The Enbridge deal: Hold, or take the money and run?

Open this photo in gallery:

I’ve done well on Enbridge Income Fund Holdings Inc. (ENF) with a gain of about 30 per cent, not including distributions. With the recent news about Enbridge Inc. (ENB) bringing subsidiaries in-house, I’m wondering if it makes sense to sell ENF and lock in my gain now or should I hang on and take ENB shares and the extra cash incentive?

First, a quick recap: Under the $4.7-billion deal announced this week, ENB (I’ll use stock symbols to keep things simple) agreed to buy all of the outstanding shares of ENF, with each ENF share to be exchanged for 0.735 shares of ENB plus 45 cents in cash. ENF shareholders will also be entitled to receive ENB’s fourth-quarter dividend in December and ENF’s monthly dividends through November, assuming the deal closes, as expected, before the Nov. 15 record date for the ENB dividend. (Check out the FAQ on ENF’s website for more information about dividends and other aspects of the deal.)

Whether you should sell ENF now or wait to receive ENB shares and a small amount of cash depends on a few factors. First, selling would lock in your gains and avoid the risk that the deal will fall apart and cause ENF’s shares to tumble. However, that seems unlikely given that the proposal is an improvement over a previous ENB offer. “While still subject to a shareholder vote, including the majority of the [ENF] shares not held by Enbridge, we believe the enhanced offer is enough to secure shareholder approval,” CIBC World Markets analyst Robert Catellier said in a note.

You should also consider the tax consequences. If you hold ENF in a registered account such as a tax-free savings account or registered retirement savings plan, no capital gains taxes will apply on the sale of the shares. However, if you hold the ENF in a non-registered (that is, taxable) account and sell them, you will be responsible for any capital-gains tax. (Capital gains are effectively taxed at half the rate of other income.) Taking ENB shares in exchange for your ENF shares would largely avoid this, because the share portion of the deal – which accounts for about 99 per cent of the purchase price – qualifies for a tax deferral. You’ll still have to pay capital-gains tax, but only when you eventually sell your ENB shares. (You can also elect to defer 100 per cent of the gain, but this requires some paperwork. See the FAQ for details.)

Another downside of selling your shares now is that you will miss out on future dividends from ENF and ENB. It’s worth noting Enbridge is pledging to raise its dividend by 10 per cent annually through 2020, although that may not be a slam dunk give that ENB has trimmed its dividend growth outlook in the past.

Perhaps the most important question to ask yourself is: Do you want to own ENB shares? Or, if you already own a chunk of ENB, do you want to own even more? Would it make sense to deploy the money elsewhere for diversification purposes?

If you decide that you don’t want to own ENB shares or add to your existing position, another option – assuming you hold ENF in a taxable account – is to accept ENB shares and cash in the transaction. You could then wait until January to dispose of the ENB shares. You’d still have to pay capital gains tax, but you would push the gain into 2019 and delay the tax hit for a year.

I hold common shares of Royal Bank of Canada (RY) and Bank of Montreal (BMO), both of which are trading above $100. In the past, Canadian banks would split two-for-one when their share prices approached triple digits, but I have heard nothing about this. Are splits likely soon for these companies?

You’re asking the wrong guy. I predicted nearly a year ago that Royal Bank and Bank of Montreal were about to split, based on the fact that their share prices had crossed the $100 threshold. That call turned out to be wrong. So today, I’m officially revising my prediction to say that banks stocks might split – or they might not. And even if they do split – and I’m not saying they will or won’t – it won’t make any difference because you’ll have twice as many shares, each worth half as much as before.

E-mail your questions to jheinzl@globeandmail.com.