment of Income Trusts (cont’d)
• Under new rules, ≥ 2011:
• Existing income trust earning business income (directly or indirectly) taxed like corporation • Fund distributions taxed as dividends
• 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
Purchase of Income Trust – Issues
• Tax treatment to Unitholders vs. Buyer • Tax basis of Units held by Canadian resident taxable investors relative to fair market value (“FMV”) • Tax basis of operating assets in Canco/LP relative to FMV – generally low tax basis due to prior vendor roll-in
51
Purchase of Income Trust – Issues (cont’d)
• Usual dynamic
• Optimizing tax treatment to Unitholders generally results in less tax shield to Buyer • Goes to pricing
• 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
Purchase of Fund (cont’d)
• Canadian resident capital account Unitholders have capital gains treatment
• ½ of gain (proceeds less tax ∴ basis of Units) included in income as taxable capital gain • Capital gain therefore taxed at ½ rate applicable to ordinary income
54
Purchase of Fund (cont’d)
• Non-resident Unitholders generally exempt from Canadian tax on gain • Canadian pension funds and other tax-exempts also receive proceeds free of tax
55
Purchase of Fund (cont’d)
• Buyer gets no step-up in tax basis of underlying business assets (assuming their FMV exceeds their tax basis) • Buyer is able to match interest expense on acquisition debt with operating income by
• Merging with Canco, or • Leaving Sub-Trust/LP structure in place because SubTrust and LP are flow-throughs
56
Purchase of Fund (cont’d)
• Can’t collapse Sub-Trust/LP if accrued gain because no rollover
• Rollover rule may be introduced in subsequent legislation to facilitate elimination of Sub-Trust/LP
• 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
Purchase of Operating Assets
Canco pays tax on income realized on sale – After-tax proceeds paid to Fund as return of capitalization and dividend Buyer Fund Income realized by LP on sale flowed out to Unitholders for tax purposes
Fund
Sub-Trust
Canco Operating Assets Buyer acquires operating assets for cash Cash
Limited Partnership
Cash
58
Purchase of Operating Assets (cont’d)
• Under Canco structure
• Canco pays tax on any income on sale (including recapture and ½ of goodwill gains and capital gains) • Canco pays after-tax proceeds to Fund as return of capital, repayment of notes and dividend
• 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
Purchase of Operating Assets (cont’d)
• Canadian taxable investors bear more tax on Canco asset sale than on sale of Units if tax on ordinary income at Canco level • Expect Canco will pay tax on asset sale because acquired assets at vendor tax basis when income trust created
60
Purchase of Operating Assets (cont’d)
• If LP realizes income on asset sale, Unitholders taxed on that income (other than capital gains) • Expect LP will have income on sale due to low tax basis of assets • Any additional proceeds (i.e. in excess of LP allocated income) received by Canadian taxable Unitholders on wind-up of Fund less tax basis of Units is capital gain
61
Purchase of Operating Assets (cont’d)
• Non-resident Unitholders taxable on Canco dividend/income realized by LP (other than capital gains)
• 15% withholding rate for US residents entitled to treaty benefits → less attractive than tax-free gain on sale of Units • Remaining proceeds tax-free capital gain
62
Purchase of Operating Assets (cont’d)
• Canadian pension funds and other Canadian taxexempt Unitholders receive proceeds free of tax in both Canco and LP asset sale scenarios • However, greater tax burden on tax-exempts under Canco structure relative to LP structure since
• Canco pays tax on asset sale • In LP structure proceeds allocated to Unitholders for tax purposes
63
Purchase of Operating Assets (cont’d)
• Assets of operating business acquired by Buyer at stepped-up FMV
• New tax basis can be amortized by Buyer in case of depreciable property and goodwill • Again, quid pro quo is higher purchase price because less attractive treatment to Unitholders
64
Purchase of Operating Assets (cont’d)
• Buyer does not inherit cumbersome Sub-Trust/LP structure
• Corporation usual vehicle for businesses • Corporation more flexible for subsequent reorganizations etc.
• No assumption of contingent liabilities
65
Tax Treatment of Losses
• If there are losses, Canadian taxable Unitholders may prefer to realize loss on sale of Units so that can use loss to shelter capital gains • Loss on asset sale in Canco or Fund cannot be flowed out to Unitholders • May have Unitholders with losses but gain on operating assets in Canco/LP because of initial roll-in
66
Reverse Hybrid Structure
• Defer recognition of interest paid by Canadian operating entity for US tax purposes
• Relative to conventional leveraged buy-out, “benefit” is deferral of interest income for US tax purposes
• 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
Reverse Hybrid Structure (cont’d)
Partnership = corporation for US tax purposes, flow-through entity for Canadian tax purposes – Means income blocked for US tax purposes Buyer Senior Debt Defer interest recognition for US tax purposes – May need to invest through Luxco
NSULC
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 (cont’d)
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 Private Equity Landscape
Michael Locke
Managing Director and Head, Private Equity Sponsor Coverage Group, Scotiabank
- Canadian Economy - Canadian Private Equity Landscape - Scotiabank – Private Equity Sponsor Coverage Group
72
Canadian Private Equity Landscape
December 11, 2006
Introduction
• Michael Locke
Managing Director and Head, Private Equity Sponsor Coverage Group
74
Agenda
Canadian Economy Canadian Private Equity Landscape ¾ Leveraged Buyout Market Scotiabank – Private Equity Sponsor Coverage Group (“PESCG”) Questions and Answers
75
Canadian Economy
Canadian Economy
GDP % YoY GDP Growth
Interest Rates %
forecast
8.0 6.0 4.0 2.0 0.0 -2.0
%
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
%
forecast forecast
-4.0 1987
1989
1992
1994
1997
1999
2002
2004
2007
1997
1999
2002
2004
2007
Canadian GDP
US GDP
Bank of Canada Target Rate
Federal Reserve Target Rate
US and Canada key indicators show similar trends
Source:Statistics Canada, Scotia Economics
77
Canadian Economy
Canadian Dollar Exchange Rate 1987 onwards
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
Canadian Dollar has been gaining strength against US Dollar
Source: Bloomberg, Scotia Economics
78
Canadian Private Equity Landscape
Canadian Private Equity Landscape
companies across all industry sectors
Market Overview
• Canadian private equity and venture capital provides a vital source of finance for growing
• The PE industry provides long-term investment capital
¾ contributing to sustainable economic growth ¾ generating employment ¾ financing new research and technologies ¾ supporting Canada’s promising growth companies
• The PE industry operates according to accepted standards of:
¾ conduct ¾ reporting ¾ valuation
• The PE industry has a strong network of professional advisors to support its increasingly
important role in the Canadian economy.
Source:CVCA
80
Canadian Private Equity Landscape
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:
¾ The lack of competition in the Canadian market during the early years of the funds led to several
companies being acquired at low multiples
¾ 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: ¾ Torquest’s IPO of Granby Industries (EV/EBITDA 8.7x) ¾ Imperial Capital’s IPO of E.D. Smith (EV/EBITDA 9.8x) ¾ Edgestone Capital’s IPO of BFI (EV/EBITDA 7.0x) ¾ Clairvest’s IPO of Gateway Casino’s (EV/EBITDA 8.6x) ¾ ONCAP’s IPO of FutureMed (EV/EBITDA 9.4x) ¾ Tricor Pacific’s IPO of Tree Island Wire (EV/EBITDA 7.6x) Private Equity market is maturing
Source: Scotia Capital
81
Canadian Private Equity Landscape
Capital Under Management
Capital Under Management by Market Segment (FY 2005)
Capital Under Management by Investor (FY 2005)
Government 5% Corporate 6% Private Independent 39%
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
New Fund Raising
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
Richardson Novacap Edgestone
$325 $210 $360
$720 $400 $800
121% 90% 122%
• 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,
Teacher’s, CPP)
Fund raising is increasing
Source: Scotia Capital
83
Canadian Private Equity Landscape
PE Funds Raised
• Almost $8 billion has been raised YTD
¾ Buyout funds have raised the majority of capital
Canadian Private Equity Fund Raising (FY 2002 – YTD)
$10,000
$8,000
$6,000
$4,000
$2,000
$0 2002
CAN $, billions
2003 Buyout Funds
2004 Mezzanine Funds
2005 Venture Capital
Q3 2006 Total
Fund raising is in high gear
Source: Thomson MacDonald
84
Canadian Private Equity Landscape
Source of Buyout and Mezzanine funds raised 2005
PE Funds Raised
Insurance Companies 5% Individuals 7%
Other 0%
Pensions 34% Corporations 22%
Foreign Sources 32%
100% = CAN $1.7 billion
Sources of funds are diverse
Source: Thomson MacDonald
85
Canadian Private Equity Landscape
Investment of Buyout and Mezzanine Capital 2001-2005
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
2.1 1.2 0.7 1.2
2002
2003 Buyout
2004 Mezzanine
2005
Buyout and Mezzanine capital invested by Canadian Private Equity Funds
Source:MacDonald & Associates, Thomson Venture Economics, CVCA
86
Canadian Private Equity Landscape
Buyout and Mezzanine Funds invested by event type 2005
Investment of PE Capital
Refinancing 6% Expansion 9% Restrucutring/ Other 10%
Acquisition 47%
MBO 28%
100% = CAN $7.63 billion
Financing opportunities are many
Source: Thomson MacDonald
87
Canadian Private Equity Landscape
2006
PE Activity
Foreign Acquisitions of Canadian Companies
Hudson’s Bay Co.
Intrawest Corp
Fairmont Hotels & Resorts
Four Seasons Hotels Inc.
Highlights of foreign Private Equity activity in Canada
Source: Thomson Financial (www.canadavc.com)
88
Canadian Private Equity Landscape
Investment Activity
• Canadian companies acquired by global strategic or private equity investors
¾ Falconbridge of Sudbury, Ont., is acquired by Swiss-based Xstrata for $18 billion ¾ Houston-based Kinder Morgan Inc. buys Vancouver-based utility company Terasen Inc. for $6.9
billion
¾ Hamilton steelmaker Dofasco is bought for $4.7 billion by Luxembourg-based Arcelor SA ¾ Graphics chip-maker ATI Technologies of Markham, Ont., is sold to California-based Advanced
Micro Devices Inc. for $5.34 billion US
¾ Vincor, Canada's largest winemaker, sold to N.Y.-based Constellation Brands for $1.1 billion ¾ Sleeman Breweries of Guelph, Ont., bought by Japan's Sapporo Breweries for $400 million ¾ 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.
High profile Canadian buyout opportunities
Source: CBC News
89
Canadian Private Equity Landscape
2005
Cross Border PE Activity
Mckenna Gale
Canada
17 million Sub-Debt and Equity
Sentinel Capital Partners
USA
Acquisition of Nanaimo’s Madill Equipment
(Major Manufacturer of Specialty Equipment)
Cross-border deals are common
Source: Thomson McDonald
90
Canadian Private Equity Landscape
Since 1995
Cross border PE Activity
Canadian General Insurance Shopper’s Drug Mart Yellow Pages Group Masonite
Kohlberg Kravis Roberts & Co.
KKR has invested $1.2 billion equity in Canadian transactions
Source: KKR website
91
Canadian Private Equity Landscape
Private Equity Returns (Buy out and Mezzanine)
All periods ending December 31, 2004
PE Returns
21.10%
20.10%
21.50%
8.10% 3.60%
8.80%
Three Years
Five Years U.S. Canada
Ten Years
Canadian Private Equity market has been delivering superior returns
Source: MacDonald & Associates Ltd, Thomson Venture Economics, CVCA and NVCA
92
Canadian Private Equity Landscape
PE Market Size Estimate
• State of Private Equity Market Balance in Canada
Bid Side/ Sources • Institutional Pools1 • Private Pools2
Institutional Investors large deals
Ask Side/ Uses • Canadian Assets3 • Foreign Assets4
=$ 56 billion =$ 5 billion =$100 billion
=$1.2 trillion =$1.0 trillion
• 10% allocation from all Canadian
• US/International funds only interested in
Note: Business Assets poised to change hands by 2010
$60 to $100 billion
$1.5 to $2 trillion
(1) (2) (3) (4)
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
Canadian Private Equity Landscape
attractive multiples
Market Outlook
• Private Equity firms are now finding it considerably more difficult to make purchases at
¾ Increased competition between sponsors ¾ 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 ¾ Many new participants in the Canadian leveraged loan market are driving leverage up
• Most private equity firms are, therefore, facing a particularly challenging market
¾ Relentless focus on acquisitions
environment where valuations have risen but they have more dollars to put to work ¾ 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 ¾ Existing income trusts may have to trade at discounts to their corporate company comparables before
becoming compelling investment opportunities
Opportunities are plenty
Source: Scotia Capital
94
Canadian Private Equity Landscape
Canadian Leverage Buyout market
Market Outlook
• Buyout industry will continue its growth • Mature industry characteristics:
¾ Bigger player to consolidate and focus on institutionalizing their capabilities
• Huge Leverage Buyout opportunity – more than a trillion Canadian dollars are expected to
change hands due to succession issues
Source:CVCA
95
Canadian Private Equity Landscape
Canadian Venture Capital Association (CVCA)
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:
¾ venture capitalists ¾ institutional investors ¾ corporate investors ¾ private equity investors ¾ angel investors ¾ advisory members which provide services such as law, finance, executive search, consultants ¾ investment banks ¾ insurance companies ¾ academia
Source:www.cvca.ca
96
Canadian Private Equity Landscape
Why Canada
Private Equity Capital / GDP
Private Equity Capital / Public Market Value
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%
The Canadian Private Equity market is underserved
Source: MacDonald & Associates Ltd, Thomson Venture Economics, Statistics Canada and Bureau of Economic Analysis
97
Canadian Private Equity Landscape
Why Canada
USA
UK
Australia
Canada
Excellent Private Equity Environment
Canada ranked fourth globally
Source: Apax Partners and Economic Intelligence Unit
98
Scotiabank - PESCG
Biography
Michael Locke
¾ ¾ ¾ ¾ ¾ ¾ ¾
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
¾ Managing Director and Head – Private Equity Sponsor Coverage Group
BA in Economics and Political Science
from Glendon College (Bilingual Program) of York University
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 [email protected] (416) 866-6506 [email protected] (416) 866-6917 [email protected] (416) 866-5651 [email protected] (416) 866-4502 [email protected] (416) 866-3369 [email protected] (416) 866-6420 [email protected] (416) 866-6499 [email protected]
101
Questions and Answers
Closing Remarks
Peter Gaines
Partner, Bell, Boyd & Lloyd LLC
103
The Changing Canadian Landscape: M&A and Private Equity Opportunities
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Opening Remarks
Peter Gaines
Partner, Bell, Boyd & Lloyd LLC
1
Canadian Income Trust Market
Peter Slan
Managing Director, Equity Capital Markets, Scotia Capital
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
2
Overview of the Canadian Income Trust Market
December 11, 2006
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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
4
Agenda
1. Income Trusts 101 2. Tax “Fairness” Plan 3. Market Outlook 4. Scotia Capital Qualifications
Note: All figures in this presentation are shown in Canadian dollars
5
Income Trusts 101
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Income Trusts 101
What is an Income Trust?
• Equity investment vehicle designed to efficiently distribute pre-tax cash flow from an underlying business to investors – Shares many of the reporting, regulatory, and governance characteristics of a common equity corporation – Income Trust IPO valuations tended to be higher relative to a: Sale to a financial or strategic buyer; and Traditional corporate IPO – Canadian tax regulations did not restrict the types of businesses that could become trusts
7
Income Trusts 101
Canadian Income Trusts vs. US MLPs
Similarities Differences
• 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
8
Income Trusts 101
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
Robust common equity market; investors focused on Tech-based opportunities
$5.3 $4.4 $3.4
$5.1 $3.2
$0.7
$1.3 $0.1 $0.0
Income Trusts 101
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%
Oct 31 Dec 6 -$26B
10
Income Trusts 101
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
Income Trusts 101
Size and Diversity
• Currently 250 income trusts with a total market capitalization of $201 billion or 12.8% of the S&P/TSX Composite Index – Most trusts have adopted a “wait and see” attitude before committing to a structural change
Composition of Income Trust Market
(December 6, 2006)
Utilities & Infrastructure $19.5 Consumer Products $26.4 Power Generation $7.3
Energy $65.7
Real Estate $28.0 Resources $21.3
Industrials $33.2
12
Income Trusts 101
Attractive Risk Return Profile
• Trusts offer higher returns with lower risk to investors
Risk vs. Return
(January 1, 1995 – December 6, 2006)
Average Daily Returns Annualized
20% Increasing Return SCITI
15%
10%
S&P/TSX Composite Index
5% Increasing Risk 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
0%
Standard Deviation of Daily Returns Annualized
13
Income Trusts 101
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
Income Trusts 101
Market Reaction to Tax “Fairness” Plan
• There was a wholesale revaluation of the income trust sector following the announcement
Performance of Scotia Capital Income Trust Index
(November 1 – December 6, 2006)
2,430 2,380 2,330
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
Since Nov 1 -10.5%
15
Income Trusts 101
Valuation Decline Varies by Sub-Sector
• Primary valuation benchmarks have become corporate multiples (e.g. EV/EBITDA, P/CF) • Valuation factors include: tax status post 2011, four year transition period, pre and post tax yield at investor level
Average Price Change by Sub-Sector
(Since November 1, 2006)
10% 5% 0% -5% -10% -15% -15.0% -20% -17.3% Energy Consumer Power Utilities and Infrastructure Industrials Resources REITs -14.2% -13.5% -13.4% -5.9% 4.3%
16
Tax “Fairness” Plan
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Tax “Fairness” Plan
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
Fall, 2003 Discussions with market participants
March 23, 2004 Budget tabled with proposals which were later rescinded
Fall, 2005 Formal consultation process resulted in status quo for trusts
October 31, 2006 “Tax Fairness Plan” announced
18
Tax “Fairness” Plan
Summary of Tax “Fairness” Plan
• Key Measures – Tax on distributions from publicly-traded income trusts and limited partnerships – Modest reduction in general corporate income tax rate • Simplified Explanation of Changes – Effective 2011, trusts will be taxed like corporations – Trusts will no longer be able to deduct income distributions to unitholders – Income distributions will be taxed as the unitholder level at the same rate as corporate dividends – Distributions that are classified as “return of capital” for tax purposes (i.e. distributions in excess of taxable income) will NOT to be taxed at trust or investor level
19
Tax “Fairness” Plan
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
Tax “Fairness” Plan
Changes to Taxation of Income Trusts
• Changes are directed at: – “Tax-deferred” Canadian investors (RSP, pension funds); and – Foreign holders of income trusts These investors were not affected by the changes enacted in 2005
Comparison of Investor Tax Rates – Current vs. 2011
Taxable Canadian Income Trust Current Income Trust Level Personal Level Total Current 2011 Income Trust Level Personal Level Total 2011 Corporate Current Income Trust Level Personal Level Total Current 2011 Income Trust Level Personal Level Total 2011 0.0% 46.0% 46.0% 31.5% 14.0% 45.5% 34.0% 16.5% 50.5% 31.5% 14.0% 45.5% Tax-Deferred Canadian 0.0% 0.0% 0.0% 31.5% 0.0% 31.5% 34.0% 0.0% 34.0% 31.5% 0.0% 31.5% Taxable U.S. Investor 0.0% 15.0% 0.0% 31.5% 10.0% 41.5% 34.0% 10.0% 42.0% 31.5% 10.0% 41.5%
•
21
Market Outlook
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Market Outlook
New Landscape Presents Opportunity
• Business trusts can be divided into two segments: – “Healthy” trusts Underlying business performing well; value impacted by recent Government announcement Investors are currently assessing the long term impact and considering short term opportunities – “Troubled” trusts Prior difficulties with business performance; value declines have been magnified by recent Government announcement Investors have been struggling to find value and liquidity in these trusts • Both “Healthy” and “Troubled” trusts may now be considered as acquisition targets
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
• Greater shareholder activism
– Hedge funds forcing companies to initiate sale processes
• Fewer structural take-over defenses available in Canada
– Limited life of poison pills – Limited effectiveness of “just say no” defense
25
Market Outlook
Issues for Consideration
• Straight Takeover of All Units • Acquisition of Underlying Business • Review Declaration of Trust • Understand Rights of Retained Interest Holders • Potential for Hostile Transactions
26
Market Outlook
Lowest Trading Multiples by Segment
Industrial Products
LTM EV/EBITDA 12/6/2006 Peak Energy Services Trust Tree Island Wire Income Fund Vicwest Income Fund TerraVest Income Fund Impax Energy Services Income Fund Total Energy Services Trust Gienow Windows & Doors Income Fund Builders Energy Services Trust Bird Construction Income Fund Trimac Income Fund 4.3x 4.7x 4.8x 5.0x 5.0x 5.2x 5.2x 5.2x 5.6x 5.6x Change in Multiple Since 10/31/2006 -1.8x -1.6x -3.2x -0.8x -0.8x -0.3x 0.0x -0.9x -0.2x -0.8x EV as of: 12/6/06 $201 $150 $203 $195 $132 $395 $172 $262 $142 $253
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
Communications, Media & Technology
LTM EV/EBITDA 12/6/2006 Entertainment One Income Fund Cinram International Income Fund Custom Direct Income Fund Bell Aliant Regional Comm. Income Fund The Data Group Income Fund Supremex Income Fund Amtelecom Income Fund FP Newspapers Income Fund Movie Distribution Income Fund Osprey Media Income Fund 4.8x 5.2x 5.5x 6.3x 6.3x 6.4x 6.6x 7.7x 7.7x 8.0x Change in Multiple Since 10/31/2006 -0.5x 0.1x -0.6x -1.0x -1.5x -0.9x -0.6x -0.1x 0.0x -1.0x EV as of: 12/6/06 $129 $1,995 $168 $9,403 $282 $320 $105 $203 $409 $421
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
For trusts with Enterprise Values greater than $100 million
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%
Income Trust Yields by Sub-Sector
35% 30% (RunningYield) 25% 20% 15% 10% 5% 0% Power Real Estate Utilities & Resource Consumer Industrials Energy Generation Infrastructure Products
Dividend Yield Range
# Issuers 107 22 17 16 8 15 5 4 2 1 0 3
28
Scotia Capital Qualifications
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Scotia Capital Qualifications
About Scotia Capital
• Wholesale division of Scotiabank: – Canada’s top performing bank in the past 10 years – Canada’s third largest public company – Canada’s most international bank - 56,000 employees in more than 50 countries • 1,200 employees in 18 offices worldwide • Two business units serving clients in Canada, the U.S., Mexico, Europe and Asia
30
About Scotia Capital
Global Corporate & Investment Banking
Global Capital Markets
• Corporate Banking • Investment Banking
• Canada, U.S., Mexico
• Capital Markets Group
• Derivatives & Fixed Income • Domestic Money Market
• • • • •
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
Scotia Capital Qualifications
Best Investment Bank in Canada
Voted Best Investment Bank in Canada for 2004, 2005 and 2006 by Global Finance
“We’re 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
Scotia Capital Qualifications
Masonite/KKR Case Study
• • • On December 22nd, 2004, KKR announced the acquisition of Masonite for C$40.20 in cash Scotia Capital was exclusive financial advisor to KKR The transaction was financed with a combination debt and equity: – Senior debt of US$1.55 billion:
Term B facility of US$1.2 billion with a term of 8 years Revolver of US$350 million (undrawn at closing)
– Bridge financing of $770 million – Equity component of US$650 million to be injected by KKR • • • Scotia Capital underwrote 100% of the total debt requirement Scotia Capital acted as lead arranger for the revolver and Term B facility Scotia Capital acted as the co-bookrunner and co-lead on the high yield financing
33
Scotia Capital Qualifications
IPO Mandates for Financial Sponsors
Strong track record of delivering results for financial sponsors
Company IPO Size
(C$ mm)
Scotia Capital Role
Financial Sponsor(s)
$70.1
• Sole Bookrunner on IPO
$41.9
• Sole Bookrunner on IPO
• Co-Lead Manager on IPO $77.0 • Lead Commercial Bank • Co-Led Corporate Borrowing
$54.6
• Lead Bookrunner on IPO
$187.7
• Co-Lead Manager on IPO
$202.9
• Joint Bookrunner on IPO • Lead Commercial Bank
34
Scotia Capital Qualifications
IPO Mandates for Financial Sponsors
Company IPO Size
(C$ mm)
Scotia Capital Role • Co-Bookrunner on IPO
Financial Sponsor(s)
$73.8
• Lead Commercial Bank • Hedging Instruments • M&A Advisory • Lead Manager on IPO
$90.2
• Corporate Lender • M&A Advisory
$74.0
• Lead Manager on IPO
• 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 $1000.0 • Co-Led MTN Offering • Corporate Lender • Co-Led Multiple Follow-On Offerings
35
Scotia Capital Qualifications
IPO Mandates for Financial Sponsors
Company IPO Size
(C$ mm)
Scotia Capital Role
Financial Sponsor(s)
$135.2
• Co-Lead Manager on IPO • Corporate Lender
$105.7
• Lead Manager on IPO • Led Secondary Offering • Co-Lead Manager on IPO
$164.4
• Co-Led Secondary Offering • Corporate Lender • Co-Lead Manager on IPO
$102.0
• Co-Led Secondary Offering • Corporate Lender
$89.5
• Co-Lead Manager on IPO
• Sole Lead Manager on IPO $151.0
Livingston International Income Fund
• Co-Led Secondary Offering • Lead Corporate Lender • M&A Advisory
36
Scotia Capital Qualifications
Advisory Mandates for Financial Sponsors
Acquiror Target
11 Office Towers from
Deal Size
(C$ mm)
Scotia Capital Role
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
Community Newspaper from
$193.5
• Financial Advisor to Osprey
$25.0
• Exclusive Financial Advisor to Haley • Exclusive Financial Advisor to Osprey
$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
Elian Terner, Associate Director, Investment Banking
• Since joining Scotia Capital in 2001, Elian has been actively involved in numerous debt and equity offerings. As a member of the Industrial Products group in Investment Banking, Elian focuses primarily on industrial equipment, transportation, and construction and engineering companies.
•
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
Acquiring Canadian Income Trusts or their Underlying Businesses–Legal Issues
Stephen Erlichman
Partner, Fasken Martineau Dumoulin LLP •- What is an income trust? •- Rights, remedies and other legal considerations •- Acquisition techniques
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 [email protected].
42
Acquiring Canadian Income Trusts or their Underlying Businesses–Tax Issues
Kathleen Hanly
Partner, Fasken Martineau DuMoulin LLP
Ron Choudhury
Associate, Fasken Martineau DuMoulin LLP •- Assets vs. units •- Resident, non-resident and tax-exempt Unit holders •- Tax-effective acquisition strategies
43
Acquiring Canadian Income Trusts or the Underlying Businesses – Tax Issues
Kathleen S.M. Hanly Ron Choudhury
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
Typical Income Trust Structures – Fund on Unitholders Corporation
Fund is flow-through entity for tax purposes Retained Interest Holders Interest on Notes minimizes Canco income subject to tax – Necessary because Canco taxable entity (not flow-through)
Fund
Common Shares
Subordinated Notes Senior Debt Canco acquired assets at historical tax basis
Canco
Exchangeable Shares Operations
46
Typical Income Trust Structures – Fund on Sub-Trust on Limited Partnership
Unitholders LP acquired assets at historical tax basis Retained Interest Holders Fund Both Sub-Trust and Limited Partnership are flow-through entities – Income taxed at Unitholder level
Units and Notes
Sub-Trust Ordinary LP Units Limited Partnership Exchangeable LP Units Operations
GP Co GP Interest (0.01%) Senior Debt
47
Changes to Tax Treatment of Income Trusts
• Before new rules, income trust (Fund) treated as non-taxable flow-through vehicle • New rules treat income trusts like corporations • Tax burden on non-residents and tax-exempts investing in corporation and income trust will be the same
48
Changes to Tax Treatment of Income Trusts (cont’d)
• Under new rules, ≥ 2011:
• Existing income trust earning business income (directly or indirectly) taxed like corporation • Fund distributions taxed as dividends
• 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
Purchase of Income Trust – Issues
• Tax treatment to Unitholders vs. Buyer • Tax basis of Units held by Canadian resident taxable investors relative to fair market value (“FMV”) • Tax basis of operating assets in Canco/LP relative to FMV – generally low tax basis due to prior vendor roll-in
51
Purchase of Income Trust – Issues (cont’d)
• Usual dynamic
• Optimizing tax treatment to Unitholders generally results in less tax shield to Buyer • Goes to pricing
• 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
Purchase of Fund (cont’d)
• Canadian resident capital account Unitholders have capital gains treatment
• ½ of gain (proceeds less tax ∴ basis of Units) included in income as taxable capital gain • Capital gain therefore taxed at ½ rate applicable to ordinary income
54
Purchase of Fund (cont’d)
• Non-resident Unitholders generally exempt from Canadian tax on gain • Canadian pension funds and other tax-exempts also receive proceeds free of tax
55
Purchase of Fund (cont’d)
• Buyer gets no step-up in tax basis of underlying business assets (assuming their FMV exceeds their tax basis) • Buyer is able to match interest expense on acquisition debt with operating income by
• Merging with Canco, or • Leaving Sub-Trust/LP structure in place because SubTrust and LP are flow-throughs
56
Purchase of Fund (cont’d)
• Can’t collapse Sub-Trust/LP if accrued gain because no rollover
• Rollover rule may be introduced in subsequent legislation to facilitate elimination of Sub-Trust/LP
• 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
Purchase of Operating Assets
Canco pays tax on income realized on sale – After-tax proceeds paid to Fund as return of capitalization and dividend Buyer Fund Income realized by LP on sale flowed out to Unitholders for tax purposes
Fund
Sub-Trust
Canco Operating Assets Buyer acquires operating assets for cash Cash
Limited Partnership
Cash
58
Purchase of Operating Assets (cont’d)
• Under Canco structure
• Canco pays tax on any income on sale (including recapture and ½ of goodwill gains and capital gains) • Canco pays after-tax proceeds to Fund as return of capital, repayment of notes and dividend
• 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
Purchase of Operating Assets (cont’d)
• Canadian taxable investors bear more tax on Canco asset sale than on sale of Units if tax on ordinary income at Canco level • Expect Canco will pay tax on asset sale because acquired assets at vendor tax basis when income trust created
60
Purchase of Operating Assets (cont’d)
• If LP realizes income on asset sale, Unitholders taxed on that income (other than capital gains) • Expect LP will have income on sale due to low tax basis of assets • Any additional proceeds (i.e. in excess of LP allocated income) received by Canadian taxable Unitholders on wind-up of Fund less tax basis of Units is capital gain
61
Purchase of Operating Assets (cont’d)
• Non-resident Unitholders taxable on Canco dividend/income realized by LP (other than capital gains)
• 15% withholding rate for US residents entitled to treaty benefits → less attractive than tax-free gain on sale of Units • Remaining proceeds tax-free capital gain
62
Purchase of Operating Assets (cont’d)
• Canadian pension funds and other Canadian taxexempt Unitholders receive proceeds free of tax in both Canco and LP asset sale scenarios • However, greater tax burden on tax-exempts under Canco structure relative to LP structure since
• Canco pays tax on asset sale • In LP structure proceeds allocated to Unitholders for tax purposes
63
Purchase of Operating Assets (cont’d)
• Assets of operating business acquired by Buyer at stepped-up FMV
• New tax basis can be amortized by Buyer in case of depreciable property and goodwill • Again, quid pro quo is higher purchase price because less attractive treatment to Unitholders
64
Purchase of Operating Assets (cont’d)
• Buyer does not inherit cumbersome Sub-Trust/LP structure
• Corporation usual vehicle for businesses • Corporation more flexible for subsequent reorganizations etc.
• No assumption of contingent liabilities
65
Tax Treatment of Losses
• If there are losses, Canadian taxable Unitholders may prefer to realize loss on sale of Units so that can use loss to shelter capital gains • Loss on asset sale in Canco or Fund cannot be flowed out to Unitholders • May have Unitholders with losses but gain on operating assets in Canco/LP because of initial roll-in
66
Reverse Hybrid Structure
• Defer recognition of interest paid by Canadian operating entity for US tax purposes
• Relative to conventional leveraged buy-out, “benefit” is deferral of interest income for US tax purposes
• 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
Reverse Hybrid Structure (cont’d)
Partnership = corporation for US tax purposes, flow-through entity for Canadian tax purposes – Means income blocked for US tax purposes Buyer Senior Debt Defer interest recognition for US tax purposes – May need to invest through Luxco
NSULC
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 (cont’d)
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 Private Equity Landscape
Michael Locke
Managing Director and Head, Private Equity Sponsor Coverage Group, Scotiabank
- Canadian Economy - Canadian Private Equity Landscape - Scotiabank – Private Equity Sponsor Coverage Group
72
Canadian Private Equity Landscape
December 11, 2006
Introduction
• Michael Locke
Managing Director and Head, Private Equity Sponsor Coverage Group
74
Agenda
Canadian Economy Canadian Private Equity Landscape ¾ Leveraged Buyout Market Scotiabank – Private Equity Sponsor Coverage Group (“PESCG”) Questions and Answers
75
Canadian Economy
Canadian Economy
GDP % YoY GDP Growth
Interest Rates %
forecast
8.0 6.0 4.0 2.0 0.0 -2.0
%
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
%
forecast forecast
-4.0 1987
1989
1992
1994
1997
1999
2002
2004
2007
1997
1999
2002
2004
2007
Canadian GDP
US GDP
Bank of Canada Target Rate
Federal Reserve Target Rate
US and Canada key indicators show similar trends
Source:Statistics Canada, Scotia Economics
77
Canadian Economy
Canadian Dollar Exchange Rate 1987 onwards
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
Canadian Dollar has been gaining strength against US Dollar
Source: Bloomberg, Scotia Economics
78
Canadian Private Equity Landscape
Canadian Private Equity Landscape
companies across all industry sectors
Market Overview
• Canadian private equity and venture capital provides a vital source of finance for growing
• The PE industry provides long-term investment capital
¾ contributing to sustainable economic growth ¾ generating employment ¾ financing new research and technologies ¾ supporting Canada’s promising growth companies
• The PE industry operates according to accepted standards of:
¾ conduct ¾ reporting ¾ valuation
• The PE industry has a strong network of professional advisors to support its increasingly
important role in the Canadian economy.
Source:CVCA
80
Canadian Private Equity Landscape
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:
¾ The lack of competition in the Canadian market during the early years of the funds led to several
companies being acquired at low multiples
¾ 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: ¾ Torquest’s IPO of Granby Industries (EV/EBITDA 8.7x) ¾ Imperial Capital’s IPO of E.D. Smith (EV/EBITDA 9.8x) ¾ Edgestone Capital’s IPO of BFI (EV/EBITDA 7.0x) ¾ Clairvest’s IPO of Gateway Casino’s (EV/EBITDA 8.6x) ¾ ONCAP’s IPO of FutureMed (EV/EBITDA 9.4x) ¾ Tricor Pacific’s IPO of Tree Island Wire (EV/EBITDA 7.6x) Private Equity market is maturing
Source: Scotia Capital
81
Canadian Private Equity Landscape
Capital Under Management
Capital Under Management by Market Segment (FY 2005)
Capital Under Management by Investor (FY 2005)
Government 5% Corporate 6% Private Independent 39%
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
New Fund Raising
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
Richardson Novacap Edgestone
$325 $210 $360
$720 $400 $800
121% 90% 122%
• 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,
Teacher’s, CPP)
Fund raising is increasing
Source: Scotia Capital
83
Canadian Private Equity Landscape
PE Funds Raised
• Almost $8 billion has been raised YTD
¾ Buyout funds have raised the majority of capital
Canadian Private Equity Fund Raising (FY 2002 – YTD)
$10,000
$8,000
$6,000
$4,000
$2,000
$0 2002
CAN $, billions
2003 Buyout Funds
2004 Mezzanine Funds
2005 Venture Capital
Q3 2006 Total
Fund raising is in high gear
Source: Thomson MacDonald
84
Canadian Private Equity Landscape
Source of Buyout and Mezzanine funds raised 2005
PE Funds Raised
Insurance Companies 5% Individuals 7%
Other 0%
Pensions 34% Corporations 22%
Foreign Sources 32%
100% = CAN $1.7 billion
Sources of funds are diverse
Source: Thomson MacDonald
85
Canadian Private Equity Landscape
Investment of Buyout and Mezzanine Capital 2001-2005
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
2.1 1.2 0.7 1.2
2002
2003 Buyout
2004 Mezzanine
2005
Buyout and Mezzanine capital invested by Canadian Private Equity Funds
Source:MacDonald & Associates, Thomson Venture Economics, CVCA
86
Canadian Private Equity Landscape
Buyout and Mezzanine Funds invested by event type 2005
Investment of PE Capital
Refinancing 6% Expansion 9% Restrucutring/ Other 10%
Acquisition 47%
MBO 28%
100% = CAN $7.63 billion
Financing opportunities are many
Source: Thomson MacDonald
87
Canadian Private Equity Landscape
2006
PE Activity
Foreign Acquisitions of Canadian Companies
Hudson’s Bay Co.
Intrawest Corp
Fairmont Hotels & Resorts
Four Seasons Hotels Inc.
Highlights of foreign Private Equity activity in Canada
Source: Thomson Financial (www.canadavc.com)
88
Canadian Private Equity Landscape
Investment Activity
• Canadian companies acquired by global strategic or private equity investors
¾ Falconbridge of Sudbury, Ont., is acquired by Swiss-based Xstrata for $18 billion ¾ Houston-based Kinder Morgan Inc. buys Vancouver-based utility company Terasen Inc. for $6.9
billion
¾ Hamilton steelmaker Dofasco is bought for $4.7 billion by Luxembourg-based Arcelor SA ¾ Graphics chip-maker ATI Technologies of Markham, Ont., is sold to California-based Advanced
Micro Devices Inc. for $5.34 billion US
¾ Vincor, Canada's largest winemaker, sold to N.Y.-based Constellation Brands for $1.1 billion ¾ Sleeman Breweries of Guelph, Ont., bought by Japan's Sapporo Breweries for $400 million ¾ 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.
High profile Canadian buyout opportunities
Source: CBC News
89
Canadian Private Equity Landscape
2005
Cross Border PE Activity
Mckenna Gale
Canada
17 million Sub-Debt and Equity
Sentinel Capital Partners
USA
Acquisition of Nanaimo’s Madill Equipment
(Major Manufacturer of Specialty Equipment)
Cross-border deals are common
Source: Thomson McDonald
90
Canadian Private Equity Landscape
Since 1995
Cross border PE Activity
Canadian General Insurance Shopper’s Drug Mart Yellow Pages Group Masonite
Kohlberg Kravis Roberts & Co.
KKR has invested $1.2 billion equity in Canadian transactions
Source: KKR website
91
Canadian Private Equity Landscape
Private Equity Returns (Buy out and Mezzanine)
All periods ending December 31, 2004
PE Returns
21.10%
20.10%
21.50%
8.10% 3.60%
8.80%
Three Years
Five Years U.S. Canada
Ten Years
Canadian Private Equity market has been delivering superior returns
Source: MacDonald & Associates Ltd, Thomson Venture Economics, CVCA and NVCA
92
Canadian Private Equity Landscape
PE Market Size Estimate
• State of Private Equity Market Balance in Canada
Bid Side/ Sources • Institutional Pools1 • Private Pools2
Institutional Investors large deals
Ask Side/ Uses • Canadian Assets3 • Foreign Assets4
=$ 56 billion =$ 5 billion =$100 billion
=$1.2 trillion =$1.0 trillion
• 10% allocation from all Canadian
• US/International funds only interested in
Note: Business Assets poised to change hands by 2010
$60 to $100 billion
$1.5 to $2 trillion
(1) (2) (3) (4)
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
Canadian Private Equity Landscape
attractive multiples
Market Outlook
• Private Equity firms are now finding it considerably more difficult to make purchases at
¾ Increased competition between sponsors ¾ 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 ¾ Many new participants in the Canadian leveraged loan market are driving leverage up
• Most private equity firms are, therefore, facing a particularly challenging market
¾ Relentless focus on acquisitions
environment where valuations have risen but they have more dollars to put to work ¾ 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 ¾ Existing income trusts may have to trade at discounts to their corporate company comparables before
becoming compelling investment opportunities
Opportunities are plenty
Source: Scotia Capital
94
Canadian Private Equity Landscape
Canadian Leverage Buyout market
Market Outlook
• Buyout industry will continue its growth • Mature industry characteristics:
¾ Bigger player to consolidate and focus on institutionalizing their capabilities
• Huge Leverage Buyout opportunity – more than a trillion Canadian dollars are expected to
change hands due to succession issues
Source:CVCA
95
Canadian Private Equity Landscape
Canadian Venture Capital Association (CVCA)
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:
¾ venture capitalists ¾ institutional investors ¾ corporate investors ¾ private equity investors ¾ angel investors ¾ advisory members which provide services such as law, finance, executive search, consultants ¾ investment banks ¾ insurance companies ¾ academia
Source:www.cvca.ca
96
Canadian Private Equity Landscape
Why Canada
Private Equity Capital / GDP
Private Equity Capital / Public Market Value
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%
The Canadian Private Equity market is underserved
Source: MacDonald & Associates Ltd, Thomson Venture Economics, Statistics Canada and Bureau of Economic Analysis
97
Canadian Private Equity Landscape
Why Canada
USA
UK
Australia
Canada
Excellent Private Equity Environment
Canada ranked fourth globally
Source: Apax Partners and Economic Intelligence Unit
98
Scotiabank - PESCG
Biography
Michael Locke
¾ ¾ ¾ ¾ ¾ ¾ ¾
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
¾ Managing Director and Head – Private Equity Sponsor Coverage Group
BA in Economics and Political Science
from Glendon College (Bilingual Program) of York University
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 [email protected] (416) 866-6506 [email protected] (416) 866-6917 [email protected] (416) 866-5651 [email protected] (416) 866-4502 [email protected] (416) 866-3369 [email protected] (416) 866-6420 [email protected] (416) 866-6499 [email protected]
101
Questions and Answers
Closing Remarks
Peter Gaines
Partner, Bell, Boyd & Lloyd LLC
103
