Lots of executives complain that hedge fund trading weighs heavy on their stock. Yellow Pages Income Fund is actually doing something about the problem.
Yellow Pages announced Friday that it will spend up to $300-million buying back units, a program that could soak up 25 million units or 5 per cent of the trust.
It's the largest buyback a trust has ever announced - this crowd typically channels extra cash into distributions.
Yellow Pages decided to roll out the buyback after its executives met with institutional shareholders, and heard widespread frustration over what the portfolio managers saw as short-term pressure on the unit price.
The thinking is this trust swooned because hedge funds are short-selling Yellow Pages and many other advertising-based publications in the wake of weaker-than-expected results from U.S. players.
Historically, Yellow Pages' growth and cash distributions have commanded a premium valuation compared with U.S. peers.
That premium has vanished over the past three months, despite strong fundamentals at the Canadian phone book and trade publication publisher.
In simple terms, Yellow Pages owners and managers think the company is undervalued and they're acting on that theory.
Early results show they're making their point. Units that commanded $14 in January were changing hands at $10.09 Friday, when the buyback was announced. They closed yesterday at $10.90 on the Toronto Stock Exchange.
Based on the trust's financial forecasts, decreasing the number of units with a buyback will mean more cash for the remaining unitholders. In other words, spending $300-million on units is accretive to distributions.
Rating agencies were quick to give their approval to the Yellow Pages buyback, as were analysts.
TD Securities analyst Scott Cuthbertson has a $12.50 target price for units and said in a note to clients: "We view the announcement of a larger normal course issuer bid than we had modelled very positively, as it underscores management's confidence in the outlook for this business."
Buying back units now also better positions Yellow Pages for its planned conversion to a traditional corporate structure in 2011, when the federal government plans to change the tax-friendly rules for trusts.
Yellow Pages forecasts that as a corporation, it would still pay out about 70 per cent of the cash it generates to shareholders.
Sherrington to head
Scotia private equity
At a time when many investment banks are cutting back coverage of private equity, Scotia Capital stepped up its commitment yesterday by making vice-chairman John Sherrington head of the private equity team.
Mr. Sherrington is the dean of financial institution investment bankers, with a string of successful assignments at insurers, money managers and banks that date back to 1976, when he joined what was then McLeod Young Weir. Among the Lucite tombstones on his credenza are mementos of starring roles for Manulife and other insurers that went public in the 1990s.
In his new role, Mr. Sherrington will have cross-border contact with both investment bankers, who think up and structure private equity deals, and commercial lenders, who provide debt financing that make these deals go. Parent Bank of Nova Scotia, never shy with its balance sheet, has a long history of lending to and investing in U.S. funds, including an early stake in Kohlberg Kravis & Roberts.
Recent private equity deals from Scotia Capital include a $500-million fund raised for life reinsurance "startup" Aurigen Re Capital, and the $3.7-billion post-credit-crunch buyout of CHC Helicopter by First Reserve.
This move means a new head of Scotia Capital's financial services team for the first time in recent memory.
David Skurka, who has been with the dealer for six years and spent a decade covering the sector, is the new head of financial services coverage. He worked in the business development group at Manulife and at GMP Securities prior to joining Scotia Capital in 2002.
Adieu to Genuity analysts
Genuity Capital Markets had a big year, moving up the charts on financing and advising on some big transactions, but following bonus payouts last month, two analysts are no longer with the Toronto-based firm.
Brandon Tu, who covered business trusts, has departed. He's not alone, as many securities dealers are shutting down coverage of the dwindling universe of trusts as they are sold or convert to corporations.
Also gone is Chantal Gosselin, who joined employee-owned Genuity in 2006 from Haywood Securities to cover gold stocks.
Andrew Willis