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AGF open to changing to trust, awaits budget

Bullish first-quarter profit fuels gossip

Canadian Press

TORONTO -- AGF Management Ltd., Canada's 10th-largest mutual fund manager, said yesterday that it is keeping its options open with respect to a possible income trust conversion after posting a higher first-quarter profit of $24-million.

The Toronto-based firm has had tongues wagging all over Bay Street on mounting speculation it could follow in the footsteps of larger competitor CI Financial Inc., which recently announced plans to transform itself into a trust.

"I think we're just keeping our options open at this point," AGF's chief financial officer Greg Henderson said. "We're going to see what all levels of government do."

After causing much consternation in the corporate community, the former Liberal federal government abandoned its review of the booming trust sector late last year, signalling it would not introduce a new tax on trusts but rather level the playing field by reducing dividend taxes.

Mr. Henderson said that if the new minority Conservative government sticks to that plan in the coming federal budget, a trust conversion would not make sense from a cost standpoint.

"However, if for some strange reason that doesn't happen, then we will have to look at that as good stewards of the company," he said.

"I think if at that time, [Prime Minister Stephen Harper] didn't do anything with the dividend tax credit, there would be a lot of people who would be upset with him," said Mr. Henderson.

John Aiken, an analyst with National Bank Financial, raised the spectre of a trust conversion earlier this week after competitor CI Financial confirmed it would take the plunge after its first attempt was botched by the federal review.

"As a result of CI's announced conversion to an income trust, we believe that the market may begin to speculate that AGF will pursue a conversion as well," Mr. Aiken wrote in a note to clients.

"While we believe that AGF could receive a valuation of approximately $31.50 if it were to become a trust, we are increasing our target price to only $26.50, reflecting an equal weighting between a conversion valuation and a more fundamental target."

He also increased his rating on AGF to "sector perform," noting the speculation could continue to drive up AGF's share price.

Earlier in the day, AGF said its profit for its latest quarter amounted to 27 cents a diluted share. That compared with a profit of $21.1-million or 23 cents during the same period last year.

Revenue for the three months ended Feb. 28 grew to $169.1-million from $145.5-million.

AGF said it reached a "significant milestone" during the quarter, reporting positive net sales of mutual funds in the month of February.

Total assets under management increased by 12 per cent during the quarter, rising to $36.9-billion. Over the same period, private investment management and institutional assets grew 30 per cent and mutual fund assets rose 3.7 per cent.

AGF said its trust company operations grew "significantly" during the quarter with total assets rising 100 per cent. The firm's consolidated revenue included a $9.9-million securitization gain from the sale of RSP loans by that division on Feb. 28.

Earlier this year, AGF boosted its quarterly dividend rate by 20 per cent to 18 cents a share.

In addition to mulling the merits of a possible trust conversion, AGF is also speculated to be considering a friendly takeover or other merger deal with Bank of Nova Scotia.

"It's a rumour and nothing more," Mr. Henderson said.

Founded in 1957, AGF Management has offices across Canada and operations in London, Dublin, Singapore, Tokyo and Beijing.

On the Toronto Stock Exchange yesterday, its shares dipped 17 cents to close at $25.43.

© 2007 The Globe and Mail. All rights reserved.

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