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Telus reorganizes under income trust

Incumbent carrier Telus Corp. on Monday announced it will take its entire business into an income trust model in a bid to increase its investments in broadband network infrastructure and grow shareholder revenues.

Monday’s announcement follows a four-year, $600-million investment in broadband network infrastructure that Telus announced last week as part of its effort to beef up its next-generation IP network in Canada for delivery of services such as HDTV. Telus also announced on Monday a three-year, $150 million deal with cellular phone manufacturer Nokia to provide new broadband networking equipment and installation services on its network.

Telus’s Darren Entwistle, president and chief executive officer, said the move to an income trust model supports the advancement off Telus’s national growth strategy, which was initiated in 2000 following Telus’s acquisitions of Clearnet Communications Inc. and QuebecTel.

“This creates a vehicle that enhances the robustness of our winning strategy, expedites its execution in the marketplace and increases its probability of its realization in full,” said Entwistle in a teleconference call to investors and financial analysts. “Increased tax efficiency will generate more cash flow from our superior asset mix at Telus, which will increase our ability to fund growth investments such as the announcement last Friday with Telus’s four-year, broadband infrastructure build now under way.”

The initial level of cash distribution is anticipated to be between $3.90 and $4.10 per unit, up significantly from the current $1.10 per share that Telus is presently paying its unitholders. This amounts to a 255 to 273 per cent increase in cash distribution for shareholders, said Entwistle, who was joined on the conference call by Robert McFarlance, Telus’s executive vice-president and chief financial officer.

Entwistle also highlighted Telus’s wireless business as a significant part of the Fund for investors. Wireless currently represents 64 per cent of Telus’s consolidated cash flow, according to the company.

“The potential for wireless growth coupled with its existing cash generation makes it a natural element for inclusion in the Telus income trust,” said Entwistle.

Brian Sharwood, a principal of telecommunications analyst firm SeaBoard group, said he expects to see more capital investments like the one announced on Friday before the conversion takes effect.

“They will announce a bunch of things before they give it out to the shareholders,” he said. “They want to pre-condition the investors in the income trust that we may be spending more.”

The conversion will not affect Telus’s day-to-day operations and no leadership changes will be made, according to the telecom provider. The move falls under the Business Corporation Act in B.C. and is subject to approval of at least two-thirds of security holders who will vote on the decision at a special shareholder meeting in January.

Telus’s decision follows an move by fellow incumbent carrier Bell Canada, which in March announced that it would form its own income trust that would combine assets of its East Coast telecommunications firm Aliant, including its wireless operations.

Roberta Fox, president and senior partner of Fox Group Consulting, said income trust funds are becoming a more popular choice for businesses to raise capital to enter new markets.

“The telcos that seem to be entering new areas whether it’s products or geography and they need to get capital, it seems that the income trust model gives you better access to capital,” she said.

A couple of weeks after Bell’s announcement to take part of its business to an income trust model, a group representing Bell Canada’s retailers, the Independent Communications Dealer Association of Canada (ICDAC), launched a $135 million lawsuit alleging that Bell forbade it from entering into its own income trust. In an interview with ITBusiness.ca Monday, Scott Phelan, president of ICDAC, said Telus’s announcement gives affirmation to what his organization is trying to do.

“The fact is that Telus is not only doing that in terms of their retail operations but their whole entire company,” said Phelan. “It’s a pretty spectacular move on their part.”

Phelan added moving to an income trust model would allow retailers to upgrade their stores, provide better training to staff and be better-prepared for competitive environments.

Phelan said he expects the lawsuit to move forward fairly quickly and will likely be before the Quebec Superior Court by early next year.

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