changing canadian landscape 2006

www.bellboyd.com© 2006 Bell, Boyd & Lloyd LLC. All rights reserved.

Welcomes You.

The Changing Canadian Landscape:M&A and Private Equity Opportunities

1

Opening Remarks

Peter GainesPartner, Bell, Boyd & Lloyd LLC

2

Canadian Income Trust Market

Peter SlanManaging Director, Equity Capital Markets, Scotia Capital

Elian TernerAssociate Director, Investment Banking, Scotia Capital

- How we got to where we are- Recent tax changes- The impact of the changes- What the future holds


Overview of the Canadian Income Trust Market

December 11, 2006

4

Introduction

The Scotia Capital professionals present today are:

• Peter SlanManaging Director, Equity Capital Markets and Private Equity Sponsor Coverage

• Elian TernerAssociate Director, Investment Banking

5

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


Income Trusts 101

7

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; andTraditional corporate IPO

– Canadian tax regulations did not restrict the types of businesses that could become trusts

Income Trusts 101

8

Canadian Income Trusts vs. US MLPs

• 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

Similarities

• 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

Differences

Income Trusts 101

9

$0.6

$2.7

$6.7

$0.7$0.1 $0.0

$1.3

$5.3$4.4

$3.4

$5.1

$3.2

$0

$2

$4

$6

$8

$10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006YTD

(C$

Bill

ions

)Market History

• Structure emerged in Canada in the 1980s– Widespread popularity began in the 1990s in the

REITs, Natural Resources and Power sectors

Income Trusts 101

Income Trust IPO Issuance(1995 – 2006 YTD)

Predominantly Oil & Gas, Real Estate and Power

Robust common equity market; investors focused on

Tech-based opportunities

Emergence of the “business” income trust

10

$0$25$50$75

$100$125$150$175$200$225$250

2000 2001 2002 2003 2004 2005 2006

(C$

billi

ons)

CAGR from 2000 to 2006 YTD = 47%

• 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

Market Capitalization

Income Trust Market Capitalization(2000 – December 6, 2006) Oct 31

Dec 6

Income Trusts 101

-$26B

11

0

50

100

150

200

250

300

350

400

450

500

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06

S&P/TSX Composite Total Return IndexScotia Capital Income Trust Total Return Index ("SCITI")

(Inde

xed

to 1

00 a

t Jan

uary

3, 2

000)

73%

298%

Relative Performance

Relative Performance(2000 – December 6, 2006 YTD)

Income Trusts 101

Oct-31

• Income Trusts significantly outpaced the broader equity market

12

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)

Income Trusts 101

Consumer Products

$26.4

Utilities & Infrastructure

$19.5 Energy$65.7

Industrials$33.2

Resources$21.3

Real Estate$28.0

Power Generation

$7.3

13

Attractive Risk Return ProfileIncome Trusts 101

Risk vs. Return(January 1, 1995 – December 6, 2006)

• Trusts offer higher returns with lower risk to investors

SCITI

S&P/TSX Composite Index

0%

5%

10%

15%

20%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Standard Deviation of Daily Returns Annualized

Aver

age

Dai

ly R

etur

ns A

nnua

lized

Increasing Risk

Incr

easi

ng R

etur

n

14

Current SituationIncome Trusts 101

• On October 31, 2006 the Canadian Government announced a Tax “Fairness” Plan aimed at eliminating the tax advantages enjoyed by income trusts

• 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

Before

• 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”

After

15

Market Reaction to Tax “Fairness” Plan

Performance of Scotia Capital Income Trust Index(November 1 – December 6, 2006)

Income Trusts 101

• There was a wholesale revaluation of the income trust sector following the announcement

Since Nov 1 -10.5%

1,980

2,030

2,080

2,130

2,180

2,230

2,280

2,330

2,380

2,430

1-Nov 6-Nov 11-Nov 16-Nov 21-Nov 26-Nov 1-Dec 6-Dec

Inde

x Le

vel

16

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)

Income Trusts 101

-17.3%-15.0% -14.2% -13.5% -13.4%

-5.9%

4.3%

-20%

-15%

-10%

-5%

0%

5%

10%

Energy Consumer Power Utilities andInfrastructure

Industrials Resources REITs


Tax “Fairness” Plan

18

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


March 23, 2004

Budget tabled with proposals which

were later rescinded

Fall, 2003

Discussions with market

participants

Fall, 2005

Formal consultation process resulted in status quo for trusts

October 31, 2006

“Tax Fairness Plan”announced

20042003 2005 2006

19

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


20

Timeline

• Immediate Implementation– Measures effective 2007, but are implemented immediately

• Four-Year Transition Period– Government proposing four-year transition period for publicly-

traded 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”


21

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


2011

CurrentCorporate

2011

CurrentIncome Trust

41.5%31.5%45.5%Total 201110.0%0.0%14.0%Personal Level31.5%31.5%31.5%Income Trust Level42.0%34.0%50.5%Total Current10.0%0.0%16.5%Personal Level34.0%34.0%34.0%Income Trust Level

41.5%31.5%45.5%Total 201110.0%0.0%14.0%Personal Level31.5%31.5%31.5%Income Trust Level0.0%0.0%46.0%Total Current15.0%0.0%46.0%Personal Level0.0%0.0%0.0%Income Trust Level

Tax-DeferredCanadian

Taxable U.S. Investor

Taxable Canadian


Market Outlook

23

New Landscape Presents Opportunity

• Business trusts can be divided into two segments:– “Healthy” trusts

Underlying business performing well; value impacted by recent Government announcementInvestors are currently assessing the long term impact and considering short term opportunities

– “Troubled” trustsPrior difficulties with business performance; value declines have been magnified by recent Government announcementInvestors have been struggling to find value and liquidity in these trusts

Market Outlook

• Both “Healthy” and “Troubled” trusts may now be considered as acquisition targets

24

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

Market Outlook

25

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

Market Outlook

26

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

Market Outlook

27

Lowest Trading Multiples by Segment

Consumer Products

Utilities

Industrial Products

Communications, Media & Technology

Market Outlook

LTM EV/EBITDA Change in Multiple EV as of:12/6/2006 Since 10/31/2006 12/6/06

Peak Energy Services Trust 4.3x -1.8x $201Tree Island Wire Income Fund 4.7x -1.6x $150Vicwest Income Fund 4.8x -3.2x $203TerraVest Income Fund 5.0x -0.8x $195Impax Energy Services Income Fund 5.0x -0.8x $132Total Energy Services Trust 5.2x -0.3x $395Gienow Windows & Doors Income Fund 5.2x 0.0x $172Builders Energy Services Trust 5.2x -0.9x $262Bird Construction Income Fund 5.6x -0.2x $142Trimac Income Fund 5.6x -0.8x $253


E.D. Smith Income Fund 6.2x -3.0x $188Clearwater Seafoods Income Fund 6.3x -0.5x $418The Brick Group Income Fund 6.3x -1.3x $497VOXCOM Income Fund 6.6x -0.5x $132Stephenson's Rental Services Income Fund 6.7x -0.6x $117Keystone North America Inc. 7.2x -0.6x $200Ag Growth Income Fund 7.2x -1.7x $170UE Waterheater Income Fund 7.2x -0.8x $1,060Golf Town Income Fund 7.2x 0.9x $177Sterling Shoes Income Fund 7.6x -0.5x $101


Entertainment One Income Fund 4.8x -0.5x $129Cinram International Income Fund 5.2x 0.1x $1,995Custom Direct Income Fund 5.5x -0.6x $168Bell Aliant Regional Comm. Income Fund 6.3x -1.0x $9,403The Data Group Income Fund 6.3x -1.5x $282Supremex Income Fund 6.4x -0.9x $320Amtelecom Income Fund 6.6x -0.6x $105FP Newspapers Income Fund 7.7x -0.1x $203Movie Distribution Income Fund 7.7x 0.0x $409Osprey Media Income Fund 8.0x -1.0x $421


Parkland Income Fund 4.9x -0.6x $350Gaz Metro LP 8.3x -0.8x $3,069Superior Plus Income Fund 8.4x -1.0x $1,598Fort Chicago Energy Partners L.P. 8.9x -0.4x $2,901Taylor NGL LP 10.0x -0.9x $501Enbridge Income Fund 10.1x -0.9x $1,896AltaGas Income Trust 10.5x -0.6x $1,775Keyera Facilities Income Fund 10.9x -2.1x $1,374Inter Pipeline Income Fund 10.9x -1.5x $2,343Pembina Pipeline Income Fund 13.6x -1.2x $2,477

For trusts with Enterprise Values greater than $100 million

28

• 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

IPOs in CanadaMarket Outlook

S&P/TSX Composite Dividend Paying Stocks

1 0 3# Issuers 107 22 17 16 8 15 5 4 2

$0

$50

$100

$150

$200

$250

$300

$350

$400

0.0% -0.5%

0.5% -1.0%

1.0% -1.5%

1.5% -2.0%

2.0% -2.5%

2.5% -3.0%

3.0% -3.5%

3.5% -4.0%

4.0% -4.5%

4.5% -5.0%

5.0% -5.5%

5.5% -6.0%

Dividend Yield Range

Mar

ket C

apita

lizat

ion

(C$

billi

ons)

Income Trust Yields by Sub-Sector

0%

5%

10%

15%

20%

25%

30%

35%

PowerGeneration

Real Estate Utilities &Infrastructure

Resource ConsumerProducts

Industrials Energy

(Run

ning

Yiel

d)


Scotia Capital Qualifications

30

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


31

About Scotia Capital

• Corporate Banking

• Investment Banking• Canada, U.S., Mexico

• Mergers & Acquisitions

• Oil & Gas M&A (Scotia Waterous)

• Equity Capital Markets

• Canadian Relationship Management

• Loan Portfolio Management

Global Corporate & Investment Banking

• Capital Markets Group• Derivatives & Fixed Income• Domestic Money Market

• Foreign Exchange

• Precious Metals (ScotiaMocatta)

• Institutional Equity

• Equity & Debt Research

Global Capital Markets

32

Best Investment Bank in Canada

“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

Voted Best Investment Bank in Canada for 2004, 2005 and 2006 by Global Finance


33

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 yearsRevolver 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

34

IPO Mandates for Financial SponsorsStrong track record of delivering results for financial sponsors


Company IPO Size Scotia Capital Role Financial Sponsor(s) (C$ mm)

$70.1 • Sole Bookrunner on IPO

$41.9 • Sole Bookrunner on IPO

$77.0 • Co-Lead Manager on IPO • 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

35


$73.8

• Co-Bookrunner on IPO • Lead Commercial Bank • Hedging Instruments • M&A Advisory

$90.2 • Lead Manager on IPO • Corporate Lender • M&A Advisory

$74.0 • Lead Manager on IPO

$204.0 • Co-Lead Manager on IPO • Senior Corporate Lender • M&A Advisory

$194.0

• Co-Lead Manager on IPO • Co-Led Secondary Offering • Co-Led Corporate Lending • M&A Advisory

$1000.0

• Co-Lead Manager on IPO • Co-Led MTN Offering • Corporate Lender • Co-Led Multiple Follow-On Offerings

IPO Mandates for Financial SponsorsScotia Capital Qualifications

36


$135.2 • Co-Lead Manager on IPO • Corporate Lender

$105.7 • Lead Manager on IPO • Led Secondary Offering

$164.4 • Co-Lead Manager on IPO • Co-Led Secondary Offering • Corporate Lender

$102.0 • Co-Lead Manager on IPO • Co-Led Secondary Offering • Corporate Lender

$89.5 • Co-Lead Manager on IPO

$151.0

• Sole Lead Manager on IPO • Co-Led Secondary Offering • Lead Corporate Lender • M&A Advisory

Livingston International Income Fund

IPO Mandates for Financial SponsorsScotia Capital Qualifications

37

Advisory Mandates for Financial SponsorsScotia Capital Qualifications

Acquiror

Target Deal Size Scotia Capital Role Financial Sponsor(s) (C$ mm)

$1,000.0 • Financial Advisor to CPP

$3,200.0 • Exclusive Financial Advisor to KKR

n/a • Exclusive Financial Advisor to United

$75.0 • Exclusive Financial Advisor to United

$19.0 • Exclusive Financial Advisor to PNG

$193.5 • Financial Advisor to Osprey

$25.0 • Exclusive Financial Advisor to Haley

$220.0 • Exclusive Financial Advisor to Osprey

Formerly 843504 Alberta Ltd.

and

11 Office Towers from

Community Newspaper from

38

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.

39

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.

40

Acquiring Canadian Income Trusts or their Underlying Businesses–Legal Issues

Stephen ErlichmanPartner, Fasken Martineau Dumoulin LLP

•- What is an income trust?•- Rights, remedies and other legal considerations•- Acquisition techniques

41

Canadian Income Trusts: Some Non-Tax Legal Considerations for U.S. AcquirersA. What is this thing Canadians call an income trust?B. Rights, Remedies and other Legal Considerations

a) Requisitioning a Unitholder Meetingb) Obtaining a List of Unitholdersc) Compulsory Acquisitions: 90% Squeeze Outd) Other Corporate Acquisitions Methodse) Oppression and Other Statutory Rights and

Remediesf) Underlying Entity Considerationsg) Income Trust Governance Project of the Canadian

Coalition for Good Governance

42

Canadian Income Trusts: Some Non-Tax Legal Considerations for U.S. AcquirersC. Acquisition Techniques

a) Hostile Acquisitionsb) 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].

43

Acquiring Canadian Income Trusts or their Underlying Businesses–Tax Issues

Kathleen HanlyPartner, Fasken Martineau DuMoulin LLP

Ron ChoudhuryAssociate, Fasken Martineau DuMoulin LLP

•- Assets vs. units•- Resident, non-resident and tax-exempt Unit holders•- Tax-effective acquisition strategies

Acquiring Canadian Income Trusts or the Underlying Businesses – Tax Issues

Kathleen S.M. HanlyRon Choudhury

45

Overview

• Typical income trust structures• Changes to tax treatment of income trusts• Purchase of income trust• Purchase of operating assets• Reverse hybrid acquisition structure

46

Typical Income Trust Structures – Fund on Corporation

Fund

Canco

Retained Interest Holders

ExchangeableShares

Operations

Senior Debt

Subordinated Notes Common Shares

Unitholders

Interest on Notes minimizes Canco income subject to tax –Necessary because Canco taxable entity (not flow-through)

Fund is flow-throughentity for tax purposes

Canco acquired assets at historical tax basis

47

Typical Income Trust Structures – Fund on Sub-Trust on Limited Partnership

ExchangeableLP Units

Senior DebtLimited Partnership

Sub-Trust

Fund

Retained Interest Holders

Operations

Ordinary LP Units GP Interest (0.01%)

GP Co

Units and Notes

Unitholders

Both Sub-Trust and Limited Partnership are flow-through entities – Income taxed at Unitholder level

LP acquired assets at historical tax basis

48

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

49

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)

50

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

51

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

52

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 non-tax perspective because no contingent liabilities

53

Purchase of Fund

Limited Partnership

Sub-Trust

FundUnitholders

Buyer

Cash

Canco

Buyer acquires Unitsfrom Unitholdersfor cash

54

Purchase of Fund (cont’d)

• Canadian resident capital account Unitholdershave 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

∴

55


• Non-resident Unitholders generally exempt from Canadian tax on gain

• Canadian pension funds and other tax-exempts also receive proceeds free of tax

56


• 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 Sub-

Trust and LP are flow-throughs

57


• 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

58

Purchase of Operating Assets

FundBuyer

CancoOperating

Assets

Cash Cash

Limited Partnership

Sub-Trust

Fund

Buyer acquires operating assets for cash

Canco pays tax on income realized on sale –After-tax proceeds paid to Fund as returnof capitalization and dividend

Income realized by LP onsale flowed out to Unitholders for tax purposes

59

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

60


• 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

61


• 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

62


• 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

63


• Canadian pension funds and other Canadian tax-exempt 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

64


• 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

65


• 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

66

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

67

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

68

Reverse Hybrid Structure (cont’d)Partnership = corporationfor US tax purposes, flow-through entity for Canadian tax purposes –Means income blocked for US tax purposes

Buyer

NSULC

NSULC = flow-through entity for US tax purposes, corporation for Canadian tax purposes

Fund

Senior Debt

Maximize internal leveragewithin 2/1 debt/equitythin cap restrictions –Leveraged equity

Defer interest recognition for US tax purposes –May need to invest through Luxco

69

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

70

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

72

Canadian Private Equity Landscape

Michael LockeManaging Director and Head, Private Equity Sponsor Coverage Group, Scotiabank

- Canadian Economy- Canadian Private Equity Landscape- Scotiabank – Private Equity Sponsor Coverage Group


December 11, 2006

74

Introduction

• Michael Locke Managing Director and Head,

Private Equity Sponsor Coverage Group

75

Agenda

Canadian Economy


Leveraged Buyout Market

Scotiabank – Private Equity Sponsor Coverage Group (“PESCG”)

Questions and Answers

Canadian Economy

77

Canadian Economy

US and Canada key indicators show similar trends

Source:Statistics Canada, Scotia Economics

GDP

% YoY GDP Growth

Interest Rates

%

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1987 1989 1992 1994 1997 1999 2002 2004 2007

Canadian GDP US GDP

forecastforecast

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1997 1999 2002 2004 2007

Bank of Canada Target Rate Federal Reserve Target Rate

forecast%%

78

Canadian Economy

Canadian Dollar has been gaining strength against US Dollar

Source: Bloomberg, Scotia Economics

USD/ CAD

0.600.650.700.75

0.800.850.900.95

1987 1989 1992 1994 1997 1999 2002 2004 2007

Canadian Dollar Exchange Rate

1987 onwards

forecastUSD/CAD

80


• Canadian private equity and venture capital provides a vital source of finance for growing companies across all industry sectors

• The PE industry provides long-term investment capital

contributing to sustainable economic growth

generating employment

financing new research and technologies

supporting Canada’s promising growth companies

• The PE industry operates according to accepted standards of:

conduct

reporting

valuation

• The PE industry has a strong network of professional advisors to support its increasingly important role in the Canadian economy.

Source:CVCA

Market Overview

81

Private Equity market is maturing

Source: Scotia Capital

• 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:

The lack of competition in the Canadian market during the early years of the funds led to several companies being acquired at low multiples

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:

Torquest’s IPO of Granby Industries (EV/EBITDA 8.7x)

Imperial Capital’s IPO of E.D. Smith (EV/EBITDA 9.8x)

Edgestone Capital’s IPO of BFI (EV/EBITDA 7.0x)

Clairvest’s IPO of Gateway Casino’s (EV/EBITDA 8.6x)

ONCAP’s IPO of FutureMed (EV/EBITDA 9.4x)

Tricor Pacific’s IPO of Tree Island Wire (EV/EBITDA 7.6x)

Canadian Private Equity Landscape Market Overview

82


Private Equity capital under management reached $56 billion in 2005 in Canada

Source: Thomson MacDonald

Buyout52%

Venture37%

Mezzanine11%

Capital Under Management by Market Segment

(FY 2005)

Capital Under Management by Investor

(FY 2005)

Private Independent

39%

Institutional30%

Retail20%

Corporate6%

Government5%

Capital Under Management

83

New Fund Raising PE Funds Raised

Fund raising is increasing


• 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:

• Furthermore, the high returns have attracted several new private equity firms into the market:

• Large pension funds are allocating more funds to direct private equity investments (OMERS, Teacher’s, CPP)

Fund Name Previous Fund (mm) New Fund (mm) % Increase

Torquest $180 $550 206%ONCAP $400 $575 44%Tricor Pacific $235 $490 109%CAI $195 $375 92%Kilmer $115 $250 (target) 117%Birch Hill n/a $850 nmf

Richardson $325 $720 121%

Novacap $210 $400 90%

Edgestone $360 $800 122%

Fund Name Fund Size (mm)

Canterbury Park $150

Whitecastle $55

Perseis $375

84

$0

$2,000

$4,000

$6,000

$8,000

$10,000

2002 2003 2004 2005 Q3 2006

Buyout Funds Mezzanine Funds Venture Capital Total

Fund raising is in high gear

• Almost $8 billion has been raised YTD

Buyout funds have raised the majority of capital


Canadian Private Equity Fund Raising

(FY 2002 – YTD)


CAN $, billions

PE Funds Raised

85

Foreign Sources32%

Corporations22%

Pensions34%

Individuals7%

Insurance Companies

5%

Other0%

100% = CAN $1.7 billion

Sources of funds are diverse



Source of Buyout and Mezzanine funds raised

2005

PE Funds Raised

86

2.33

2.1

4.3

6.4

0.9 10.7

1.2 1.2

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005Buyout Mezzanine


Buyout and Mezzanine capital invested by Canadian Private Equity Funds

CAN $, billions

Source:MacDonald & Associates, Thomson Venture Economics, CVCA

Investment of Buyout and Mezzanine Capital

2001-2005

Investment of PE Capital

87

100% = CAN $7.63 billion

Financing opportunities are many



Buyout and Mezzanine Funds invested by event type

2005

Acquisition47%

MBO28%

Restrucutring/ Other10%

Expansion9%

Refinancing6%

Investment of PE Capital

88


Highlights of foreign Private Equity activity in Canada

Hudson’s Bay Co. Intrawest Corp

Fairmont Hotels & Resorts Four Seasons Hotels Inc.

Foreign Acquisitions of Canadian Companies

2006

PE Activity

Source: Thomson Financial (www.canadavc.com)

89


• Canadian companies acquired by global strategic or private equity investors

Falconbridge of Sudbury, Ont., is acquired by Swiss-based Xstrata for $18 billion

Houston-based Kinder Morgan Inc. buys Vancouver-based utility company Terasen Inc. for $6.9 billion

Hamilton steelmaker Dofasco is bought for $4.7 billion by Luxembourg-based Arcelor SA

Graphics chip-maker ATI Technologies of Markham, Ont., is sold to California-based Advanced Micro Devices Inc. for $5.34 billion US

Vincor, Canada's largest winemaker, sold to N.Y.-based Constellation Brands for $1.1 billion

Sleeman Breweries of Guelph, Ont., bought by Japan's Sapporo Breweries for $400 million

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

Investment Activity

90


Source: Thomson McDonald

Cross-border deals are common

Sentinel Capital Partners

MckennaGale

Acquisition of

Nanaimo’s Madill Equipment(Major Manufacturer of Specialty Equipment)

17 million

Sub-Debt and EquityCanada USA

2005

Cross Border PE Activity

91


Source: KKR website

KKR has invested $1.2 billion equity in Canadian transactions

Canadian General Insurance

Shopper’s Drug Mart

Yellow Pages Group

Masonite

Kohlberg KravisRoberts & Co.

Since 1995

Cross border PE Activity

92


Source: MacDonald & Associates Ltd, Thomson Venture Economics, CVCA and NVCA

Canadian Private Equity market has been delivering superior returns

8.10%

3.60%

8.80%

21.10% 20.10%21.50%

Three Years Five Years Ten Years

U.S. Canada

Private Equity Returns (Buy out and Mezzanine)

All periods ending December 31, 2004

PE Returns

93

• State of Private Equity Market Balance in Canada

• Institutional Pools1 =$ 56 billion

• Private Pools2 =$ 5 billion

• 10% allocation from all Canadian Institutional Investors =$100 billion

• US/International funds only interested in large deals

Bid Side/ Sources

• Canadian Assets3 =$1.2 trillion

• Foreign Assets4 =$1.0 trillion

Ask Side/ Uses


Source: Kensington Analysis, May 2006

Numbers do not support the notion that too much money is chasing too few deals

$60 to $100 billion $1.5 to $2 trillion

PE Market Size Estimate

Note: Business Assets poised to change hands by 2010

(1) Goodman and Carr LLP 2005 Private Equity Report(2) Kensington Capital Estimate(3) CIBC World Markets – February 2005(4) Globe and Mail Estimate

94

Market Outlook

Opportunities are plenty

• Private Equity firms are now finding it considerably more difficult to make purchases at attractive multiples

Increased competition between sponsors

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

Many new participants in the Canadian leveraged loan market are driving leverage up

• Most private equity firms are, therefore, facing a particularly challenging market environment where valuations have risen but they have more dollars to put to work

Relentless focus on acquisitions

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

Existing income trusts may have to trade at discounts to their corporate company comparables before becoming compelling investment opportunities



95


Canadian Leverage Buyout market

• Buyout industry will continue its growth

• Mature industry characteristics:

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

Market Outlook

96

Canadian Venture Capital Association (CVCA)

• 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:

venture capitalists

institutional investors

corporate investors

private equity investors

angel investors

advisory members which provide services such as law, finance, executive search, consultants

investment banks

insurance companies

academia

Canadian Private Equity Landscape Industry Association

Source:www.cvca.ca

97


The Canadian Private Equity market is underserved

Private Equity Capital / GDP Private Equity Capital / Public Market Value

2.00%

4.80%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

Canada

US

2.40%

5.20%

0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00%

Canada

US

Source: MacDonald & Associates Ltd, Thomson Venture Economics, Statistics Canada and Bureau of Economic Analysis

Why Canada

98

Why Canada

UK Australia CanadaUSA

Excellent Private Equity Environment

Canada ranked fourth globally

Source: Apax Partners and Economic Intelligence Unit


Scotiabank - PESCG

100

Michael Locke

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

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

Biography

101

(416) [email protected]

Ashutosh ChauhanAssociate

(416) 866-6420 [email protected]

Jeff Snowden Associate


Christine MacInnesAssociate


Doug PettenAssociate Director

(416) 866-5651 [email protected]

William (Nick) DinkhaAssociate Director


David TorreyDirector


Paul Hodgson Director


Michael Locke Managing Director & Head

Phone/ EmailName/ Designation

Contact List

Questions and Answers

103

Closing Remarks

Peter GainesPartner, Bell, Boyd & Lloyd LLC

changing canadian landscape 2006

Documents

canadian income trusts

equity capital markets

income trust ipo issuance1995

business income trust10

equity investment vehicle

corporate tax

tax burden

trustsincome trusts