9/11/09: Two Deals
Two Canadian Edge Portfolio holdings–AltaGas Income Trust (TSX: ALA-U, OTC: ATGFF) and EnerVest Diversified Income Trust (TSX: EIT-U, OTC: ENDTF)–have announced transactions that require decisions from investors.
AltaGas is offering to acquire the 80.2 percent of its utility affiliate AltaGas Utility Group (TSX: AUI) it doesn’t now own. Following the parent’s conversion to an income trust, AltaGas Utility Group was spun off to AltaGas shareholders in 2005. The parent is now offering to reacquire those shares for CAD9.05 per share in cash, a 45 percent premium to AltaGas Utility Group’s pre-deal market price. US capital gains taxes will be determined by subtracting investors’ cost basis, determined at the time of the spinoff, from the proceeds. There should be no withholding of the CAD9.05 in proceeds on either side of the border. But with AltaGas Utility Group now trading basically at the takeover price, US investors might consider selling to avoid any potential erroneous withholding.
As for AltaGas Income Trust itself, the Conservative Holding remains a strong buy. Absorbing AltaGas Utility Group will add to the company’s base of low-risk, high-cash-generating assets as it prepares to convert to a corporation next year. Management’s current plan is to trim the current payout rate upon conversion to a level that will produce a yield of around 9 percent based on current prices. That will cover taxes and provide more funds to grow the asset base, which eventually will bring higher dividends. On track for solid long-term returns, AltaGas Income Trust is a buy up to USD20. Tender any AltaGas Utility Group shares you own or sell them outright. The offer is good until Oct. 7, 2009.
Closed-end fund EnerVest Diversified Income Trust is offering to buy back its units at a 5 percent discount to net asset value (NAV). That’s a considerably smaller discount that what has prevailed in the market over the past couple of years. In my view it’s a gesture of good faith by management, which has taken several steps in recent months to narrow the discount to NAV, improve governance and lower investment risk. However, my advice is to reject the offer.
First of all, EnerVest is a desirable long-term holding for growth and income, and recent actions have only reinforced these factors. I intend to keep it in the Portfolio as long as that’s the case, which should be for some time to come. Second, the buyback is an accretive event for investors who hang on. It’s being executed at a discount to the value of the fund’s underlying assets. By shrinking the number of units in circulation, this deal will increase the pool of share value and cash flow to go around to remaining unitholders. Finally, this transaction should further narrow the discount between EnerVest’s market price and NAV–with the likely effect of driving the market price higher.
If you own EnerVest, don’t respond to the tender offer. If you don’t, this closed-end fund is a great way to gain wide exposure to Canadian markets, as it owns bonds as well as stocks and trusts. Buy EnerVest Diversified Income Trust up to USD12.
Contact Vanguard
On a final note, I strongly urge customers of Vanguard brokerage to write or call their representative as well as corporate headquarters on the issue of dividend withholding: Vanguard Brokerage Services 455 Devon Park Drive Wayne, PA 19087-1815 PHONE: 800-992-8327. The new company’s clearing corporation, JPMorgan Chase (NYSE: JPM), has apparently instituted a blanket policy of withholding 25 percent of all dividends and distributions paid by non-US companies. That apparently includes all disbursements from Canadian trusts and corporations, as well as all dividends paid in respect of American Depositary Receipts.
In my opinion, JPMorgan’s motives are clearly to save money at a time when business is soft. Several CE readers who are Vanguard customers have been told Vanguard is trying to negotiate a change in policy–i.e. back to the correct withholding of 15 percent of Canadian trust dividends. But we’ve been unable to get a satisfactory answer on when this will occur, or even what will happen to the additional 10 percent that’s now being erroneously withheld.
My first reaction is simply to advise changing brokerages. That would solve the problem of being over-withheld in the future. On the other hand, those who have been withheld at a 25 percent rate are certainly entitled to recoup the difference. And many investors are understandably uneasy about pulling up stakes completely, especially as Vanguard has generally provided good service in the past.
If you’re not a Vanguard customer, don’t become one until they resolve the withholding issue. If you are a Vanguard customer, write their headquarters at the address shown above, and preferably call them as well. Resolving this issue means, one, that Vanguard/JPMorgan officially reverts to 15 percent withholding, as is proper and legal according to the income tax Convention between the US and Canada and, two, anyone who’s been over withheld gets a full refund. Don’t be satisfied until they get this right.
AltaGas is offering to acquire the 80.2 percent of its utility affiliate AltaGas Utility Group (TSX: AUI) it doesn’t now own. Following the parent’s conversion to an income trust, AltaGas Utility Group was spun off to AltaGas shareholders in 2005. The parent is now offering to reacquire those shares for CAD9.05 per share in cash, a 45 percent premium to AltaGas Utility Group’s pre-deal market price. US capital gains taxes will be determined by subtracting investors’ cost basis, determined at the time of the spinoff, from the proceeds. There should be no withholding of the CAD9.05 in proceeds on either side of the border. But with AltaGas Utility Group now trading basically at the takeover price, US investors might consider selling to avoid any potential erroneous withholding.
As for AltaGas Income Trust itself, the Conservative Holding remains a strong buy. Absorbing AltaGas Utility Group will add to the company’s base of low-risk, high-cash-generating assets as it prepares to convert to a corporation next year. Management’s current plan is to trim the current payout rate upon conversion to a level that will produce a yield of around 9 percent based on current prices. That will cover taxes and provide more funds to grow the asset base, which eventually will bring higher dividends. On track for solid long-term returns, AltaGas Income Trust is a buy up to USD20. Tender any AltaGas Utility Group shares you own or sell them outright. The offer is good until Oct. 7, 2009.
Closed-end fund EnerVest Diversified Income Trust is offering to buy back its units at a 5 percent discount to net asset value (NAV). That’s a considerably smaller discount that what has prevailed in the market over the past couple of years. In my view it’s a gesture of good faith by management, which has taken several steps in recent months to narrow the discount to NAV, improve governance and lower investment risk. However, my advice is to reject the offer.
First of all, EnerVest is a desirable long-term holding for growth and income, and recent actions have only reinforced these factors. I intend to keep it in the Portfolio as long as that’s the case, which should be for some time to come. Second, the buyback is an accretive event for investors who hang on. It’s being executed at a discount to the value of the fund’s underlying assets. By shrinking the number of units in circulation, this deal will increase the pool of share value and cash flow to go around to remaining unitholders. Finally, this transaction should further narrow the discount between EnerVest’s market price and NAV–with the likely effect of driving the market price higher.
If you own EnerVest, don’t respond to the tender offer. If you don’t, this closed-end fund is a great way to gain wide exposure to Canadian markets, as it owns bonds as well as stocks and trusts. Buy EnerVest Diversified Income Trust up to USD12.
Contact Vanguard
On a final note, I strongly urge customers of Vanguard brokerage to write or call their representative as well as corporate headquarters on the issue of dividend withholding: Vanguard Brokerage Services 455 Devon Park Drive Wayne, PA 19087-1815 PHONE: 800-992-8327. The new company’s clearing corporation, JPMorgan Chase (NYSE: JPM), has apparently instituted a blanket policy of withholding 25 percent of all dividends and distributions paid by non-US companies. That apparently includes all disbursements from Canadian trusts and corporations, as well as all dividends paid in respect of American Depositary Receipts.
In my opinion, JPMorgan’s motives are clearly to save money at a time when business is soft. Several CE readers who are Vanguard customers have been told Vanguard is trying to negotiate a change in policy–i.e. back to the correct withholding of 15 percent of Canadian trust dividends. But we’ve been unable to get a satisfactory answer on when this will occur, or even what will happen to the additional 10 percent that’s now being erroneously withheld.
My first reaction is simply to advise changing brokerages. That would solve the problem of being over-withheld in the future. On the other hand, those who have been withheld at a 25 percent rate are certainly entitled to recoup the difference. And many investors are understandably uneasy about pulling up stakes completely, especially as Vanguard has generally provided good service in the past.
If you’re not a Vanguard customer, don’t become one until they resolve the withholding issue. If you are a Vanguard customer, write their headquarters at the address shown above, and preferably call them as well. Resolving this issue means, one, that Vanguard/JPMorgan officially reverts to 15 percent withholding, as is proper and legal according to the income tax Convention between the US and Canada and, two, anyone who’s been over withheld gets a full refund. Don’t be satisfied until they get this right.
Stock Talk
Add New Comments
You must be logged in to post to Stock Talk OR create an account