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CI takes hit on conversion plan

CEO shrugs off stock plunge, welcomes chance to get back into acquisitions game

FUNDS REPORTER

Bill Holland saw CI Financial's unit price take a sharp tumble yesterday on plans to convert back to a corporation, but he is not bothered by any short-term pain to get back into the takeover game.

CI Financial Income Fund is proposing to convert back to a common stock company from an income trust by the start of 2009 to pursue acquisition opportunities arising from the global credit crisis and stock market downturn.

"People don't want trust paper," lamented Mr. Holland, CI's chief executive officer. "Sellers don't want them because of the uncertainty."

CI's conversion is well ahead of 2011, when Ottawa plans to tax income trusts like corporations, sparking some investors seeking income to head for the exits yesterday.

But the income trust structure has frustrated attempts by CI to make several acquisitions over the past year, including a bid for rival DundeeWealth Inc., Mr. Holland said in an interview.

"And if we ever wanted to issue shares outside of Canada, trusts are a complete non-starter."

CI, which is Canada's third-largest fund company with $59-billion in assets, converted to an income trust in 2006. Over the past decade, it has made 10 acquisitions and transformed itself into a wealth management company, which includes financial planning firm Assante Corp. and brokerage Blackmont Capital Inc.

Its units closed down $1.92, or almost 11 per cent, at $16.03 on the Toronto Stock Exchange, with more than 2.8 million units trading hands. Mr. Holland figures the drop is not too bad, given that the market was off 6 per cent yesterday, and CI units would have taken a hit anyway.

CI unitholders, meanwhile, will vote on the conversion at a meeting on Dec. 19. The change, which is expected to be a tax-free rollover, would enable CI to begin life as a corporation by the new year.

Under federal rules, incomes trusts are restricted on the number of new units they can issue if they hold so-called "exchangeable units" in addition to regular units.

That affected CI because more than half of its market value is locked into exchangeable units, which had offered investors shelter from capital gains upon their rollover from CI shares.

Ned Goodman, who controls DundeeWealth through his stake in Dundee Corp., acknowledged in a recent interview the trust structure hampered CI from getting closer to a possible deal for DundeeWealth.

"Had he [Mr. Holland] been able to make an offer, I would have been on the horns of a dilemma because we didn't want to sell," Mr. Goodman said. "We were too big for [CI] to buy and still remain an income trust."

Sun Life Financial Inc., meanwhile, last week sold its 37-per-cent stake in CI to Bank of Nova Scotia for $2.3-billion to pursue acquisition opportunities in the insurance industry in the wake of the credit crisis.

Some analysts have speculated that CI's potential acquisitions could include Scotiabank's mutual fund operations now that Sun Life is out of the picture.

CI is arguably the most efficient mutual fund operator in Canada but needs a significant level of assets under management - $10- to $15-billion - to achieve the next level of efficiency, suggested John Aiken, Dundee Securities Corp. analyst. "Purchasing Scotia's operations would fit the bill and create significant synergies benefiting shareholders."

CI said the new corporation will pay quarterly cash dividends at 12 cents a share, and conserve available cash for acquisitions and growth. It will not pay a distribution in December, but will pay an additional 4 cents a share for the quarter ended March 31, 2009, so shareholders will receive 16 cents a share at that time.

In 2008, CI's annual distribution will end up being $1.88 per unit compared with $2.20 a unit in 2008.

Mr. Holland said CI's proposed annual dividend of 48 cents a share as a corporation is still only a starting point. "We'll evaluate it in the first quarter of next year," he said.

AIC Ltd. portfolio manager Robert Almeida, who holds a 5-per-cent stake in CI in his two AIC Advantage funds, is hanging on to his holdings. "The downside of the conversion is not that significant in the grand scheme of things," and is outweighed by the potential growth from acquisitions, he said.

© 2007 The Globe and Mail. All rights reserved.

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