While Canada mostly missed out on the hot, pharmaceutical-driven global deal market of 2015, Bay Street lawyers say inbound investment could pick up this year as the weak Canadian dollar turns domestic firms into more tempting targets, especially for a U.S. market that has become increasingly open to the idea of a Canadian deal. Infrastructure and electricity investments could be popular, along with the always-significant mining and energy sectors. Outbound investment, the driving force between many of the 2015 transactions, will stay strong, given the deep pockets and hefty investment appetites of the powerful Canadian pension funds, coupled with interest in out-of-country acquisitions from domestic financial firms, private capital, and other strategic buyers.
“I think [the] Canadian M&A market is oftentimes reflective of how good those key sectors [mining and energy] are, but other sectors can certainly be strong and you could have the lower dollar inducing foreign bidders,” says Jeremy Fraiberg, co-chairman of the mergers and acquisitions group at Osler Hoskin & Harcourt LLP.
“Mining and oil and gas are areas where I think one might expect to see some deal activity, although commodities are under stress. Maybe the strong will buy the weak or some people will merge together to create synergies. You could also do stock-for-stock deals, so you ride it up and down together. Stock-for-stock mergers, or mergers of equals, tend to be more palatable when you’re in a challenging market. If you feel your stock is really undervalued and you take cash, then that’s it, whereas if you think you can weather the storm and perhaps combine with a similarly sized company . . . you can perhaps ride it back up when commodities recover.”
Two things to watch in 2016 are the industrial and takeover policies that the new Liberal government will follow, as well as the promised changes to the rules for hostile takeovers in Canada. The new rules will give a target company a fixed, 120-day term to seek alternatives to a hostile bid, rather than waiting for a decision from a provincial securities regulator. “They will have certainty as to the period, so at the outset they will know what to expect, as opposed to the uncertainty of a securities commission hearing,” says Peter Hong, a partner at Davies.
“We have an increase in the time it takes to complete a hostile bid, but the increase from 60 or 90 days to 120 days is not such that it would discourage hostile bidders.” That’s still shorter than in the United States, where it can take a year to complete a hostile takeover.
Lawyers say the Liberals have signalled a broad, pro-business approach, although it remains to be seen how they will respond to a bid for a Canadian firm regarded as a crown jewel, or whether they will share the reservations of the previous Conservative government about state-owned enterprises buying big energy companies. In a decision that effectively closed the door to big new oilsands investments from state-owned firms, the Conservatives in 2012 allowed China National Offshore Oil Corp. to acquire Canadian energy giant Nexen, but it said it would be the last deal of its kind. In a shock decision that raised questions about Canadian openness to foreign investment, the Conservatives had previously blocked a US$39-billion bid for Saskatchewan fertilizer giant PotashCorp from Australia’s BHP Billiton, arguing that the proposal was not in Canada’s best interests.
“We know many of the players who are influential in the government and I think what they bring to the table is a very thoughtful approach,” says Cornell Wright, co-head of the M&A practice at Torys LLP. “I think you’ll see a very evidence-based approach, whereas I think in the past there has been a concern about . . . an overly secret, potentially more political approach. Certainly, people are hopeful that what you will see is more transparency and inclusion and consultation, and an approach that is very much focused on doing what is right for the public interest and for all the relevant stakeholders, business and otherwise.
“I think this government is very much focused on maintaining an attractive climate in Canada for investment. The fundamentals in Canada remain very, very strong. We have one of the most educated populations in the world, we’ve got lower corporate tax rates than in the United States, we’ve got living standards and a quality of life that I think most people around the world envy. . . . We are known internationally as the place where people can come and be successful.”
That’s a view shared by his colleague, Torys’ M&A practice co-head John Emanoilidis, who expects individual government departments to have more autonomy than was the case over the previous decade, where the prime minister’s office played a crucial role. “The Investment Canada Act has always been a political statute, but many felt that the statute became more politicized under the previous Conservative government,” he says. “Although reviews in high-profile cases will still be influenced by the political implications of approval, we would expect to see a more transparent process and more autonomy to administer the act being provided to [Economic Development] Minister Navdeep Bains and the public service.”
Yet fragile markets, a faltering dollar, and weaker stock prices may make it harder to price a deal, as buyers seek a bargain and targets fear selling at the bottom of the downturn. “I think that [there] are some very well-managed strategic buyers who are using the uncertainty in the marketplace to make opportunistic and shareholder value enhancing acquisitions,” says Hong.
An inbound or outbound transaction involving stocks or options is, of course, more complicated to manage than a straight cash deal, adding to the workload of legal teams and other advisers. Other relatively complex vehicles include the newly popular Special Purpose Investment Companies (SPAC), where a shell company is set up through an initial public offering with the specific purpose of completing a deal. Some deals include contingent value rights, where options are pegged to a specific event that might happen in the future.
“One of my partners has shared with me recently that he thinks that everything we do is challenging now, and is that the deal market or is that as you get more senior that’s just what happens? The deals you get are the deals that are tricky,” says Samantha Horn, a partner in the Toronto office of Stikeman Elliott LLP, where she focuses on mergers, private equity, and venture capital financing.
She highlights the SPAC as a trend that proved successful last year and will continue. “There’s a limited number that can go in our marketplace because, of course, then they have to go and find a deal,” says Horn. “The U.S. marketplace tends to do somewhere between 10 and 15 a year, so I would think if we did five or six, that would probably be the maximum that our market could bear. I would expect that to continue as an option for people putting money out into that new space.”
Wright agrees that M&A deals have become more complicated, and not just because of the SPACs. “I think there’s a whole series of factors that have made M&A more complicated for those that are practising it,” he says, highlighting the global nature of many deals, the complexities of the deals themselves, and the complicated regulatory environment. “It’s just the nature of the work. Everything you do is far more complex and [has] many more dimensions than it did 10 years ago or 20 years ago.”
For outbound investment, still tempting despite the weaker Canadian dollar, the pension funds will remain big players, if only because the domestic market is too small for investments of the scale for which they are looking. “Our Canadian pension funds are some of the most active dealmakers in the world, some of the most sophisticated dealmakers in the world, and the Canadian market is not large enough for them, so they have been going abroad to diversify their assets and I think that is a trend we are going to continue to see in 2016,” says Emanoilidis.