CI Financial converting from income trust 'to pursue growth opportunities'

By David Friend, The Canadian Press

TORONTO - CI Financial Income Fund (TSX: CIX-UN.TO) will convert from an income trust back into a corporation by the end of the year in a bid to take advantage of the turmoil in the financial markets and make acquisitions, the trust said Wednesday.

"The unprecedented situation in today's markets has created attractive opportunities for acquisitions in the asset management business," stated CEO Bill Holland.

"A corporate structure will allow us to take full advantage of these unique circumstances and put us at the forefront of industry consolidation."

In recent months, the turmoil on Wall Street has led to the takeover or merger of several big U.S. banks and the possible selloff of parts of their businesses, including wealth management.

Canada's major banks, including CI's single largest shareholder, Bank of Nova Scotia (TSX: BNS.TO), have been eyeing the U.S. market, looking for selective acquisitions.

"CI has been historically very acquisitive," said Chris Blumas, a financial analyst at Morningstar.

"In the Canadian asset management industry is getting more mature and dominated by the banks. To stay relevant as an independent player they'll have to get bigger."

The conversion of CI, which adopted the income trust structure in mid-2006, is subject to unitholder approval at a meeting set for Dec. 19.

The announcement comes about a week after Scotiabank said it would pay $2.3 billion for Sun Life Financial's (TSX: SLF.TO) 37 per cent stake in CI. The deal boosts the bank's presence in wealth management, after acquiring 20 per cent of Dundee Wealth Inc. (TSX: DW.TO) about a year ago.

Investors appeared to dislike the planned conversion, pushing CI Fund units down on the Toronto Stock Exchange. CI units fell $1.92 to closer at $16.03, a drop of 10.7 per cent.

"I think they want to just correct it quick, though over the short term it's having the exactly opposite impact - it's hurting their stock," said Blumas.

"It's bad short term, but it does create a unique opportunity long-term for investors."

CI, Canada's third largest mutual fund company, expects to complete its 2008 financial year as a trust and start its new year as a corporation, which the board expects will pay a quarterly dividend of 12 cents per share.

"This proposal removes CI from the uncertainty gripping the income trust marketplace today," Holland stated, adding that a corporate structure will provide better access to capital markets and make it easier for CI to expand outside Canada.

On Oct. 31, 2006, Ottawa changed the tax rules and said it would begin taxing existing trusts as regular corporations in 2011.

At the time, Finance Minister Jim Flaherty said more than $1 billion had seeped out of federal and provincial government coffers as a result of income trusts.

"With the impending taxation of trusts and the severe limits to growth imposed by the government, the trust structure has become disadvantageous," Holland said.

He said several acquisition attempts in the past year were impeded by the trust structure and limits on the trust sector's growth imposed by the government.

"CI cannot afford to miss any more of these opportunities," he said.

Since the 2006 announcement, about 64 trusts have been acquired or converted into corporations. About 22 in energy and other sectors have been bought by foreign buyers.

That leaves about 174 trusts left, but many expect most will convert into ordinary corporations by 2011.