I-banks partially solve income trust barrier

2007 bonus excitement can now begin

Now that golf season is here (for some of you), October 31, 2006 seems like so long ago, unless you’re an income trust investor/financier. But take heart. The ECM desks of the Canadian investment banking industry have been busy trying to figure out how to make a fabulous living in the absence of those nifty income trusts.

And they might have made some headway, based upon the announcement yesterday regarding the $150 million Northstar Healthcare initial public offering. The deal was led by BMO, with CIBC World Markets and RBC Capital Markets as co-leads. Congrats to them all, and to the law firms (Goodmans and BLG) that helped them figure this all out. And the $9 million in underwriting fees is nothing to sneeze at.

Here’s a summary from one of the dealers:

“We finally have some news from the Canadian IPO market. Northstar Healthcare, a high dividend paying common share IPO priced it’s $150 million offering today. It was a very strong outing for the company with roughly 35 institutions (and a very strong list of trust and common share buyers) participating and a overall ‘book’ that was roughly 2.5x covered. It priced at $12.25 (low end of the range as many orders were price sensitive at/around $12) or 9.8% dividend yield. If you hold the stock in your taxable account the gross-up brings this to an income equivalent of a 13.7% yield. The book was allocated 45% retail and 55% institutional.

The Issuer is selling a controlling interest in 2 ambulatory surgery centres in Houston, Texas and it also manages a ambulatory surgery centre in Dallas and three pain management centers in Houston. 99% private pay revenue. The valuation is roughly 8x LTM TEV/EBITDA which looks attractive relative to other ambulatory centres.

The ‘magic’ in the structure is as follows: the issuer is a Canadian corporation that will buy “acquisition units” in a US holdco and payments made to the Issuers are treated as dividends for Canadian tax purposes. The acquisition units are for the purposes of US tax purposes considered debt (as its has a term of 12 years) and the interest is tax-deductible reducing US Holdco’s tax burden. The issuers indirect investment in the operating partnerships can be written up and the goodwill can be amortized over a 15 year period creating additional tax shield. Not sure if the structure is fully replicable for a Canadian group of assets however, would be if you own US assets. For Canadian assets with either strong growth or good dividend yield we believe would be attractive to buyers in today’s market.

This IPO is really the first of a new breed of product for the yield hungry Canadian investors who, a result of the government’s announcement on October 31, 2006 and the subsequent M&A activity in the trust sector, have struggled to put money to work in investments that provide stable, steady distributions.”

At the rate we are going with these massive foreign acquisitions of great Canadian taxpaying corporations (Alcan being this week’s example), it won’t be too long before the corporate tax base dwindles to zero in any event. With or without income trusts.

As for the wisdom of taking some Texas-based medical centres — with no Canadian business link — public on the TSX, its pretty obvious the investors are focused on yield and not domain of operations. And a 13.7% yield is incredibly high, when compared to the sub-10% deals we were seeing in 2006.

MRM