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M&A Symposium Income Trust Issues

M&A Symposium Income Trust Issues. Craig McDougall C.A., C.B.V. Co-Head & Managing Director Mergers & Acquisitions National Bank Financial. 5 th October 2006. Table of Contents. Section. Canadian Income Fund Market 1 Understanding Value Accretion 2 Selling the Deal to the Market 3

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M&A Symposium Income Trust Issues

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  1. M&A SymposiumIncome Trust Issues Craig McDougall C.A., C.B.V.Co-Head & Managing Director Mergers & AcquisitionsNational Bank Financial 5th October 2006

  2. Table of Contents Section • Canadian Income Fund Market 1 • Understanding Value Accretion 2 • Selling the Deal to the Market 3 • Hostile Income Fund Deals 4

  3. Canadian Income Fund Market • The Income Fund market has expanded to 244 funds with an aggregate market capitalization of $232 billion • ~$1 billion/mo. is paid to investors – funds which are largely reinvested • Many Canadian corporations have successfully converted to Income Funds, in order to capitalize on more attractive valuation multiples Number of Income Funds and Aggregate Market Value Source: NBF Database

  4. Income Trust Market Overview • Income fund issuance has totaled approximately $3 to $5 billion quarterly since 2003 Income Trust IPO and Follow-on Offerings(1) (1) Includes convertible debentures

  5. Average Income Trust Yields Average Income Trust Yields(1)(2) (1) Average yield is calculate weekly based on Friday’s close (2) Includes all trusts, new issues are added as they come to market Note: As of January 24, 2004 yields are calculated based on last distribution annualized (formerly LTM)

  6. Average Income Trust Yields vs. Cash Flow & EBITDA Multiples(1)(2) Business Trust Cash Flow EBITDA Multiples Income Trust Yields vs. Cash Flow & EBITDA Multiples (1) Average yield is calculate weekly based on Friday’s close (2) Includes all trusts, new issues are added as they come to market Note: As of January 24, 2004 yields are calculated based on last distribution annualized (formerly LTM)

  7. 9.82% Max. Spread – 7.6% Current Spread5.7% Min. Spread – 4.2% 4.25% 4.10% Income Trust Market Overview Income Trust Valuations Continue to Drive New Issues Average Business Trust Yields(1)(2) (1) Average yield is calculated weekly based on Friday’s close (2) Includes all business trusts, new issues are added as they come to market

  8. Average = 1.5x Selling the Deal to the Market at IPO Debt • Generally accepted level of third-party senior leverage for an IPO is 1.0x to 2.0x EBITDA • Includes drawn term debt, average drawn amount under the revolver for working capital and capitalized leases • Acceptable level of leverage is dictated by underlying business • Average leverage of recent income fund IPOs is 1.5x • Initial 3rd party debt typically provided by Canadian banks • Generally for a period of 24-36 months • Active private and public markets accessible for longer term financing Recent Specialty Business Income Funds – Senior Debt / EBITDA Ratios at IPO(1) (1) Senior Debt/EBITDA includes term debt and estimated average working capital facility borrowings.

  9. Income Funds – Debt Levels have Increased over Time Net Debt / EBITDA for Income Funds Debt levels have increased over time Source: NBF New Issues Database

  10. $2.4 (2) Convertible Debenture Market Overview • Significant issuance of convertible debentures by income trusts • $7.9 billion since 2001 in 100 offerings • $1.6 billion raised since the beginning of 2006 in 26 offerings Income Trusts Convertible Debenture Offerings(1) The convertible debenture market remains strong (1) Includes business trusts, REITs, Oil & Gas and Energy & Power income funds (2) Shaded portions represent annualized figure for 2006

  11. Capital Structure Considerations • The following tables illustrates the proportion of convertible debentures in the current capital structures of operating income trust having convertible debentures Percentage of Total Market Capitalization(1) Percentage of Fully Diluted Shares Outstanding(2) Convertible debentures generally limited to 25% of total market cap (1) Calculated as convertible debenture face value as a percentage of market capitalization plus convertible debenture face value (2) Calculated as underlying units of convertible debentures (offering value divided by conversion price) as a percentage of fully diluted shares, including the underlying convertible debenture units

  12. M&A Market Overview Canadian M&A Activity – Announced Deals: 1997 – YTD 2006 (1) Source: Crosbie & Company Inc. (1) As at July 31, 2006

  13. M&A Market Overview Canadian M&A Activity vs. Income Trust Offerings: 1997 – YTD 2006 (2) Source: Crosbie & Company, NBF database (1) Includes both IPOs and Secondary Offerings; excludes Fund of Funds and Structured Products (2) As at July 31, 2006

  14. Canadian Income Fund Market • Income Fund M&A Activity • M&A activity has steadily increased since 2002 with 112 deals announced in 2005 as several income funds have used their currency to complete accretive acquisitions • Trust enjoy premium valuations and thus have the ability to pay higher prices • Market has demonstrated a willingness to finance accretive acquisitions • Recent watershed transactions involving PBB / Livingston, Royster Clark / Agrium, Connors/Bumble Bee, BFI/IESI and YPG/ADS mark the beginning of a new wave in income fund M&A opportunities Income Funds(1) – Number and Aggregate Market Value(2) (1) Includes income funds, royalty trust and REITS (excludes property brokerage transactions). (2) Transactions sizes greater than US$1 million. Source: Bloomberg Financial Markets.

  15. Acquisition Financing of Recent Business Income Trust M&A Transactions Transaction Financing Review • Convertible debentures are frequently issued in conjunction with an acquisition • Compelling use of proceeds increases marketability Conv. Deb. Issue as % of Pro-forma Market Cap 16% SFK Pulp / AFRI Mills (Aug 06) 15% Data Group / Relizon Canada (Aug 06) Arctic Glacier / California Ice (May 06) 25% Yellow Pages / Trader Classified Media (May 06) 4% Gateway Casinos / Langley Casino and Hotel (Apr 06) 8% Versacold / P&O Cold Logistics(Nov 05) 49% Superior Plus / JW Aluminum(Oct 05) 3% Cineplex Galaxy / Famous Players (June 05) 11% Superior Plus / Leon's Insulation, Foster Energy, IBS (Apr 05) 5% 18% KCP / CCL Assets (Apr 05) Increasingly important in M&A transaction financing

  16. Average 8.6% Adjusted Average(1) 6.4% KCP / CCL Assets (Apr 05) Superior Plus / Leon's Insulation (Apr 05) Yellow Pages / Advertising Directory Solutions (Mar 05) Connors Brothers / Castleberry (Dec 04) BFI Canada / IESI (Nov 04) Terravest / Atlantic Furniture (Nov 04) Superior Plus / Winroc (May 04) Connors Brothers / Bumble Bee (Feb 04) Chemtrade / Peak (Aug 05) Terravest / 80% of Don Park (Apr 05) Livingston / PBB (Oct 05) Superior Plus / JW Aluminum (Oct 05) Cineplex Galaxy / Famous Players (June 05) Medical Facilities / Oklahoma Spine (June 05) Data Group / Relizon (Aug 06) GMP / Edgestone (Jun 06) Arctic Glacier / California Ice (May 06) Yellow Pages / Classified Media (May 06) E.D. Smith / Seaforth Creamery (Apr 06) Amtelecom / People's(Dec 05) Versacold / Various (Nov 05) Precedent Trust Transaction Accretion Levels Accretion to Distributable Cash of Recent Income Trust M&A Transactions (1) Adjusted average excludes the following transformational acquisitions: Data Group, Arctic Glacier, E.D. Smith, Livingston, Chemtrade, Cineplex, KCP, YPG/ADS, BFI, and Connors/Bumble Bee

  17. Selling the Deal to the Market (cont’d) • Transaction Considerations • Initial cost pressure on Income Fund • Considerable amount of work to prove financial case before proceeding • Tax, Financial and Structure discussions • Establish Mergeco cash flows • Precedent Accretion Analysis for price negotiation • Target accretion in excess of precedent mean as a result of required marketing for contingent equity financing

  18. Income Trust Transaction Premium Levels to 20 Day VWAP(1) Energy TrustsAverage: 28.7% Real Estate Investment TrustsAverage: 9.9% Operating TrustsAverage: 33.5% Precedent Trust Transaction Premium Levels (1) Premium calculated based on the 20 Day volume weighted average prices from one day prior to transaction announcement

  19. Hostile Deals of Income Trusts Size(C$ MM) Date Acquiror Target Premium(1) Result 03-Aug-06 Avion Group Atlas Cold Storage IF $574 10.0% Pending 11-May-06 Canadian Oil Southern Petroleum $190 153.0% Pending Sands Trust 08-Nov-05 Agrium Inc. Royster-Clark IF $480 57.3% Successful after increased offer 03-Nov-05 Mullen Group IF Pe Ben Oilfield Services $62 97.9% Successful after increased offer 19-Oct-05 Livingston PBB Global Logistics IF $318 57.0% Successful International IF after increased offer (1) Premium calculated based on the 20 Day volume weighted average prices from one day prior to transaction announcement

  20. Income Fund Defense • Widely held income trust on TSX (no insider > 20.0% ownership) • 12 Unitholders Rights Plans in place • Tactical plans viable option • Standard Canadian style plans • Premium valuation makes difficult for strategic acquirors, effective barrier to M&A • Fallen angels provide opportunity • Trust on Trust deals other than Oil & Gas and Real Estate are rare

  21. Selling the Deal to the Market Structuring the Transaction • Pre-determined price, back solving based on precedent market accretion Debt • Comparison to leverage of industry peers • Targeted conservative leverage level to ensure successful marketing of the equity financing • Creeping debt levels compared to historical Equity • Determination of Canadian market capacity • Pricing – lift from accretion to distributions • Mechanism – receipts vs. units Timing • Parallel process to M&A negotiation and announcement • Road show and marketing material preparation

  22. Precedent Income Fund Conversions • On average, corporations that have converted to income funds have experienced value accretion of 27.7% and an increase in trading volumes Selected Income Fund Conversion – Precedent Transactions Fund Name Conversion Date(1) Market Cap.($ Millions) Conversion Price(1) Unit Price Appreciation(2) Relative Vol. Increase(3)(4) Business Telus(5) Pending 22-Jul-56 $60.51 12.9% n/a Telecom CI Financial Income Fund 30-Jun-06 $8,389 $29.54 10.9% 79.23% Wealth Management Cinram International Income Fund 05-May-06 $0 $29.25 0.7% -8.87% DVD Manufacturing GMP Capital Trust 01-Dec-05 $1,050 $17.00 21.9% 317.06% Investment Banking Premium Brands Income Fund 26-Jul-05 $159 $10.60 10.1% 19.42% Private Label Pet Food Mullen Group Income Fund 07-Jul-05 $1,834 $22.40 10.9% 199.33% Transportation Wajax Income Fund 15-Jun-05 $322 $19.42 19.7% 143.27% Mobile Equipment Parts Medisys Health Group Income Fund 04-Jan-05 $63 $10.65 15.7% 1.226 Healthcare Services CML Healthcare Income Fund 25-Feb-04 $1,028 $12.15 73.6% > 600% Medical Services Fording Canadian Coal Trust 05-Mar-03 $1,501 $30.64 33.1% -6.30% Coal Newalta Income Fund 06-Mar-03 $253 $9.30 50.6% 82.70% Industrial Waste Mgmt. Boyd Group Income Fund 28-Feb-03 $30 $8.30 15.2% 60.30% Auto Repair Centres Big Rock Brewery Income Fund 15-Jan-03 $38 $6.60 -1.5% 32.40% Brewery TransForce Income Fund 02-Oct-02 $554 $8.27 19.6% 98.10% Transport / Logistics Contrans 23-Jul-02 $263 $9.50 35.6% 238.50% Transportation Parkland Income Fund 04-Jul-02 $142 $11.61 43.1% 16.90% Petroleum Retailing Rainmaker Income Fund 04-Jun-02 $38 $3.40 23.4% -9.00% Film Production Services CCS Income Trust 27-May-02 $406 $15.20 72.2% 140.80% Oil & Gas Services Arctic Glacier Income Fund 22-Mar-02 $223 $9.59 46.0% > 600% Packaged Ice Versacold Income Fund 12-Feb-02 $188 $8.52 96.2% > 600% Cold Storage North West Company 07-Apr-97 $197 $12.24 11.7% -61.60% Department Stores Adj. Average 27.7% 80.6% (1) First Trading Day After Conversion Date (2) Calculated as the conversion price divided by the 30-day, volume weighted average share price prior to the announcement date (3) Increase in average daily volume in the 30-days following conversion from the average daily volume traded during in the 30-days prior to announcement (4) Average daily trading volumes that increased in excess of 600% are not shown (5) Telus’ unit price appreciation calculated one week following the announcement of the intention to convert into an income trust

  23. Summary Observations • Leverage levels of Trusts are increasing partly due to acquisitions and increased use of converts • Premiums tend to be narrower than corporate deals, except on business trusts • Accretion levels approach 10% which is less than historic corporate deals • Limited hostile activity • Conversions acting as substitute for M&A change of control transactions

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