In the oil patch there’s hope for a resurgence of larger resource deals in 2017. REUTERS/Dan Riedlhuber
FOR ALL THE POLITICAL and economic headwinds around the world last year, 2016 proved to be a surprisingly strong year for Canadian M&A. In fact, figures compiled by Crosbie & Co. show a total of $331.5 billion in announced M&A activity in which a Canadian company was a major party, up from $275.7-billion in 2015. The investment banking firm will release its 2016 fourth-quarter report tomorrow.
And the message from the front lines? Get ready for more.
“The environment’s excellent at the moment,” says Jean Marc Huot of Stikeman Elliot LLP in Montreal, crediting both the low Canadian dollar and the new Trump administration’s commitment to stimulating the US economy through lower taxes and infrastructure, among other measures.
“We see this as creating a lot of momentum for the US economy but, more to the point, also for the M&A market, even in Canada,” he says, adding that Canadian companies will want to participate in the stronger US economy through acquisitions, and US companies with stronger balance sheets will be looking for new markets in which to expand.
He is not alone in his optimism. Two-thirds of 50 senior Canadian M&A practitioners, including both lawyers and bankers, surveyed by Citi Canada in conjunction with Mergermarket Group, said they were expecting 2017 to surpass 2016 M&A levels, with 14 per cent looking forward to “significant growth” and over half predicting a moderate rise.
The main risk to prospects for a blistering-hot year also comes from south of the border: President Donald Trump, and the possibility he could make an unexpected statement or announce an unanticipated economic measure, or even that his relationship with the US Congress might breaks down, making it unclear how quickly the new president would be able to get things approved.
Huot says M&A markets don’t like uncertainty “and often will tend to pause until uncertainty has gone away and it’s clear exactly what’s happening.”
But he’s convinced Canadian companies and pension funds that have to diversify their assets will be “more than willing to invest in the US in an environment where there’s stimulation through lower taxes.”
Several practitioners pointed to Trump’s talk of a new border tax as an example of uncertainty that could place cross-border manufacturers or Canadian businesses that sell to the US in a waiting mode for a merger or acquisition, which could slow down deals in for these companies.
Philippe Tardif is the Toronto regional leader of the securities and capital markets group at Borden Ladner Gervais LLP, which just released its M&A Building Blocks resource for 2017. Tardif says there’s been a wait-and-see approach to inbound deals from the US, but he is hopeful the positive statements following last week’s meeting between President Trump and Prime Minister Justin Trudeau will help calm concerns.
“Once that trade certainty is there, I think we’re going to see continued interest from US private equity because they’re very, very well-funded and they have to spend their money somewhere,” he says.
Tardif also expects to see continued outbound M&A in 2017. A US company with a Canadian parent, for example, may not be viewed as a foreign company subject to new or increased cross-border tariffs, which President Trump has alluded to, so a cross-border acquisition could be “a defensive move vis-à-vis any sort of trade protectionism.”
Another measure that bodes well for Canadian M&A in 2017, he says, is the European Parliament’s approval last week of the Comprehensive Economic and Trade Agreement. It was seen as the Canadian-European trade deal’s last major hurdle, and would remove many trade tariffs in a market as large as the US. “This is definitely very important to the investment world,” Tardif says, “and to me M&As are just another form of investment –– so it’s important.”
Tardif has been seeing signs of robustness through the new equity and debt issues that started appearing in the fourth quarter of last year, he says, “which signals issuers are funding their development.” That’s very positive, because on the heels of a couple of years of slow revenue growth, many issuers who want to grow their bottom line are going to be looking at acquisitions –– and they are amassing the money to do it.
In the oil patch there’s hope that this will translate into a resurgence of larger resource deals, with Suncor’s $4.2-billion takeover of Canadian Oil Sands –– the last major deal in the sector –– already a year old.
Higher oil prices are having a definite impact. A report by Deloitte on 2017 US M&A trends ranks Canada “first among foreign markets,” with 40 percent of US companies poised to do transactions citing it as a target market for inbound deals. “Energy and resources” was ranked as the number one most likely sector for M&A in over two-thirds of markets, with 56 percent of those surveyed saying they are “looking to Canada for opportunities.”
Brent Kraus, co-head of capital markets and M&A at Bennett Jones LLP in Calgary, says that a year ago the difference in valuations between buyers and sellers meant companies weren’t able to agree on a price to get a deal done. “But somewhere over the course of the last year, as prices stabilized and OPEC started to give some direction, expectations have started to begin to meet.”
Those with a longer-term view are poised to take advantage of that, he says, “and the favourable exchange rate only adds onto that.” While commodity prices are nowhere near where they were two or three years ago, the exchange rate means oil prices around the US$54-a-barrel-mark bring about $70 to Canadian producers, helping nudge buyers and sellers closer to a common view of a company’s value.
Deanne MacLeod, an M&A partner at Stewart McKelvey in Halifax, believes inbound M&A in all sectors is being fuelled by Canada’s reputation as a stable geopolitical and economic jurisdiction.
She expects outbound M&A in 2017 will also be powered by the balance-sheet cleanup that resulted from the collapse of commodity prices and the ripple-through effect on resource, resource-related, and then the broader Canadian economy.
“There’s been a lot of consolidation,” says MacLeod, “so the weaker companies that just can’t survive or don’t have a good model are being taken out, and the remaining companies are for the most part strong.”
MacLeod expects those companies with the money and wherewithal to make some good strategic acquisitions, while those with weaker balance sheets will get bought out of the market.
She, too, sees the only cloud on the horizon as the new Trump administration, which she says is “a bit of a wild card. As we’ve seen, it’s a bit unpredictable about what action President Trump is going to take in terms of tax reform, and perhaps restrictions on capital and other things. Who knows what’s going to happen there?”
While it could slow or derail M&A that has a cross-border component, she says, “the rest of the world still seems to see Canada as a good market to invest in –– and maybe it will be an even more positive market in some ways if the US has more uncertainty.”