I owned shares of Brookfield Asset Management Inc. before its recent split into two publicly traded companies. Is there any guidance or formula to determine the adjusted cost base I should attribute to the shares I now own?
Yes, there is. But first, let’s briefly recap the transaction. Like many aspects of Brookfield’s sprawling business empire, it’s a bit complicated. But I’ll try to keep it simple.
Prior to the spinoff, Brookfield Asset Management Inc. traded under the symbol BAM.A on the Toronto Stock Exchange. After the Dec. 9 transaction, the company changed its name to Brookfield Corp., which now trades under the symbol BN. The number of shares held by each investor didn’t change: If you owned 100 shares of Brookfield Asset Management Inc. before the transaction, you held 100 shares of Brookfield Corp. after it was completed.
Concurrent with the name change, the company distributed 25 per cent of its asset management business to shareholders. This created a new company called – I warned you this might get a bit confusing – Brookfield Asset Management Ltd. For every four shares of the old BAM Inc., investors received one share of the new BAM Ltd., which trades under the symbol – you guessed it – BAM (without the .A suffix).
With me so far? Now, let’s look at how to determine the adjusted cost base of those BN and BAM shares. It’s important to know your cost base so that, when you sell, you can calculate your capital gain, or loss, for tax purposes. (If you hold your BN and BAM shares in a registered account, you’re off the hook because there are no capital gains taxes to worry about.)
According to tax information on Brookfield’s website, 88 per cent of the original cost base of the old BAM.A shares should be allocated to the BN shares, with the remaining 12 per cent allocated to the new BAM shares.
Let’s look at a simple example.
Say you owned 500 shares of BAM.A that you purchased a few years ago at an average price of $40, for a total cost of $20,000. After the distribution, you would own 500 shares of BN, plus 125 shares of the new BAM.
Using the formula provided by Brookfield, 88 per cent – or $17,600 – of the original cost would be allocated to the 500 BN shares. The ACB would therefore be $35.20 for each BN share ($17,600/500). The remaining 12 per cent – or $2,400 – of the original cost would be allocated to the 125 new BAM shares, which would have an ACB of $19.20 per share ($2,400/125). (Brookfield provides another example on its website )
In theory, your broker should do these calculations for you and update the ACB – also known as “average cost” or “book value” – shown on your statements. However, I’ve heard from readers who say their broker botched the numbers, which is not unusual in such spinoffs. So it’s worth crunching the numbers yourself to make sure they are correct.
Why have my Brookfield shares fallen so much since the spinoff?
Well, you would expect shares of Brookfield Corp. (BN) to trade at a significantly lower price than its predecessor, Brookfield Asset Management Inc. (BAM.A). After all, the company spun off 25 per cent of its asset management business.
But here’s the thing: If you add back the new Brookfield Asset Management Inc. (BAM) shares that you received, you’ll see that the overall vale of your investment is about the same.
Immediately prior to the spinoff, BAM.A traded at $58.88. As of Friday at noon, BN was trading at about $47.50, and BAM was priced at $42.50. If you add the market price of BN to one-quarter of the price of BAM – to reflect the one-for-four distribution of BAM shares – the sum is $58.12. So you’re pretty much back to where you started.
What are you planning to do with your Algonquin Power & Utilities Corp. shares now that the company has cut its dividend?
In November, with a dividend cut widely expected, I removed Algonquin (AQN) from my model Yield Hog Dividend Growth Portfolio. I also sold a portion of my shares personally. But I’m holding on to the rest of my shares for now.
This week’s 40-per-cent dividend cut, along with reduced capital spending and about US$1-billion of planned asset sales, are necessary steps to preserve Algonquin’s credit rating and strengthen its balance sheet. However, some investors are questioning whether the dividend cut goes far enough, and there remains a great deal of uncertainty about Algonquin’s outlook. This was reflected in the sharp drop in the stock price after Thursday’s investor update.
One wild card is whether Algonquin’s proposed US$2.6-billion purchase of Kentucky Power will proceed. In December, the U.S. Federal Energy Regulatory Commission rejected the transaction as filed, triggering a rally in Algonquin’s shares. Some investors worried that the deal would saddle Algonquin with additional debt at a time of high interest rates, so the FERC decision was greeted with relief.
But the deal isn’t dead. This week, Algonquin said it remains committed to the transaction and plans to file an amended application with FERC, which is not surprising given that Algonquin is required to use its best efforts to complete the acquisition. Should the process extend beyond the “outside date” of April 26, however, Algonquin “has the option to terminate the transaction and pay the US$65-million termination fee” or agree with the seller to extend the deadline, Nelson Ng, an analyst with RBC Dominion Securities, said in a note.
“Based on our discussions with shareholders and investors, we believe the market’s preference is for AQN to not move forward with the transaction and pay the termination fee. As a result, we believe there continues to be uncertainty on whether AQN will ultimately acquire Kentucky Power,” Mr. Ng said.
There are a lot of moving parts here, and I expect that Algonquin’s share price will remain under pressure until there is more clarity.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl