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Who do you trust will be a trust?

CI's move opens speculation on who is next; so far, AGF's a maybe, IGM a no


AGF Management Ltd. is a maybe. IGM Financial Inc., on the other hand, is a definite no.

There's much speculation as to which mutual fund company will follow CI Financial Inc.'s lead and move forward with plans to convert to an income trust.

"With one player doing it, you can't not look at what the implications are," said John Aiken, analyst at National Bank Financial Inc. Competitive issues may drive further conversions, he said. Income trust units trade at higher valuations than shares, making the cost of capital lower and giving growth-oriented CI the upper hand when it comes to future consolidation across the financial services sector, he said.

On Friday, CI, Canada's third-largest fund company, said it will ask its board of directors to support trust conversion next month. It's CI's third kick at the trust conversion can -- legislative uncertainty ended plans in 2004 and again last September .

"Naturally, there are valid reasons to be skeptical," said Doug Young, TD Newcrest analyst in a research note on CI yesterday. Nevertheless, "only government intervention would stop CI from converting," he said. He is maintaining a "hold" rating on CI shares and has a 12-month price target of $32.

The Toronto company's shares rallied smartly on the news, up 6.5 per cent over the past two trading sessions on the Toronto Stock Exchange. The stock closed at a record high of $31.57 yesterday.

Speculation AGF and IGM might follow CI's lead has helped power the shares of both companies. On the TSX yesterday, AGF of Toronto rose 60 cents to $25.30 while IGM, the Winnipeg parent of Investors Group and Mackenzie Financial Corp., was up $1.13 to $47.98.

In an industry report released on Sunday, Mr. Aiken said there was "an even chance" that AGF will convert. A potential conversion price of $31.50 per AGF share means "significant upside" for investors, he said.

But there are some serious factors that may make conversion difficult. International operations in Singapore and Ireland are taxable legal entities. More importantly, it is unclear the Goldring family, AGF's largest shareholder, would be willing to surrender control.

"The objectives of the owners that control the votes may be significantly different that those wishing to collect the income," said Mal Spooner, president and chief executive officer of income trust specialist Mavrix Fund Management.

AGF's next move is to get "a clear understanding of what the federal government is going to do" on the tax status of trusts and dividends, said Greg Henderson, AGF's chief financial officer and senior vice-president.

The new federal Conservative government is expected to support former Finance Minister Ralph Goodale's plan to leave the tax status of the asset class alone and raise the dividend tax credit. Quebec supports a new dividend tax regime while British Columbia and Manitoba have committed to raising their dividend tax credits pending federal legislation. Alberta and Ontario have declined to make a policy commitment.

IGM, meanwhile, threw cold water on speculation yesterday, issuing a statement that said "the company is not considering conversion to an income trust."

But IGM, like CI, is a leading industry consolidator and valuations may force IGM's hand, Mr. Aiken said in his report. He estimates IGM shares are worth about $65 each when converted to trust units.

The "wild card" is the intentions of Power Financial Corp., the Montreal majority owner of IGM, Mr. Aiken said. Power Financial's long-term strategy and the tax implications of conversion are unclear, he said. But he estimates that conversion will mean a substantially sweeter pay day for Power Financial, forecasting $502.1-million in 2007 cash flow distributions from IGM as a trust versus $241.1-million if IGM were to remain a publicly traded company.

© 2007 The Globe and Mail. All rights reserved.

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