Telus Corp. changed its financial structure to the income trust model. The move will provide the telecommunications service firm greater access to capital to fund its plans to expand its broadband network, according to a company statement.
A Canadian telecommunications analyst said significant savings in taxes is primarily why the Vancouver-based telecom service provider is changing its financial structure.
“The biggest impact of this move is the tax savings that Telus will realize,” according to Kevin Restivo, of Toronto-based research firm SeaBoard Group Inc.
Apart from the company, the other winners are Telus investors who will receive $3.90 to $4.10 per share. This is a significant increase from the $1.10 per unit the company currently pays shareholders and amounts to a 255 to 273 per cent increase in cash distribution for shareholders.
“This will create a rich environment that enhances the robustness of our winning strategy,” said Darren Entwistle, president and CEO of Telus.
He said Telus expected to achieve significant tax savings that could be channeled into further investments. “Increase in tax efficiency will generate more cash flow to fund growth investments.”
The company’s decision followed its announcement last week of a four-year strategy to invest more than $600 million in a broadband network that will boost its capability in delivery such services as High Definition TV (HDTV) services. The company also recently signed a $150 million contract to provide equipment and services to Finnish cell phone manufacturer Nokia Corp.
The term income trust designates a capital structure and ownership vehicle for certain assets and businesses. An income trust’s shares are traded on security exchanges just like stocks. The income passed on to investors is generally 10 per cent higher than yields provided by stock dividends. Income trusts generally invest funds in assets that provide a return to the trust and its beneficiaries.
Trust companies pay significantly lesser taxes than corporations. “This is the reason you see a flood of companies who want to become income trusts,” said Restivo.
When Telus acquired Clearnet Communications Inc. in 2000, the company also inherited more than $800 million in tax losses which served as a tax shelter. That tax break expires this year.
Converting to a trust company minimizes the taxes Telus has to pay because the company’s reported income is reduced by the payout it gives to shareholders.
The conversion still needs shareholder and regulatory approval. But yesterday’s announcement sent Telus shares up 13.8 per cent to $59.8 on the Toronto Stock Exchange.
Shares of rival BCE Inc. also went up by 8.5 per cent to $29.68 on speculations that it could convert its telephone arm, Bell Canada, into an income trust as well.
Bell had spun its rural line Bell Aliant Regional Communications into an income trust earlier this year.
Restivo said the industry now is watching if other telecom players will follow suit. “This now begs the question will MTS-AllStream Inc. do the same,” said Restivo.
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