March 21, 2005
With a crush of new entrants in the income trust market, established trusts grappling with how to grow may consider the “transformational transaction” structure now on the radars of U.S. private equity players. The structure involves a Canadian trust acquiring the assets of a much larger U.S. company with money raised through a subscription offering. The transformational transaction structure represents a quantum leap in the trust market, says Phil Brown, because it allows existing trusts to increase distributions—and keep their yields competitive—at a speed no one had thought possible.
“These types of deals are the big-growth stories you’d have in any kind of industry, but we haven’t seen them in the trust sector until very recently,” says Phil. “Historically, business trusts haven’t been doing these large acquisitions—they’ve been doing smaller transactions. And if you go from a market cap of $600 million to $1.5 billion in one shot, it potentially changes the nature of your whole company in a way that a $100-million acquisition doesn’t.”
Phil was part of the team that acted for BFI Canada Income Fund in its recent C$1.1 billion combination with Texas-based IESI to form North America’s largest solid non-hazardous waste management company. BFI’s market capitalization ballooned from C$680 million to C$1.5 billion overnight, and BFI’s unitholders saw 12% added to their distributions. Phil also acted on Connors Bros. Income Fund’s 2004 acquisition of California-based Bumble Bee Seafoods, whereby unitholders saw an instant 12.5% accretion and Connors more than tripled its market cap from C$230 million to C$700 million.
While accretion is the name of the game in transformational transactions, it is all about the multiples for private equity players. In both BFI and Connors, private equity firms found more value in selling into an existing Canadian business trust than going public in the United States.