BCE Inc. and Telus Corp. said on Wednesday they need to take a close look at their income trust plans after Ottawa said last night it will start taxing the structure.
The announcements coincided with the Montreal-based BCE's earnings release, came a day after Finance Minister Jim Flaherty surprised Bay Street by announcing plans to tax new trusts including BCE and rival Telus like corporations starting next year. The proposal wouldn't impact existing trusts until 2011.
The uncertainty put the shares under pressure in trading on Wednesday. Telus shares sank 13 per cent to $56.15, while BCE's stock declined 11 per cent to $28.10.
BCE chief executive officer Michael Sabia told analysts on a conference call that he needs more time to assess the announcement's impact on the company's trust plans.
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“In deciding to convert to an income trust, we made a decision within the existing policy framework at the time and within that framework we took that action in the interest of maximizing value for shareholders,” Mr. Sabia said. “In our view, that was the right decision for shareholders given that framework. Now that framework has substantially changed and in the near term that's certainly at a cost to our shareholders, and that's clearly disappointing.”
Nevertheless, BCE did say it still intends to eliminate its holding company structure and focus on the main Bell Canada telephone business.
In a statement on Wednesday, Vancouver-based Telus said it's also assessing the impact. “As a result of the announcement by the Federal Minister of Finance, there can be no assurance at this time that TELUS will proceed with its proposed income trust conversion,” Telus said.
Observers believe it's unlikely that BCE and Telus will go down the trust road now. Until now, companies that converted to trusts have minimized their tax bills by paying out most of their cash to unitholders, who in turn pay taxes on those distributions. Under Mr. Flaherty's proposal, trusts will be taxed on their distributions at the corporate tax rate, removing the incentive to convert to that structure.
“Our initial view is that we believe Telus and BCE will not proceed with the conversions,” UBS Securities Canada Inc. analyst Jeffrey Fan wrote on Wednesday in a note to clients. He reduced his rating on BCE to “reduce 1” from “neutral 1” and also cut his rating on Telus to “neutral 2” from “buy 2.”
Mr. Flaherty, who is concerned about a growing tax leakage as more companies convert to trusts, said yesterday he expected the change would stop BCE and Telus. Those two phone giants would be the biggest conversions yet.
“BCE and Telus will not be able to become income trusts and have the tax benefits that are currently available,” he said. “Does that make it clear?”
BCE also reported third-quarter results on Wednesday. The company said revenue was little changed in the three months ended Sept. 30, rising 0.3 per cent to $4.42-billion.
Profit slipped to $285-million, or 36 cents a share in the quarter, from $441-million, or 48 cents, in the year-earlier period. Higher restructuring charges for job cuts combined with expenses to create the Bell Aliant Regional Communications Income Fund contributed to the decline.
The company said 793 employees left in the quarter. That brings its total headcount reduction so far to 2,664 in 2006. BCE had targeted as many as 4,000 job cuts, but now says it expects a cap at 3,000 because of fewer-than-expected positions eliminated through attrition. However, it says its full-year operating cost savings target is unchanged.
Revenue for Bell's residential business climbed 1.6 per cent to $1.8-billion. Bell signed up 114,000 wireless subscribers, 30,000 customers for its television services, and 90,000 high-speed Internet clients in the quarter. Those gains, though, were partly offset by the loss of 71,000 local phone lines.
“Although local access line losses increased year-over-year, the rate of erosion in our traditional voice business has stabilized since the beginning of 2006, as new competition starts to mature and as our customer winback initiatives gain momentum,” BCE said in the statement.
The unit that serves small, medium and large businesses posted a 1.5 per cent gain in revenue to $1.5-billion as Bell sold more wireless and Internet protocol-based products.
BCE owns a minority stake in Bell Globemedia, owner of The Globe and Mail and the CTV television network.
With files from The Canadian Press
