Trust takeovers reward investors

Shareholders in Gateway Casinos Income Fund (TSX: GCI.UN) got a huge break last month. The value of their positions soared by almost 26 per cent after the trust announced it has accepted a take-over offer of $25.26 per unit from Australia’s New World Gaming Partners Ltd., a joint venture owned by Publishing and Broadcasting Limited and Macquarie Bank Limited. Total value of the bid is about $800 million.

The deal represents a windfall for Gateway shareowners and raises the hopes of other trust investors that similar buy-outs may enable them to recover some of the losses suffered after last fall’s announcement that trusts will be taxed starting in 2011.

Certainly those who hung on to their Gateway shares after the trust market plunged in early November will be richly rewarded for sticking it out. The share price fell as low as $14.50 following the move by Finance Minister Jim Flaherty. The take-over bid is 74 per cent higher than that and represents a 25.7 per cent premium on Tuesday’s closing price of $20.03. In fact, the offer tops the highest trading share price in the history of the trust, which operates seven casinos in British Columbia and Alberta. No wonder CEO Dave Gadhia seemed gleeful when he said the offer “represents exceptional value for unitholders and an immediate and substantial premium to the recent trading price”. (Several of Gateway’s trustees and senior officers have large personal stakes in the trust and they are strongly supporting the bid.}

The Gateway announcement was just the latest in an escalating number of trust buy-outs as managers adjust to the reality that the trust tax, which has been embedded in the budget measures, will almost certainly be passed by Parliament. A day before the Gateway news came out, KCP Income Fund (TSX: KCP.UN), announced it has entered into an agreement with Caxton-Iseman Capital, Inc., a New York-based private equity firm, to be taken over at a price of $10 a share in a deal worth $804 million.

Here again, investors enjoyed an unexpected windfall. KCP, which manufactures laundry, household cleaner, and personal care products for a number of major brands, saw its shares jump from $8 to $9.93 on the TSX the day the announcement was made. The $10 bid represents a 25 per cent premium to the March 30 closing price and a 45 per cent premium over the low of $6.90 hit after the Oct. 31 tax announcement.

There’s more – much more! On March 28, Great Lakes Carbon Income Fund (TSX: GLC.UN) announced it had entered into a definitive agreement with Oxbow Carbon & Minerals Holdings, Inc. to be taken over at a price of $14 per unit in a cash deal worth about $527 million. Oxbow is a U.S. company based in West Palm Beach, Florida.

In this case, the share price didn’t spike up because a take-over battle between Oxbow and a company based in India had been going on for some time. But here again, the bid price represents an all-time high for the units and a premium of about 40 per cent over its November low.

Previously-announced trust take-overs include Lakeport Brewing Income Fund (TSX: TFR.UN) by Labatt at a premium of 36 per cent, Entertainment One Income Fund (TSX: EOF.UN) by U.K.-based Earl Street Capital Ltd. at a 33 per cent premium, and Amtelecom Income Fund (TSX: AMT.UN) by Maritime-based Bragg Communications Inc. for a 26.7 per cent premium.

There are two points that are especially worth noting in all this. The first is that the premiums being paid in most of these take-over deals are quite high, in some cases above the all-time peak trading price for the shares. The second is that the majority of successful offers to date have come from non-Canadian entities (even Labatt is now foreign-owned).

That point has led to renewed criticism of the Finance Minister from trust supporters who claim that the end result of his policy will be to cost the Government of Canada significant tax dollars as entities that were making taxable distributions to Canadian residents pass into foreign hands. Predictably, Mr. Flaherty has fired back, saying that the take-overs are not “something that has to do with a particular tax policy” but rather are the result of “large pools of capital that have been accumulated and are looking for purchases in various parts of the world”.

Mr. Flaherty is being disingenuous. Most of the trusts would not have put themselves up for sale had the tax measure not been introduced. We’ll see how all this plays out but the way things are going so far the government policy will be seen as deeply flawed if a large number of Canadian trusts end up in foreign hands.

Be that as it may, retreat is unlikely and investors must deal with the new reality. Based on the way events are unfolding, that new reality suggests that holding on to existing trust positions, assuming the underlying business is sound, may be a very wise move. The corporate raiders are clearly on the prowl and Canada’s lame duck trust sector has become fair game. There are going to be many more takeovers in the months to come and if the premiums we are now seeing are any indication, patient investors can expect to be rewarded. And while you’re waiting, the monthly distributions will keep flowing in.

Perhaps this will all work out much better than anyone expected.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder member, go to