Telus Spread Presents Opportunity

Oct.30.08 | About: TELUS Corporation (TU)

The spread between Telus Corp.’s voting (NYSE:TU) and non-voting (T.A) shares hit an all-time high above C$4.00 on Monday, before closing at C$3.20. While the spread may have grown in the past week as a result of forced unwinding of positions, RBC Capital Markets analyst Jonathan Allen says there is no fundamental reason for it to be so wide. It continued to be above C$3.00 on Wednesday.

As a result, he suggests investors switch to the non-voting shares. Another option to capitalize on the mis-pricing could be a long-short pair trade. The analyst noted that liquidity between the two share classes is roughly the same at 175 million common and 145 million non-voting.

Both hold the same net exposure, but the non-voting shares offer a cheaper valuation, he added. Recent figures showed that T.A trades at a 9.2 times 2009 estimated price-to-earnings ratio and offers a 4.6% dividend yield, versus 10.0x and 4.3%, respectively for the T shares.

“Both share classed rank equally in the capital structure and would receive the same price for a tender,” Mr. Allen said. Non-voting shares are also granted a vote for important events like the company’s attempt to convert to an income trust or a takeover.

Not-voting shares may automatically convert to common shares if Canada’s foreign ownership rules for telecom and broadcasting are removed or if Telus decides to combine the two classes, the analyst noted.

Finally, he pointed to the strong preference the company has for repurchasing non-voting shares as part of its buyback plan. Year-to-date it has bought back 5.7 million non-voting shares and just 900,000 voting shares.