2011 Report on M&A: Crisis? What crisis?

Final results are still coming in, but 2011 will surely go down as a strong year for M&A in Canada, despite a shaky global economy. Here’s Listed’s look at the top deals and dealmakers
By Paul Brent

DESPITE SOVEREIGN DEBT and currency worries in Europe and about-even chances of a double-dip recession in the U.S., the market for mergers and acquisitions has been strong in Canada in 2011. Our status as an international M&A haven can be attributed to a voracious appetite for commodities and energy, pension funds brimming with cash and a banking sector which has skated around the financial shocks post-2008. Oh, and a revitalized Canadian loonie doesn’t hurt either.

While the year isn’t quite over as this issue goes to press, it’s fair to say that the Canadian M&A sector has recovered from the drubbing it took in 2008 and 2009 and could surpass the solid showing of 2010. (Listed ranks the top 10 M&A deals in 2011, as well as the leading investment banks and law firms here.)

International consultancy PwC, which tracks business acquisitions on a quarterly basis, says activity in Canada was well ahead of last year’s pace for the first three quarters of the year, although heightened worries about the fate of the Euro and the political and economic union behind it caused some deceleration in deal making in the final quarter. According to PwC, there were 2,928 deals worth $188 billion through Nov. 23, 2011, compared to 2,761 deals worth $147 billion at the same point in 2010.

While crisis du jour headlines may be putting a damper on investor optimism about the prospects for renewed M&A activity, doom and gloom financial news is not necessarily reflected in corporate boardrooms, says lawyer Craig Thorburn, a partner with Blake’s in Toronto, which has been involved in some of the biggest buyouts of 2011. “It is clear that there is going to be turbulence in a lot of places, but the thing that has struck me in both my practice and generally as an observer is that the United States seems to be coming back pretty strongly.

“I’m surprised, happily so, about how relatively unfazed the U.S. is about what is happening in Europe,” he says. “We still continue to see a lot of activity in Canada by U.S. acquirers and a lot of deals that are not yet announced but in the planning. From the perspective of the M&A lawyer in Canada, next year holds, even today with the fluctuations in Europe, a lot of promise of acquisitions.”

Foreign interest in Canadian assets continues from places such as the U.S. and China, driven by the mining and energy sectors. However, domestic firms have more than held their own in the acquisition field and outflows have paced ahead of foreign-led deals here.

One of two blockbuster deals this year is Toronto-Dominion Bank’s (TSX:TD) US$7.5-billion acquisition of the Canadian MasterCard operations of MBNA Canada (Bank of America), which is expected to get final approval in TD’s first quarter of fiscal 2012. Not only does the purchase make TD the top credit-card issuer with both Visa and MasterCard offerings and remove a competitor, the bank’s president and chief executive Ed Clark said the buy made “strategic sense, fit within our risk profile and [is] financially attractive.”

Blake’s Thorburn, whose firm worked on the TD transaction, says it illustrates the strength and stability of Canada’s financial sector and how institutions in that space are getting more serious about using that newfound muscle to make acquisitions. “That is a big deal, and part of a trend that we are seeing—HSBC is selling some non-core assets [namely, part of its advisory practice to National Bank] and we see that probably continuing this year.”

A similar major Canadian purchase in the financial service sector this year was Intact Financial’s (TSX:IFC) purchase of AXA Canada’s insurance business from its French parent for US$2.8 billion. That was bookended by Intact’s follow-on sale of the AXA life insurance business for $300 million to SSQ Financial Group.

“The acquisitiveness of financial institutions in Canada as they continue to look for opportunities to grow their business is certainly an interesting trend because it is counter to what is happening in the rest of the world,” says Kristian Knibutat, national deals leader for PwC Canada. He also highlighted the Bank of Nova Scotia’s (TSX:BNS) October US$1-billion deal to acquire a 51% stake in Colombia’s Banco Copatria. In the third quarter of the year, Scotiabank also announced the acquisition of a 19.99% stake in China-based Bank of Guangzhou Co., Ltd, for about C$719 million, adding to its China presence where it holds a 14.8% interest in Bank of Xi’an. (Foreign banks are limited to 20% stakes in no more than two Chinese banks).

Strategic buyers looking to add scale or geographic reach drove M&A activity for much of the year. Besides TD’s credit card foray, the other blockbuster of 2011—and Listed’s Deal of the Year (see companion story, “Cash flow is colour-blind”)—was Barrick Gold Corp.’s (TSX:ABX) US$7.7-billion takeover of Australian copper producer Equinox Minerals Ltd., which shouldered aside a rival offer from a Chinese buyer. Industry observers said the purchase illustrated the current dearth of junior gold miner takeover candidates and was a bet by the world’s largest gold miner that world copper demand—and prices—will stay robust.“We are optimistic on the outlook for copper. We think its demand fundamentals are quite strong,” Barrick CEO Aaron Regent said when the deal was unveiled.

In fact the Equinox acquisition was the end result of a string of failed M&A attempts that began when Canada’s Inmet Mining Corp. (TSX:IMN) attempted to form a friendly “merger of equals” with Lundin Mining Corp. (TSX:LUN). That agreement attracted a hostile bid for Lundin from Equinox, a development that potentially put the trio of Toronto-connected mining companies in play. Equinox then attracted a hostile takeover bid from China’s Minmetals. After Equinox eventually ended up in the friendly arms of Barrick, Lundin and Inmet called off their merger and remain independent for now.

As strategic buyers pulled back from major transactions somewhat in the latter part of the year, financial purchasers opportunistically stepped into the breach, notes PwC’s Knibutat. “[Pension funds] are always ready to go and will tend to move in and out of the market when they see those opportunities for better opportunities and less competition” for acquisitions, he says. “The reason that they probably weren’t in the market for a period of time was because the ‘strategics’ were in the market.”

Major acquisitions involving pension funds or other financial investors this past year include OMERS Private Equity teaming up with Berkshire Partners to buy Onex Corp.’s Husky Injection Molding Systems Ltd. for $2.1 billion and, more recently, the US$6.3-billion acquisition of U.S.-based medical device maker Kinetic Concepts Inc. by a consortium including the Canada Pension Plan Investment Board (CPPIB), PSP Investments and Apax Partners. Canadian pension funds, either as leads, co-leads or part of buyer/seller consortiums, were involved in deals worth more than $15 billion in the third quarter as part of a larger trend of foreign acquisitions by Canadian institutions, PwC found.

The why is simple: “They have got a staggering amount of money to put to work,” says David Woollcombe, practice group leader of McCarthy Tétrault’s business law group. “They are doing more and bigger transactions,” citing OMERS’ participation in the Husky takeover as a sign of things to come. “It speaks to the financial heft and weight of the big Canadian pension funds that they can compete for deals at that level. In the biggest transactions, the pension funds are generally in the mix.”

OMERS also made headlines in the summer with the US$520-million purchase of Isle of Man-based ship servicing company V.Group, the world’s largest ship-servicing company. The deal was the pension fund’s first European buyout since it was established in London in September 2009, at a time when the financial crisis had all but killed the market for private equity deals.

Two British Columbia pension plans, the British Columbia Investment Management Corp. and the Public Sector Pension Investment Board teamed up for the acquisition of TimberWest Forest Corp. for $1 billion. The two funds, which stressed they intended to own the timber producer over the long term, said in a joint statement that they prized the company’s land holdings and end-products. The funds “view the acquisition of TimberWest as a complement to traditional asset classes, as timber and real estate exhibit inflation-hedging characteristics and provide stable risk-adjusted returns, attributes which are particularly well matched to the needs of pension plans,” they stated.

One major transaction that is still to be completed, but can be considered fairly certain to go ahead, is Maple Group Acquisition Corp.’s US$3.8-billion takeover play for TMX Group Inc. (TSX:X), which won approval of TMX’s board of directors not long ago. A consortium of 13 buyers, the Maple group is comprised of four of the country’s Big Six banks, a number of independent brokerages, and four of the country’s largest pension funds. While the acquisition of TMX Group awaits approval from four provinces, perhaps the biggest hurdle the deal faces is gaining approval from the federal Competition Bureau, which is investigating “everything from pricing models to the intricacies of the clearing system that handles the payments between buyers and sellers of stocks,” according to a report in The Globe and Mail.

The emergence of the Maple bid allowed Canada to sidestep an international label of being hostile to foreign takeovers in the wake of the US$40-billion hostile takeover attempt of Potash Corp. (TSX:POT) last year by BHP Billiton, says McCarthy Tétrault’s Woollcombe. “The thing that really has made the TMX transaction particularly interesting is that it falls on the heels of the failed BHP-Potash transaction,” he says. “Think back a year to all the hand-wringing about whether that transaction was or wasn’t of net benefit to Canada and the political implications of making that decision.”

The takeover bid from the Australian giant was ultimately squashed by Ottawa after intense lobbying by the Saskatchewan government and raised questions about the country’s openness to foreign takeovers at a time when Canadian companies were making more international deals. “That transaction was one that people around the world watched closely because it arguably changed the landscape for foreign acquirers,” says Woollcombe.

Against that backdrop, the rejection of the London Stock Exchange’s $3.3-billion bid for the TMX by its shareholders ended what was a politically controversial deal for those concerned about Canada’s capital markets falling into foreign hands. “The feds likely breathed an enormous sigh of relief when the TMX shareholders made the decision for them,” says Woollcombe. “Things would have been very different if the TMX shareholders had approved that deal and then the government would have had to make a very, very difficult political decision.”

With 2011 looking to exceed the healthy M&A pace of 2010—barring an 11th-hour financial meltdown—the question is what does 2012 have in store? Thomson Reuters is forecasting a 22% rise in world-wide mergers and acquisitions for 2012, powered by deal making in the energy, financials and industrials sectors—all areas of Canadian strength.

PwC’s Knibutat foresees a year in which pension funds support the market when strategic buyers do not have the confidence to make acquisitions. Just how active Canadian strategic buyers ultimately will be depends on whether Europe can extricate itself from its currency and debt crisis and the continued strength of the Canadian dollar, he says. “We are kind of in that zone right now which means that there is probably some fundamental support for Canadian companies to continue to do deals.”

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