(Adds unit price decline, analyst’s comments)
TORONTO, Oct 15 (Reuters) - CI Financial Income Fund CIX_u.TO said on Wednesday it wants to convert from an income trust to a corporation before yearend to give it better access to capital markets and make it easier to pursue business deals, including opportunities outside of Canada.
CI, one of Canada’s largest independent fund managers, said its board has agreed the new corporation would pay a quarterly cash dividend of 12 Canadian cents (10.3 U.S. cents) a share. It also said it might distribute earnings to owners by buying back shares.
CI’s units fell almost 11 percent to C$16.02 on the Toronto Stock Exchange on Wednesday morning, as investors who own CI for its high distribution yield started selling their holdings, analysts said.
“It’s probably going to take a couple of months for the investor base to shake out,” Dundee Securities analyst John Aiken said in an interview.
“Predominantly the retail investors who were in CI were looking for yield, and it looks like CI is now turning that on its head with a significantly lower payout ratio in terms of its (new) dividend,” Aiken said.
Without other changes, such as a potential acquisition, demand to buy CI units may be muted because investors looking for capital gains have plenty of other choices in this market environment, Aiken added.
CI converted to a trust, which carried tax benefits, in June 2006. Four months later, Canada’s governing Conservative Party shocked markets by reversing its position on trusts, saying their distributions would be taxed as of 2011.
“With the impending taxation of trusts and the severe limits to growth imposed by the government, the trust structure has become disadvantageous, despite CI’s subsequent success in sales, asset growth and profitability,” Chief Executive William Holland said in a statement.
Holland said CI had tried to make several acquisitions over the past year, but uncertainty over the trust structure stymied its efforts.
“CI cannot afford to miss any more of these opportunities,” he said.
Holland noted in the press release that conversion back to a corporate structure would provide for better access to capital markets, and make it easier for CI to explore business and strategic opportunities “outside of Canada”.
The decision comes slightly more than a week after Bank of Nova Scotia (BNS.TO) said it would buy Sun Life Financial’s (SLF.TO) 37.6 percent stake in CI for C$2.3 billion to boost the bank’s wealth management operations. Analysts speculate that Scotiabank could eventually buy all of CI, or that CI could buy the bank’s mutual fund division.
The conversion of the income fund to a corporation is subject to unitholder, court and other approvals. Unitholders of record on Nov. 7 will be able to vote on the conversion at a special meeting scheduled for Dec. 19.
CI had about C$92.3 billion in fee-earning assets as of Sept. 30, mainly in retail mutual funds. ($1=$1.16 Canadian) (Reporting by John McCrank and Lynne Olver; Editing by Peter Galloway)