Winnipeg grain handling equipment firm Ag Growth plans to convert from an income trust to a corporation by the end of June.
Ag Growth Income Fund announced late Sunday it has signed a conversion deal through mining firm Benachee Resources under which Ag Growth can continue to pay a 17-cent-per-share monthly dividend ($2.04 per year), as it has up until this conversion.
Ag Growth said Sunday it’s been “proactively assessing several options available to provide long-term stability of distributions for Ag Growth unitholders” while minimizing the impact of the federal government’s decision to tax income trusts starting in June 2007.
To qualify for a tax-free conversion, Ag Growth has to convert to a corporation before the end of 2013 and thus “believes that it is in its best interests to proceed with the conversion at this time.”
Following the conversion, the company said Sunday, “Canadian taxable unitholders should benefit from lower income taxes paid on dividends compared to taxes paid on current distributions.”
The conversion is expected to enable what the company calls “New Ag Growth” to reinvest a “significant portion” of its free cash flow into the business.
The company said the conversion may also result in greater access to capital in Canada, the U.S. and other international markets and the removal of the “normal growth” and “undue expansion restrictions” in the federal Specified Investment Flow-Through (SIFT) trust income and distribution tax legislation. The SIFT law effectively “limits Ag Growth’s ability to consider strategic acquisitions,” the company said.
As well, the conversion “may result in improved liquidity, resulting in higher trading volumes.”
The deal, pending the approval of TSX and other parties, calls for Ag Growth unitholders to get one common share of Benachee in exchange for every trust unit of Ag Growth held on the effective date of the conversion, and Benachee would change its name to Ag Growth Industries Corp. (“New Ag Growth”).
“New Ag Growth” would then operate the existing businesses of Ag Growth and its subsidiaries and the trustees and management of Ag Growth would become the board and management of “New Ag Growth.”
“New Ag Growth” would not get any additional business carried on by Benachee, which under this deal would transfer substantially all of its non-Ag Growth assets and all of its liabilities to a new subsidiary of its parent corporation, Toronto-based mining firm Tahera Diamond Corp.
Then, $4 million in common shares and $4 million in convertible preferred shares of “New Ag Growth” would go to Tahera for payment to Tahera’s principal secured creditor, Caz Petroleum.
According to a CBC report last month, Tahera has built up over $300 million in tax losses since its now-mothballed Jericho mine project opened in 2006 in western Nunavut. Tax losses from such a company can be purchased and used by income trusts.
Tahera was able to gain an extension on its creditor protection last month while it worked on a deal to sell its tax credits to “an unidentified Canadian income trust,” CBC reported in March. Tahera first filed for creditor protection in January last year.
Ag Growth’s businesses make portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories and grain aeration equipment. It has a sales, marketing and distribution system of about 1,400 dealers and distributors in nine provinces, 48 states and overseas.
The income trust’s Canadian holdings include grain auger makers Westfield and Wheatheart; conveyor belt maker Batco; grain bin manufacturer Twister Pipe; and the Edwards Group, a grain dryer company.