Last week Citi and Mergermarket released “Charting the course: The future of Canadian M&A in volatile markets.” While 46 per cent of those surveyed said M&A will increase, an additional 22 per cent of respondents believe the volume of deal making will remain the same. Only 32 per cent expect it to decrease somewhat.
Citi commissioned Mergermarket to survey 50 senior M&A practitioners in December 2014 to hear their predictions surrounding Canadian deal making in 2015.
Fifty-six per cent of respondents cite inorganic growth as the main driver behind Canadian M&A for the coming year, followed by sales of private businesses (38 per cent) and strong valuations of companies (36 per cent).
The majority of respondents expect private equity activity to increase in cross-border and domestic deals, with 44 per cent of respondents projecting these firms will conduct the most acquisitions in 2015.
“From where I sit it’s a pretty robust M&A market,” says Ian Palm, a partner at Gowling Lafleur Henderson LLP in Toronto. “I wasn’t overly surprised by this. I think as far as in-bound work is concerned the Canadian dollar is a plus for M&A activity.”
Palm says there is more interest from U.S.-based businesses to potentially acquire Canadian businesses because they are measurably less expensive as a result of the lower Canadian dollar.
“I think the more interesting thing is where the activity might be,” says Palm. “We’re just finishing up PDAC [the mining conference] and the viewpoint is that there is some activity but people have come to the realization there’s not as much activity as they would hope. I would expect to see activity in energy, technology, and driven by the fact there are opportunities for growth and there will be consolidation opportunities.”
Canadian tech companies like OpenText and Constellation Software do acquisitions all over the world, says Palm.
While the conditions might be right for acquisition, buyers are being more careful and with how they pursue M&A transactions.
“I think at the very end of 2014 and beginning of 2015, there was a pause of activity in Canada mostly driven by the drop in oil prices. But when you sit back and think about the ingredients necessary to drive M&A, I think they are all there,” says David Woollcombe, a partner at McCarthy Tétrault LLP in Toronto. “There is tons of money available to be put to work, but also strong corporate balance sheets. People have the money to deploy when they find an asset they like.”
Growth is also more likely to come through acquisition.
“If you’re trying to grow your business you’re probably not satisfied with growing at the rate of the economy. No one will give you kudos for giving two-per-cent growth to your board,” says Woollcombe. “In many ways, that can drive you to make acquisitions.”
For cross-border transactions, everything in Canada is now significantly cheaper than it was, if you’re buying in U.S. dollars, adds Woollcombe. That will create opportunities for buyers outside Canada.
“While there hasn’t been much activity in the mining sector or oil and gas, inevitably the challenges in those sectors mean there will be opportunistic buying in those areas. Already we’re seeing in the mining sector people looking at projects or companies,” he says.
A Mergermarket report issued last month on the outlook for the Canadian oil and gas market indicated the energy sector offers plenty of M&A opportunities.
One trend driving M&A is disposition of non-core assets — companies trying to generate cash or offset the decrease in cash flow by finding non-core assets to monetize, says Craig Hoskins, a partner with Norton Rose Fulbright Canada LLP in Calgary.
For example, in late December, Calgary-based Veresen Inc. and U.S.-equity firm KKR & Co. LP teamed up to buy gas processing facilities owned by Encana Corp. for $412 million. That allows Encana to concentrate on drilling while the buyers handle transportation and expansion of the infrastructure.
“Unlike in the United States, a lot of our large [exploration and production] companies own the midstream assets directly. One question I’ve been asking is whether this new commodity price regime in Canada will cause there to be more transactions like that Encana sale of assets,” says Hoskins.
The twist on that deal, he says, is it included entering into a $5-billion commitment by Veresen and KKR to support Encana’s future gas production.
“It shows you how the dynamics work. It’s a good deal, but the kind of deal you may see more impetus for companies to entertain because of the fact they are trying to offset their dramatic decrease in cash flow.”
Companies may also try and offset decreased revenue and asset base by going out to do acquisitions.
“There are lots of interrelated things happening. There are a lot of companies in distress —– the TSX gets a lot of notices of oil and gas companies stopping payment over the last three months on interest on their bonds. We’ve had some clients working on restructuring their debt. Sometimes the outcome of those transactions is an M&A solution,” says Hoskins.
The oil and gas service companies in Alberta are also getting hit badly right now.
“The proposition is that companies are able to weather the storm may see it as an opportunistic time to do some acquisitions. There may be some consolidation there,” he says.
Pension funds, private equity funds, insurance companies, and other international companies may also be kicking the tires of vulnerable companies.
Larger international deals that might require federal approval seem to have gone quiet.
“I think part of the reason you’re not seeing as many transactions in that space is that people aren’t getting the comfort they want before they’re prepared to jump,” says Palm.