Heck they do have 4 years to do whatever they need to in order to get this mess cleaned up and hopefully removed in general.

Barbarians at the Border By Justice Litle

“The barbarians are amassing along the Canadian border. But
these barbarians don’t wear bearskins and wield clubs. They
wear Armani and wield wads of cash. Foreign investors are
preparing to sweep into the beaten-down investment trust
sector, to plunder the valuables and return the booty to
their native lands. Canadians will not enjoy this
plundering very much. Individual investors, however, would
stand to benefit if they purchased selected investment
trusts before the barbarians arrived.

The aptly titled, “Barbarians at the Gate,” is a famous
book-turned-movie about one of the biggest private equity
deals in history. In the late ’80s, private equity firm
Kohlberg Kravis Roberts bought out RJR Nabisco for $25
billion, a staggering sum that was only recently topped.
(And still hasn’t been topped in inflation-adjusted terms.)

The global economy is still awash in a sea of cash and
private equity firms have literally tens of billions to
throw around. They are bigger, badder and hungrier than
ever before. What are a private equity guy’s favorite two
words in the world? “Cash flow.” What do Canada’s income
trusts have in spades? Cash flow. Put the two together and
it’s not hard to see: The barbarians are coming.

Private equity guys recently bought Freescale Semiconductor
for $17.6 billion. They bought HCA for $33 billion – the
largest deal ever in noninflation-adjusted terms. That may
soon be topped; Kohlberg Kravis Roberts, of RJR Nabisco
fame, was recently in the hunt to break its own record. The
proposed deal price? A cool $50 billion.

All the Canadian energy trusts put together have a market
value of $60-80 billion. That’s a drop in the bucket… a
mere two or three mega-deals by today’s standards. The
barbarians are sitting on so much investor cash that they
are literally desperate to deploy it. They are no doubt
drooling over the situation Flaherty created.

For example: On Halloween night, The Globe and Mail
reports, the CEO of KCP Income Fund was heading home to go
trick-or-treating with his kids. In the space of minutes,
he had received half a dozen e-mails on his Blackberry –
all inquiring about his willingness to go private. As soon
as the news was out, the jets were scrambling.

“So what?” You might ask. “What does it matter if the
barbarians take over? Isn’t it all the same?”

Well, no.

When an energy trust goes private, for one thing, public
investors no longer get to participate in the revenue
stream. Instead of enriching Canadian citizens and other
small-scale investors, the cash flows to bigwigs in L.A.
and New York. Flaherty got brownie points for offering tax
exemptions to Canadian senior citizens; those exemptions
won’t matter much if the trust distribution streams no
longer exist.

More importantly, the “hollowing out” problem is still
there… and arguably gets worse under a barbarian regime.

Private equity firms used to take pride in shaping the
companies they acquired. The old way was to really clean up
a company, improve its efficiency and make a mint by way of
genuine value creation. That still happens, but it’s more
and more rare these days. The new model is more akin to
strip-mining: load the target with debt, extract as much
cash as you can and flip it back to the public as quickly
as possible. Under the old-fashioned way, polishing up a
company took years. Not any more. The new record for a
private equity strip ‘n’ flip is an astonishing three
weeks.

Private equity guys don’t care about the world’s energy
future. The name of the game is fees and cash flow, end of
story. They view their acquisitions in the same way credit
card companies view subprime borrowers – as assets to be
leveraged and exploited. If the barbarians can snap up
these trusts like barracudas eating minnows, what do you
think their focus will be? Will they be worried about
growing operations, expanding capex to meet future demand?
Heck no. They’ll be cutting costs left and right, forgoing
expenditures wherever they can. If you thought Exxon and BP
were stingy on the capex side, you ain’t seen nothing yet.

Flaherty’s proposal not only produced a sweet opportunity
for foreigner buyers, it also created bitter opportunity
for domestic sellers. A lot of Canadian executives now feel
they’ve been betrayed and abused; this makes the trusts all
the more susceptible to selling out. If the business you
love has been trashed by your government, and your net
worth just took a sizable hit, why not cash out with your
wealth and your dignity intact?

At the end of the day, I can see why Flaherty did what he
did. But I think all his talk of “fairness” and “doing
what’s best for Canadians” is probably a bunch of hooey.
Given the opportunity, I would love to ask him: If you were
so upset about big banks and telecoms converting to trusts,
Mr. Flaherty, why didn’t you just go after big banks and
telecoms? Is your only policy tool a sledgehammer? Why
didn’t you respect the spirit, if not the letter, of your
promise, by grandfathering in existing trusts?

Bottom line: If Canada’s energy trusts are taken private en
masse, that could hurt Canadian investors and workers
alike, as cash flows are diverted and capex is cut. If that
doesn’t happen – if Flaherty decides to block the
barbarians with restrictive legislation – then he will be
responsible for demoralizing and shrinking an industry that
has less lifeblood and less expansion capability than
before. If such occurs, tax revenue gained from betraying
the trusts could easily be offset by economic activity
lost.

But we individual investors need not trouble ourselves with
such issues; we need merely assess the situation as it
currently exists and respond. The situation as it currently
exists offers compelling value. The high-yielding
investment trusts will continue to pay their high-yields
without taxation until 2011…assuming the barbarians do
not swoop in to take them private in the meantime.

Net-net, seek out the values that would attract a
barbarian.”

Regards,

Compared to how China handle the appreciation of RMB, I think this particular example is quite far from being smooth. The way China has handled the appreciation in RMB is by defeating the entire purpose of speculation through gradualism. If you are going to get some 3 to 4% in currency exchange return, the speculators will go away.

On the other case of GG/GLG merger, I think Canada court has sided with big money. How can anyone agree to disrepect the owners of the company? It’s truly beyond me. You might want to look into that, and let me know whether the judicial system is somewhat corrupted. (That’s not saying that the judicial systems are not corrupted elsewhere, ).

Sigh, you’re sounding like sour grapes.. emotional and everything. I didn’t know about the U.S. withholding taxes, so that was something new for me. But to say morons run Canada, that’s harsh especially when you don’t live here. All in all, I should probably forget that you ever wrote such a post.

FinancialSense just had an article out, criticizing the tax change move by not doing grandfathering the old trusts. I think angering the investors is the most stupid thing to do. A country that doesn’t attract capital will sink in the long term.

Now, especially after Canadian court fully disrespect shareholders’ right in the GG/GLG merger, I’m going to shift my money more into Australia rather than Canada now.

There are some unbelievable morons running Canada, and I won’t let them screwed up my money again.

Although the results may be fair, its political execution is quite stupid. This is probably one of the least intelligent way of doing things.

Fair use excerpt from Thursday’s Barronsonline:

“Holders of existing royalty trusts have to decide what to do now. Given the devastating losses they took Wednesday, it doesn’t seem to make much sense to dump them now at depressed prices. Moreover, the trusts will maintain their tax-favored status through 2011. And, one observer posits, the trusts would have an incentive to maximize their production until the tax change goes into effect in four years. Meanwhile, fully taxed corporations such as Suncor won’t be at a disadvantage to the royalty trusts.

“Many observers had believed that some curtailment of the trusts’ tax advantages loomed in the long term, but most were shocked that it happened so soon. “It was inevitable, though,” observes Willens. “They had to do something before the entire corporate tax base was eroded.”

“That raises the question of whether U.S. tax authorities could rein in master limited partnerships, which provide analogous tax advantages to the Canadian trusts, he adds. But REIT investors can rest easy, Willens says. They’re too well represented to worry about such taxation.”