BREAKING NEWS: TransForce TransFormed

MONTREAL — Canada’s largest for-hire carrier announced today its intention to convert from an income trust to a corporation.

However, TransForce Chairman President and CEO Alain Bedard said the company remains in shopping mode, with about $100 million in hand.

He has his eye on two large purchases and an assortment of smaller outfits, and he hopes to have them in his stable by the end of the year.

“TransForce remains fully committed to pursuing its growth strategy and continuing to lead the consolidation of our industry,” he said.

The change from income-trust status doesn’t surprise industry watchers.

Bedard said that with the decision in 2006 to relieve Income Trusts of their special tax status, “Our friends in Ottawa killed us.”

A handful of Canada’s biggest truckers are also income trusts, including Contrans, the Mullen Group, Trimac, and Andlauer Transportation Services.

TransForce became a trust in 2002. And since that time, the Montreal-based carrier has purchased about 75 related companies. Most recently, TransForce purchased the remaining 50 percent of a Montreal-based landfill site company that it already owned half of.

In 2007, the fund rang in about $1.7 billion in revenue.

In making the announcement about the change to corporation status from income trust, Bedard said when the company became a trust in 2002, naysayers predicted that because trusts deliver monthly payouts to shareholders that there would be no money for acquisitions, but Bedard said he proved the cynics wrong. Almost all of the company’s purchases came after the 2002 switchover.

However, he said because of the new legislation regarding income trusts (or Specified Investment Flow-Through Trusts-SIFTS) he and his staff determined that “it would be increasingly difficult for TransForce to meet its strategic objectives given:

*The higher cost of capital as a result of the new SIFT rules;
*A decline in investor interest for trusts, which increasingly limits access to equity capital as 2011 approaches;
* And limited financial flexibility due to TransForce’s commitment as an income trust to distribute a large portion of its cash flow to unitholders.”

Additionally, the management believes that the value of TransForce’s distribution payments is not being properly reflected in the price of its trust units in comparison to other Canadian income funds. (In a question-and-answer period following the announcement, Bedard called the company’s current stock price “a joke.”)

“Our cost of capital and access to equity capital markets have deteriorated following the Minister of Finance’s announcement on SIFTs, making the funding of our growth as a trust more difficult.

“Because we remain committed to growth and see numerous attractive opportunities in the current market, we strongly believe that the most suitable way to pursue our acquisition strategy and create value for our security holders is to retain a greater portion of our significant free cash flows, to better support and fund our disciplined acquisition program and other growth opportunities in the new tax environment.”

Bedard told analysts that almost every sector of its operation — LTL, couriers, specialized services, logistics and waste management have been performing well.

However, decreases in truckload traffic as well as the Canadian dollar surge were very hard on the company’s bottom line.

His response to the lackluster truckload performance? “Lower volume to protect your margin,” he told investors. “We’re getting less trucks on the road to match the supply with the demand.”

For more on what TransForce’s decision means to you, read the May issue of Today’s Trucking magazine and watch this website for updates.