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Industry consolidation has been driven by income trusts. Will it continue despite the income trust snakeup?
Now that the dust has started to settle from Ottawa's surprise move to curb the growing trend towards income trusts, a clearer picture about the impact on the transportation sector is emerging.
Several major players in the transportation sector, including TransForce Income Fund, Contrans Income Fund, Mullen Group Income Fund and Livingston International Income Fund, were affected by Ottawa's recent decision to introduce a distribution tax aimed at placing trusts on an even footing with corporate tax rules.
Income trusts in the transportation sector - Transforce and Contrans in particular - have been extremely active acquirers in recent years, spearheading the trend towards motor carrier consolidation. Their portfolios have become full of operating companies which were once independent operators. Will the government's new plan mean the end of new acquisitions? Most experts we spoke with say no. In fact, some say that though the nature of consolidation may change, the actual amount of consolidation may increase because of cheap valuations in the industry.
"I think at the end of the day, (more consolidation) is probably a decent thing to the extent that it's economically efficient and can provide scale and better service," says David Newman, financial analyst with National Bank Financial. "Sure, it reduces the competitiveness, but it depends on what field you're in. If there are enough players out there, they have a competitive field to agree to some consolidation to bring scale and efficiencies."
Certainly the actions and comments shortly following Ottawa's move by two of the major transportation players that operate as income trusts would indicate they were not fazed by the legislative change.
The Mullen Group Income Fund announced its acquisition of Carl Brady Trucking Ltd. and Brady Sand & Gravel Ltd. (the "Brady Group"), private companies based in Halbrite, Sask., which have been in operation since 1968. The Brady Group provides services to the oil industry in the Midale and Weyburn fields located in southeastern Saskatchewan, through its facilities located in Halbrite, Weyburn and Lampman, Sask. It owns and operates a fleet of about 55 power units, employs about 85 people, and has revenues of about $16 million.
"This acquisition reaffirms our...