Billion-dollar empires in aisle four

No doubt about it, retailer buyers—from Loblaw to HBC to Sobeys and more—have pretty much owned the M&A story in 2013. It's also made them an exception, along with REITs and pension funds, in what's otherwise been a down year in dealtown
By Jim Middlemiss

Canada’s 2013 mergers and acquisitions market will be remembered as much for the deals that didn’t happen as for the ones that did.

Fairfax withdrew its $4.7-billion bid for BlackBerry (TSX:BB) in the fall; the federal government nixed an Egyptian billionaire’s attempt to buy MTS Allstream, casting further confusion over what will and won’t pass muster with Industry Canada; state-owned enterprises virtually abandoned Alberta’s oil patch, after multi-billion-dollar deals in 2012; and big-ticket mining deals, a staple of Canadian M&A, have entered a dry spell.

As Michael Boyd, managing director and head, global M&A at CIBC World Markets in Toronto, observes: “Overall M&A activity is down fairly significantly this year versus last year.”

It’s been a disappointing year, given that the economic climate seems primed for M&A activity, says John Leopold, a lawyer at Stikeman Elliott in Montreal. The debt markets were strong, there were strategic and financial buyers flush with capital, and the mood was upbeat, he says. “I would have expected 2013 to have been a really strong year.”

“You are not seeing M&A activity at levels you have seen in previous years,” agrees John Emanoilidis, a corporate lawyer at Torys LLP in Toronto. “Buyers are much more cautious in making acquisitions.”

While the year-end numbers are still to be tallied, by the end of October, Canada had seen 2,027 deals worth $126.1 billion, according to PwC. Deal volume was trending down about 17% from last year’s 2,448 deals over the same period, while dollar value was down 27%.

“When you look at M&A activity, it’s very lumpy,” notes Peter Buzzi, co-head of mergers and acquisitions at RBC Capital Markets. “A lot of big-ticket transactions haven’t been there. Mining has been particularly hard hit.” Also suffering is oil and gas. “When those two sectors are down, overall activity is down quite substantially.”

While metals and mining continued to lead in terms of the volume of deals, the category fell off the scale in terms of value. Oil and gas deals, which have propelled Canada’s M&A markets since the financial crisis of 2008, have also slumped, both in value and volume of deals. “Transaction volumes are off very significantly,” says Frank Turner, a corporate law partner at Osler, Hoskin & Harcourt in Calgary.

However, not everything was bleak. CIBC’s Boyd says, “We continue to be in a very good environment from a financing perspective with very low interest rates, which has helped make acquisitions more affordable for acquirers.”

What energy and mining lacked, however, real estate and retail made up, with some of the busiest activity seen in years. In fact, by the middle of fall, the Top 10 deal list (see table, at bottom) resembled the holdings of an ETF specializing in retailers.


Loblaw Companies Ltd. (TSX:L) led the pack—and earned Listed’s acclaim as Deal of the Year (see “A big bet on small stores,” page 26)—with its July $12.4-billion acquisition of Shoppers Drug Mart Corp. (TSX:SC). That was followed in September by the Canada Pension Plan Investment Board and Ares Management LLC’s US$6.1-billion acquisition of luxury retailer Neiman Marcus Group LTD Inc. Earlier in June, Eastern Canada-based grocer Sobeys Inc. furthered its westward expansion, buying Canada Safeway Ltd. in a $5.8-billion deal. In July, Hudson Bay Co. (TSX:HBC) announced it was buying upscale retailer Saks Inc. for US$2.9 billion.

Experts say the Canadian grocery deals are a response to the arrival of U.S. retailer Target and the competition from Wal-Mart. “There is increasing competition and a desire to get bigger,” says RBC’s Buzzi. Five years ago, he says, combining a drug store with a grocer was “unlikely to happen. The retail landscape is changing.”

As for the Saks and Neiman Marcus deals, those are a bet on the U.S. consumer, who has been paring back for five years. “As soon as they get any ray of hope, they will be back out and spending again,” says Julian Brown, head of the Canadian corporate finance group at PwC. “That’s what people are betting on in those deals.”


Real estate deals were also strong, ranking in the top two for both volume of deals and value of deals in each of the first three quarters of 2013, according to PwC, and that continued into Q4.

M&A lawyer Markus Viirland, of Blake, Cassels & Graydon in Toronto says “one good uptick has been real estate activity. REITs are coming in and doing deals.”

Interestingly, the two grocery deals had a REIT angle. In December 2012, Loblaw announced it would spin its real estate into a publicly traded REIT in 2013; that, in turn, helped unlock value to make the Shoppers’ purchase happen. Sobeys, meanwhile, spun 68 properties into its Crombie REIT from the Safeway deal.

H&R REIT (TSX:HR.UN) kicked off the year with a $4.6-billion takeover of Primaris Retail Real Estate Investment Trust, topping a $4.4-billion hostile bid launched late in 2012 by the KingSett Capital consortium, which included private equity firm KingSett, the Ontario Pension Board and RioCan REIT (TSX:REI.UN). By the time the dust settled on that mall brawl, H&R and the KingSett group had joined forces, with H&R taking 25 shopping centres and the KingSett consortium claiming 18 others.

From there, activity picked up. Leading the way was Brookfield Property Partners LP’s (TSX:BPY.UN) October $US5-billion deal to acquire the remaining 49% of Brookfield Office Properties it didn’t already own. That created a global property giant with 111 properties worth US$45 billion, including First Canadian Place in Toronto and Bankers Hall East and West in Calgary. Earlier in the year, Brookfield Office (TSX:BPO) acquired MPG Office Trust, Inc., buying the largest office landlord in Los Angeles for US$2.1 billion.

REITs such as Pure Industrial, Dundee, Artis and InterRent were active during the year, as were pension plans such as the CPPIB, which did three international property deals in the third quarter alone.


Pension plan activity wasn’t isolated to retailers or REITs. Canada’s pension funds’ voracious appetite for global acquisitions, particularly involving infrastructure, continued in 2013, with no signs of letting up.

Blake’s Viirland says pension plans “continue to have funds to invest. Domestic and international acquisitions will continue to grow. They are looking for yield and return.”

In March, Allianz Capital Partners and Borealis Infrastructure—the infrastructure investing arm of the Ontario Municipal Employees Retirement System—teamed up to buy Czech gas transmission operators Net4Gas in a US$2-billion deal (1.6-billion euros).

OMERS also announced the first successful investment by the Global Strategic Investment Alliance (GSIA), which includes OMERS, Japan’s Pension Fund Association and a consortium lead by Mitsubishi Corp. The group, which has pooled $7.5 billion, bought a one-third stake in Midland Cogeneration Venture, the largest gas-fired generation plant in the U.S. for an undisclosed amount. (OMERS’ Borealis bought the stake last year from EQT Infrastructure and Foristar for an estimated US$1.3-billion.)

But pension funds weren’t confined to infrastructure. OMERS and Alberta Investment Management Corp. teamed up in June to buy Europe’s largest cinema company Vue Entertainment Ltd. for $1.5 billion. Earlier in the year, the Ontario Teachers’ Pension Plan paid US$1.8 billion to buy SeaCube Container Leasing.


The mining sector continued to be mired in write-downs as companies digested expensive acquisitions from a few years ago, and coped with low commodity prices, which crimped the deal pipeline. “We have seen a real come-off in resources in general, certainly in deals of size,” says Blakes’ Viirland. “It’s been a historic driver of the Canadian M&A space. It’s had quite an impact.”

Aside from Barrick Gold Corp.’s (TSX:ABX) October US$3-billion bought deal, one has to look back to January to find a notable mining transaction. That’s when ARMZ Uranium Holding Co. of Russia bought the remaining shares of Uranium One Inc. for $1.3-billion. By the halfway point in the year, the average mining deal was a paltry $11.2 million, according to PwC.

PwC’s Brown says that for the mining sector to come back, “you need Chinese growth to be back on track,” which would boost commodity prices.


**Through Sept. 30, 2013

Perhaps the biggest disappointment has been the oil and gas sector. After coming off highs in 2012, which saw numerous multi-billion dollar deals driven by foreign state-owned enterprises (SOEs), things went silent as the SOEs took their deal money elsewhere after the federal government limited their ability to invest in oilsands projects.

The biggest deal well into November was Pacific Rubiales Energy’s (TSX:PRE) $925-million acquisition of Petrominerales Ltd., a South American deal between the two companies, which both list on the TSX.

Canada’s beleaguered forest industry actually had more lucrative deals, with Weyerhaeuser Co. buying Longview Timber LLC for US$2.65 billion, including debt and Louisiana Pacific Corp. buying Ainsworth Lumber Co. Ltd. for US$1.1-billion.

In terms of oil and gas, Osler’s Turner notes that the junior space is dead. “There was very little capital for junior and mid-market resource issuers.”

Craig Hoskins, an M&A lawyer at Norton Rose in Calgary, says the Western Canada economic model for juniors is “maturing and changing dramatically.” It used to be a smart team of geologists and business people could come together, raise $40 million in a blind capital pool and build an exploration company that they would sell to a royalty trust. “It was a great system,” Hoskins says. Now with trusts gone, “we need larger scale players to be able to make it work.”

One of the positive moments came in March, when Ontario Teachers’ Pension Plan announced that its Natural Resources Group, created at the beginning of 2013, completed its first transaction, buying a 4.9% interest in a producing Saskatchewan oil and gas field known as the Weyburn Unit for $153.4 million. NRG’s goal is to provide Teachers with “exposure to commodities with direct physical investments in producing natural resource assets,” suggesting more to come.

Other bright spots exist, Hoskins says. “A lot of energy and resources are being directed towards development of LNG projects underway in Western Canada,” he says. There is also some “wait and see” involving pipeline projects like XL and Northern Gateway, which could be impacting M&A. “Something has to give one way or another.”

Reaction, however, is mixed about the overall impact the SOE rules will have on future oilsands development. Osler’s Turner notes that SOEs were big drivers in 2012 M&A with more than $35 billion spent in Canada’s oil patch. This year it amounted to $300 million. “That work has essentially evaporated.” He says the new Industry Canada rules limiting SOEs investment in the oilsands have had a “fairly significant chilling effect. It’s broader than the oilsands. It’s really dampened investment into the sector as a whole.”

Not everyone is concerned. Norton Rose’s Hoskins says the “hand-wringing” about SOEs is “a little bit overblown.” He recently met with Asian investors and talked about the new rules and “none of those investors and funds thought the sky was falling in Canada. They seemed to understand why the government took the position it did.”


Lawyers and financial experts say regulatory risk continued to rise in 2013, and it seems to have shifted from the oil and gas business to the broadcast and telecom sectors. CIBC’s Boyd says “foreign acquirers are much more cognizant of both the issues around regulatory approvals and the potential risks associated with them.”

Bell got a do-over in its $3.4-billion deal to take over Astral Media, after the CRTC, balked at the first deal. In late October, Telus got the go-ahead to buy Public Mobile, one of the new wireless entrants, but a week later was rebuked in its attempt to buy financially struggling Mobilicity after Industry Canada rejected the deal. “What any market benefits from is consistency and transparency,” says Buzzi. “If there are more deals turned down under the Investment Canada Act, people are going to start wondering what deals can be done. I don’t think we are at that stage yet.”

As well, another hurdle lurks in the weeds. Securities regulators have been pondering whether Canada’s takeover rules are too bidder-friendly and are “looking at whether targets need more leeway to be able to respond,” notes PwC’s Brown. If securities regulators provide more takeover defences, it’s not clear what impact that will have on future M&A activity.


While 2013 is a year to forget for some, from an M&A perspective it hasn’t been due to lack of opportunity. Stikeman’s Leopold notes there were no problem in closing quality deals and there were some “very robust auctions” in 2013. “The big negative was pricing.”

Conditions exist to support a rebound in 2014, says PwC’s Brown, noting there remains “a lot of dry powder in both strategic and financial buyers and a lot of liquidity in the financial markets.” Adds CIBC’s Boyd: “As long as people are confident around the economic outlook and the economy continues to improve from a global perspective, we should see a rebound in M&A activity.”

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