Sell the acquirer, and buy the target: That’s pretty much the market’s reflexive reaction to any takeover announcement.

The only important thing for investors is whether the deal makes sense. If it does, the last thing you want to do is sell a company or trust that has just made a key strategic move, especially if it’s trading more cheaply because of it.

Last month, Conservative Portfolio holding Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) completed its takeover of Clean Power Income Fund, for a combination of cash and shares. The announcement of the deal initially triggered selling in Macquarie as nervous investors worried management might be overpaying.

Not too long after, however, it became crystal clear that Macquarie knew exactly what it was doing. First, Clean came in with its first decent quarterly results in at least a couple years, with first quarter cash flow actually covering the distribution by a comfortable margin. Then, Macquarie announced its buyout terms, essentially forcing Clean’s US investors to take cash proceeds from a sale of their shares in Toronto.

The rebound in the trust’s shares since the deal’s completion in late June is only the most recent sign that this was a good deal for Macquarie Power & Infrastructure and its shareholders. And with the trust still yielding nearly 10 percent, there’s a lot more to come. Macquarie Power & Infrastructure Income Fund is still a buy up to USD12.

This month, Aggressive Portfolio holding Advantage Energy Income Fund (AVN.UN, NYSE: AAV) has made the big move, snapping up troubled Sound Energy Trust (SND.UN, SNDFF). Predictably, there’s been some selling of Advantage and buying of Sound. And as much as the aforementioned Macquarie deal, this one looks like a huge long-term winner for the buyer.

Sound’s motivation as a seller is obvious. As a small trust with limited access to capital, it was capable of surviving on its own only by restricting capital spending and distributions to cash taken in from operations. There was no hope for growth and precious little even for staying in business beyond the 5.5-year projected life of its proven reserves.

In contrast, this deal offers Sound shareholders either 0.3 Advantage units or 0.2557 units plus 66 cents Canadian in cash. Either way, they get a stake in a much bigger outfit that’s building staying power to both grow and pay competitive distributions well beyond 2011.

As is always the case for an acquirer, the benefits to Advantage are more subtle. In my view, however, they’re far more compelling. Mainly, the purchase price—or potential dilution—won’t impact the trust’s current distribution. Rather, it enhances its long-run viability in three ways.

First, because Sound has been struggling to survive, its share price has actually been at a discount to the value of its reserves in the ground. As a result, the transaction is immediately accretive (adds to) to Advantage’s per-share production, cash flow, reserves and net asset value, and reduces its payout ratio. Proved plus probable reserve life is now at 11.8 years or a little less than eight years based on proved reserves alone.

If natural gas prices continue to slide for the rest of 2007, this deal at a minimum makes it easier for Advantage to maintain its current distribution rate. And if gas prices rebound as is likely, it will increase the trust’s ability to actually increase the payout. As it stands now, management is projecting maintaining the current rate of 15 cents Canadian per month for the foreseeable future.

Second, the deal adds a huge amount of undeveloped land to Advantage’s base of properties. Sound’s 400,000 acres will more than double Advantage’s tally to some 760,000 acres. That’s one of the largest totals in the trust sector, and it means numerous opportunities to ramp up output if market conditions warrant.

Finally, this deal is extremely accretive to Advantage’s tax pool situation. As I pointed out in the June 2007 issue of Canadian Edge—when I first added the trust to the Aggressive Portfolio—Advantage is being managed to maximize tax pools for the years 2011 and beyond, when it will presumably be taxed as a corporation.

Tax pools are basically noncash expenses that can be carried forward to reduce taxable income dollar-for-dollar. Before this merger, Advantage had about CD1.2 billion in tax pools to write off against post-2010 income. That was roughly equivalent to 95 percent of the trust’s market capitalization and 18 quarters of cash flow (4.5 years). With Sound, that rises to CD1.6 billion, one of the highest totals in the industry.

Even with Sound, Advantage remains a midsized trust and will need to grow again, very likely by with at least one or two additional mergers. Meanwhile, its tax pools, building reserve position, increasingly solid finances and low price of just 1.39 times book value mean it’s also a potential takeover target.

Natural gas prices are still the single most-important factor that will determine what Advantage shares will be worth going forward. That won’t change following the Sound deal, though Sound does have a slightly higher oil reliance than Advantage.

Gas has been weak now for several weeks. And though Advantage has been among the stronger gas trusts—in part because of a large hedge position—its shares could still be vulnerable in coming months if prices head much lower and stay there.

If that happens, the damage should be temporary. Meanwhile, the near-term risk is dwarfed by the long-run potential of this growing and aggressively managed trust. Advantage Energy Income Fund remains a buy up to USD14.

Note that other trusts and trust issues are updated in the weekly Maple Leaf Memo. The next issue will be e-mailed today. Please go to http://www.mapleleafmemo/ to sign up for this complementary weekly e-mail portion of your Canadian Edge subscription.