“You can tell the state of the economy by how we change our résumés to showcase our skills,” says Jeffery Barnes, a senior corporate partner at Fraser Milner Casgrain LLP in Toronto. In 2003 Canada was full of corporate restructuring and insolvency lawyers enmeshed, inter alia, in the US$4 billion reorganization of Laidlaw Inc., the $5 billion restructuring of AT&T Canada, and the desperate battle to save Air Canada.
Restructurings in 2003 outperformed “pure” M&A (merger and acquisition) transactions in interest, complexity, and, with the exception of the billion dollar plus financial services deals, size. In addition, a sizeable portion of the restructurings were the result of informal, out-of-court reorganizations. It was the year in which deals didn’t get done, the year of no blockbuster IPOs (initial public offerings), the year of long summer vacations, the year to lay off first-year associates, the year where the only thing Canadian lawyers were grateful for was that they weren’t American investment bankers.
“The investment bankers don’t get paid until the deals close, so 2003 is a write-off for them,” notes Barnes. “They’re looking to 2004 as the resurrection year.” Lawyers, fortunately, have experienced a bit of a lift in the third quarter. And, in the meantime, there were all those insolvencies and reorganizations to work on.
“If you’re a corporate law firm today you survived one of two ways: income trusts or restructurings,” says James Riley, a well-known corporate lawyer at Ogilvy Renault in Toronto. “This has been a very grinding year—not a year for the faint of heart.” It has also been the year of cautious decisions, prolonged due diligence and conservative management of balance sheets. “We’ve been working on big deals that haven’t happened and will never happen,” says Stephen Halperin, co-chair of the corporate securities practice at Goodmans LLP in Toronto. “People are taking forever to make decisions.”
Fortunately for the bottom line of law firms, hard times call for desperate measures and the clients who did manage to make decisions in 2003 presented their legal advisors with some hefty challenges. “The restructurings create the most interesting work in terms of creativity and complexity,” points out Sidney Horn, a partner with Stikeman Elliott LLP in Montreal. Between the bankruptcies and the blahs, 2003 also gave us the largest Canadian IPO by an income fund, Yellow Pages Income Fund, the first-ever cross-border equity offering by a Canadian energy trust, Pengrowth Royalty Trust, and the largest foreign acquisition by a Canadian company, Manulife Financial Corporation’s $15 billion bid for Boston-based John Hancock Financial Services, Inc.
Crediting the Manulife/Hancock deal with resurrecting the moribund North American M&A market may be excessive, but the dealmakers’ pipeline improved around the time Manulife’s chief executive officer, Dominic D’Alessandro, shared his good news. Still, as Barnes points out, “One multi-billion deal does not a recovery make.” Still, there was work. Just not the sort of work an M&A lawyer likes to crow about. Or, as Norman Steinberg, a senior corporate partner with Ogilvy Renault in Montreal puts it, “There were a lot of deals of importance, but not of stature.”
Lexpert| asked the legal profession’s top dealmakers to share their thoughts on the year’s most interesting, complex and challenging transactions—not necessarily the biggest. Nine of the selected top 10 deals are around or above the billion dollar mark. A couple of the transactions have even made history. One is a “feel good” story. But most are not for the squeamish. As Riley puts it, “None of these deals is clean. They’ve all got hair on them.”
1. Air Canada Restructuring. There is a consensus among the majority of our legal dealmakers that this is the “top deal” of 2003. Air Canada’s restructuring is actually a series of deals, and thinking of it that way helps Toronto-based senior corporate partner Marvin Yontef, who’s heading the enormous Air Canada team at Stikeman Elliott, sleep at night. “The first transaction was getting the CCAA [Companies’ Creditors Arrangement Act] protection and stay, the second transaction was getting the DIP financing from GE Capital, which actually got signed in conjunction with the filing,” he explains. “There was the renegotiation of nine labour agreements. There is the renegotiation and restructuring of all the aircraft leases.” There is the ongoing question of how to reinvent Air Canada so that when it emerges from CCAA, its low-cost rivals don’t “eat its lunch” again. There is the troubling, and still unresolved, issue of the pension shortfall.
Earlier on, there was the heated battle around one of the airline’s few profitable ventures—Aeroplan One Corporation and the attendant Aerogold Visa partnership with CIBC, which involved Air Canada’s former nemesis Onex. Onex walked away when it couldn’t get the deal it wanted. CIBC, represented by Blake, Cassels & Graydon LLP, stayed but lost its exclusivity arrangement, with American Express getting the right to reward its users with Aeroplan points. “The exclusivity clause was obviously one of the most highly negotiated aspects of the new deal,” admits James Christie, chairman of Blakes and the lead lawyer on the CIBC team.
For Yontef, every one of the “smaller deals” is a milestone, but GE’s US$700 million loan is a Canadian record. “It is the largest DIP financing in Canadian history,” says Scott Horner, a corporate and financial services partner with Osler, Hoskin & Harcourt LLP in Toronto. Horner leads the legal team on the transaction for GE Corporate Financial Services. “It is also one of the most complex financing transactions ever done because of the number of stakeholders involved and their varying interests.”
Some participants in the restructuring were clinging to a 2003 emergence from CCAA, but with Victor Li’s equity investment (Trinity Time Investments) contingent on a number of conditions, including Air Canada sorting out its horrific pension shortfall, the deal inevitably will drag on into the first quarter of 2004. Throwing a further unknown into the equation is the mid-December counter equity offer of Cerberus Capital Management, a Wall Street hedge fund represented by Derrick Tay of Ogilvy Renault. Saving Air Canada is clearly the number one deal of 2003, but as this issue of Lexpert goes to press, it is far from clear as to who will be driving the bus at the end of the day.
Air Canada topped the lists of all but two of the dealmakers Lexpert consulted. For Jonathan Levin, a partner with Fasken Martineau DuMoulin LLP and director of the firm’s banking and restructuring group in Toronto, “It’s not a deal, it’s a saga.… There’s not even a meeting of minds yet.” True. Almost every “solution” seems to lead to new problems. At press the inclusion of huge retention bonuses for CEO Robert Milton and chief restructuring office Calin Rovinescu in Li’s $650 million injection is causing other stakeholders, including creditors, shareholders, and severely rolled back employees, to riot.
But let’s face it, the insolvency of the national carrier has contributed greatly to the solvency of a dozen or more Canadian law firms. Stikeman Elliott has 25 lawyers working full-time on the file on a slow week; busy weeks employ upwards of 50 lawyers. Even the Calgary office of Bennett Jones LLP is in the game, applying the expertise its lawyers received while trying to keep Canadian Airlines International Ltd. afloat to help Stikes and its client. “We’re doing the aircraft,” says Patrick Brennan, who leads the Air Canada team at Bennett Jones, which on busy weeks—and there are a lot of those—count 15 lawyers. “We’re acting in respect to what we call the fleet restructuring—the repudiation of aircraft leases, the return of suprlus airplaines, and the amendment, restructuring or refinancing of the leases on the leases on the aircraft remaining in the fleet.” And then, there are the armies of clients and lawyers on the creditors, lessors, bankers, and financiers’ side.
“If Calin Rovinescu walked into any room full of lawyers right now, he’d get a standing ovation,” says one lawyer. “They could rent Maple Leaf Gardens for some of these meetings.” All those lawyers don’t come cheap. “Work on the Air Canada restructuring is our biggest billable account this year,” says another lawyer whose firm represents one of the key parties in the restructuring.
“Half the lawyers in the country are working on this,” quips Jay Swartz, a partner with Davies Ward Phillips & Vineberg LLP in Toronto. Swartz and his team are working in tandem with U.K. law firm Freshfields on behalf of ECA Lenders, a group of European creditors. Davies is also representing Norddeutsche Landesbank-Girozentrale, an agent for a group of European banks that financed Air Canada’s spare engines, as well as the European equivalent of Export Development Canada. They could have done more. “We’ve turned down an awful lot of retainers because of conflicts,” says Swartz.
At Oslers, the situation is similar with different teams at the firm representing DIP lender GE Capital, Onex, the unsuccessful bidder for Aeroplan, and successful equity bidder Victor Li. The head of the Li team at Oslers, John Evans, is, incidentally, head of the firm’s conflicts and ethics committee. “So far, so good,” he says, but Oslers also could have had more retainers.
Davies and Oslers multi-role involvement in the Air Canada saga drives home the consolidation of the legal services market, particularly in Toronto and Montreal. The Air Canada restructuring is so huge, there actually aren’t enough tier-one firms to go around. “The market in terms of handling these major mandates is shrinking,” says Brian Levitt, co-chairman of Oslers. “There are no longer eight or ten firms capable of filling those roles.” Word on the street is more than one stakeholder isn’t sending his “first choice” law firm to court and the negotiation table. But, as the next deal shows, sometimes, not getting what you want the first time could be the best thing that ever happened to you.
2. Manulife’s Acquisition of Hancock. Manulife wanted Canada Life Financial Corp. (earlier, it wanted CIBC, but Ottawa nipped that one in the bud). Hancock wanted Fleet Boston Financial Corporation. Instead, they got each other in a transaction, slated to close in early 2004, that got lawyers, investment bankers, and other “dealmakers” crying that the sky had stopped falling. And there’s a lot to be excited about. It’s peanuts compared to Bank of America Corporation and Fleet Boston’s US$47 nuptial, but at $15 billion they don’t get much bigger north of the border. In fact, it’s the biggest foreign acquisition by a Canadian company, and it’s a cross-border transaction in which the head office stays in Canada.
It’s also in the financial services sector. “Anytime major players in the financial sector merge, it’s a big deal,” says James Riley. And, while the earlier domestic consolidation in the insurance industry had Bay Street wondering whether Ottawa was allowing insurers to bulk up in anticipation of bank mergers, this deal has provided ammunition for the other side. “Those who believe banks don’t need to merge domestically to compete in the U.S. see that deal as evidence,” says Levitt. A Montreal lawyer states, I query whether it means banks don’t need to merge and the doubters are right. In any event, it’s insurers stealing a march on the banks.”
“We’ve taken it for granted banks will acquire insurance companies. Well, maybe now it will be insurance companies acquiring banks,” comments Pierre Raymond, interim co-chair of Stikeman Elliott and an M&A partner in its Montreal office. It’s a deal that has everyone talking—even though most of the legal work will be done in the U.S., and by U.S. counsel. Still, both target and buyer will send at least some work to their Canadian lawyers—Stikeman Elliott in the case of Hancock, and Torys LLP and Oslers for Manulife. In a $15 billion deal, even a fraction of the available work will be a lot.
Not everyone’s a fan of the deal. “It’s big, but it’s a plain, vanilla transaction,” says Pierre-André Themens, a top-ranked corporate lawyer at Davies Ward in Montreal. Maybe. But $15 billion cross-border mergers in the financial sector don’t grow on trees, and it’s a relatively “good news” merger in a hairy year—a bold, and expensive, acquisition of a U.S. icon by an aggressive Canadian player in a year marked by defensive consolidation and necessity-dictated divestiture.
3. The Canadian Coal Wars. It ended with a five-way love-in and a complete restructuring of Canada’s coal industry, but the battle for Fording Inc. started as a nasty hostile bid, of all things, by pension funds. Sherritt Coal Partnership II and Ontario Teachers Pension Plan launched a $1.6 billion bid for control of Fording, Canada’s largest producer of metallurgical coal.
“It’s been a long time since we’ve seen such an aggressive takeover,” comments Norman Steinberg. Fording brought in Westshore Terminals Income Fund and Teck Cominco Limited as white knights, who proposed to convert Fording into an income trust. Sherritt and Teachers’ countered with their own income trust proposal, bumping the bid up to $1.8 billion. There was litigation, a proxy fight, corporate governance issues galore, inflammatory headlines, and a pension fund transaction that got seniors’ pulses racing. In the end, Westshore, Teck Cominco, Sherritt and Teachers’ all got together to buy Fording Inc. for $1.8 billion, completing the consolidation of the coal industry that had started several years earlier with also hotly contested battles for Manalta Coal Income Trust (buyer: Luscar Coal Income Fund) and Luscar (buyer: Sherritt and Teachers’).
“This is the one deal of the year that touches on everything,” says a Toronto investment banker. “There has been no other deal this year as unique as Fording.” Pat Finnerty, a securities and M&A partner with Blakes in Calgary calls it Calgary’s only “super deal” of the year. “It had so many twists and turns,” says David Smith, who shares time between Lawson Lundell’s Calgary and Vancouver offices. Lawson Lundell represented Westshore and CONSOL Energy Inc. on the deal. “In the end, everyone decided to bury the hatchet.”
Fording marked the resurgence of hostile bids, including Manulife’s failed bid for Canada Life Financial Corporation and Alcan Inc.’s so-far successful bid for French-based Pechiney SA. Interestingly, it was a hostile bid launched by institutions traditionally perceived as having low-risk appetites. “It shows they are going further out along the risk continuum,” suggests Brian Levitt.
Hmmm: the West’s deal of the year, done in Calgary, and who are the major legal players? The Calgary offices of Oslers and McCarthy Tétrault LLP, Torys’s Toronto office, Vancouver powerhouse Lawson Lundell, and Toronto and Vancouver-based Lang Michener LLP. Of the three independents that dominate the Calgary market, two are nary to be seen, and one is sidelined to competition issues. Are the nationals finally making in-roads, or was it just a freak pension fund thing?
4. Couche-Tard’s Acquisition of Circle K. It’s the story of the little depanneur that could—and did. Alimentation Couche-Tard Inc. started life as one convenience store in the Montreal suburb of Laval. It went public in 1986 with 86 stores. Fast-forward to October 2003, when the 2,575-store company announced it was buying the Circle K Corp. chain from Conoco-Philips for US$830 million (Can$1.12 billion), growing to 4,630 stores. Hearts in Quebec are, as one would expect, a-pounding.
“It has sizzle,” says Maryse Bertrand, a senior corporate partner with Davies Ward in Montreal. The firm has continued to represent Couche-Tard, a relationship that goes almost as far back as the company. “They went from a little depanneur in Laval to four thousand stores, these French Canadian guys taking over a U.S. company and becoming the fourth-largest convenience store retailer in North America.” Like the Manulife/Hancock deal, it’s a cross-border transaction in which a home-grown company is spreading its wings, and keeping headquarters in Canada. Better yet, it’s growing because it wants to, not in desperation or to preclude an unwelcome takeover.
So, it’s a good news story all the way—with, perhaps, one little smear. Couche-Tard was so determined to buy Circle K it financed the deal up front. While unusual, such a proceeding is certainly not unheard of. Most of the deal will be debt-financed in the usual way, but Couche-Tard also raised some $223 million of equity by selling class B subordinate voting shares through “private placement to a select group of shareholders.” And the unselected shareholders are not pleased, and exploring different ways of sharing this displeasure with Couche-Tard.
The really good news: Davies Ward Phillips & Vineberg is working the deal for Couche-Tard on both sides of the border. The not-so-good news? At press Circle K hasn’t bothered to retain Canadian counsel.
5. Yellow Pages Income Fund IPO. In a depressed M&A market in which lawyers were forgetting how to draft IPOs, U.S.-based Kohlberg Kravis Roberts & Co. (KKR) and partners monetized Teledirect International Inc.’s Yellow Pages asset, which they had acquired less than a year ago from Bell Canada Enterprises (BCE) and made out like bandits. The IPO was tenfold oversubscribed, gross proceeds exceeded $1 billion, and the debt-plus-equity value was $4.5 billion. The transaction was the largest IPO of the year, the largest Canadian IPO in three years, and the largest IPO ever for a Canadian income fund. And, it was done at the speed of light: less than six weeks to convert the Yellow Pages Group into an income trust and prep the IPO.
“Numerous income funds have gone to market in place of more traditional initial public offerings for which there has been no effective market for a couple of years,” says Peter Jewett, a senior corporate partner at Torys. The Yellow Pages IPO represents this trend, and stands outside it as the most successful. And, to some lawyers, it suggests the resurrection of the traditional IPO may be just around the corner. “It sent a clear message that with a quality asset you can do a successful IPO, even in this market,” says Raymond. “An IPO of an income fund is a tax assisted IPO. The structure has helped the transaction by a number of percentage points. But nonetheless, the transaction shows there’s room for quality IPOs.”
Neat trivia: Goodmans was retained by Yellow Pages Group Co. as underwriters’ counsel a month before the underwriters were appointed.
6. Great-West’s Acquisition of Canada Life. “Canada Life was road kill, waiting to be picked up,” says one Toronto lawyer of the $7.3 billion acquisition of Canada Life by Great-West Lifeco Inc. But it was road kill in the financial services sector, which, with Canadian bank mergers still in a holding pattern, makes it big news with most Canadian lawyers. “The deal reflected consolidation of the industry, and its ability to do deals that the banks could not do,” says Jeffery Barnes. It resurrected the spectra of bank mergers—several analysts (and lawyers) expect to see a Canadian bank merger, if not before the end of 2004, definitely by 2005.
The deal, along with the bigger and cross-border Manulife/Hancock deal, also suggested the rules on consolidation in financial services may not be written by banks. “With these deals, suddenly, the insurance companies are very much a part of that game. A bank/insurance company merger is certainly a possibility,” says Jewett at Torys. Great-West is now the largest life insurance company in Canada—a major player by any standard, the Manulife/Hancock merger notwithstanding. “Financial services are consolidating globally. We’re clearly going to see more mergers, domestically and internationally,” continues Jewett.
Additionally, the Canada Life takeover started life as a hostile bid by Manulife, and, as Garth Girvan, a senior partner with McCarthy Tétrault’s corporate finance and M&A group in Toronto, says, “Hostile bids are always interesting.” (And profitable) Plus, as a Toronto investment banker points out, it was a Canadian deal involving Canadian advisors—something that, in 2003, appeared to be an endangered species.
7. AT&T Canada Restructuring. It took AT&T Canada Inc. less than six months to emerge from CCAA protection as the debt-free Allstream Inc., its freely tradeable shares listed on the TSX and NASDAQ. As part of the transaction, Brascan Corporation. and CIBC Capital Partners bought AT&T Canada for $5.6 billion. But the really neat thing about this transaction is that erstwhile parent AT&T Corp. had to shell out $5.5 billion for the shares of its practically worthless former child, as a result of a deposit receipts agreement drafted in March 1999 when AT&T was looking to buy MetroNet Communications Corp. Regulation restrictions prevented AT&T from buying MetroNet, and the agreement provided for a future sale of the MetroNet sales—at an agreed value. Don Gilchrist at Oslers drafted the agreement in about a week, “and its guts were completely redrafted in the last 12 hours,” recalls partner Terrence Burgoyne, who was co-ordinating the MetroNet team at Oslers in the final week of the transaction.
In 2003, MetroNet and AT&T Canada, which combined in 2002, were valued at, well, nothing. But, according to the 1999 deposit receipts agreement, explains Burgoyne, “AT&T Corp. had this obligation to buy the shares or make whole at the earlier agreed price. Ultimately, AT&T paid $5.5 billion for the shares of a company that filed under the CCAA a week later. It says something about AT&T that it did that—it says a good deal about how honourable a corporation AT&T is that they lived up to their obligations under these circumstances.”
AT&T was simply accepting the inevitable—Gilchrist’s agreement was inviolate. According to one U.S. investment banker, “That agreement was walked up and down to every law firm on Wall Street, and no one could dent it.”
“Oslers did a nice job on it,” comments James Riley, referring to both the 1999 agreement and the subsequent restructuring. “All the telcos tended to have a lot of cash and a lot of debt. That was true of AT&T Canada, and they paid the banks in full and converted their remaining debt into equity.” Ogilvy Renault represented the banks in the deal, which was the biggest restructuring this year in a beleaguered industry.
8. Bombardier’s Sale of its Recreational Products Division. “In Quebec, every kid either owned a skidoo or wanted one,” says Norman Steinberg, and the name Bombardier continues to be synonymous with winter sports, not airplanes. Bombardier Inc.’s recreation products business was a “marquee asset”, a legacy of Quebec Inc., and a cultural institution. Its $1.225 billion sale to a consortium consisting of Bain Capital, LLC, the Bombardier/Beaudoin families, and (who else?) Caisse de dépôt et placement du Québec, ensured the legacy stayed, at least partly, in Québec hands. (Bain Capital, of course, is a U.S.-based player).
The deal also showed the metier of CEO Paul Tellier, who clearly was not going to let sentiment stand in the way of Bombardier’s transformation. What with this sale, its April public offering of $1.2 billion in common shares, and its other streamlining measures, Bombardier has spent 2003 effectively restructuring without resorting to the CCAA.
“Bombardier was in a difficult situation, and they executed successfully in several directions to re-stabilize company,” says Robert Paré at Fasken Martineau. The deal attracted a lot of attention nationally, but it was in Montreal that it hit closest to heart. Says Pierre Raymond, “It’s history that’s being sold here.”
Fun fact: It was Bain Capital who first looked at acquisition in June 2003, teaming up with the Caisse and the Beaudoin family at the end of the summer. Bain owns 50 per cent of the division.
9. Bruce Power L.P. In the vendor’s corner: the insolvent British Energy PLC, selling because it had to, it’s every action scrutinized by the British government. In the buyer’s corner: a consortium of purchasers with virtually nothing in common. At stake: a lease of Ontario’s largest independent power generator from Ontario Power Generation Inc., owned by the Government of Ontario. The added complication: a price cap on electricity for consumers and small users introduced by the government in the middle of the deal, totally changing the economics of the deal and requiring a renegotiation of price.
“It’s certainly one of the five most difficult deals I’ve ever done,” says Donald Ross, a partner with Oslers in Toronto, who represented the consortium of purchasers, which included Cameco Corporation, BPC Generation Infrastructure Trust (established by the Ontario Municipal Employees Retirement Systems (OMERS)), and TransCanada PipeLines Limited. In addition to sorting out the different objectives of the purchasers and making them one, there was the strained financial position of the vendor to contend with, and a deregulation-gone-bad debate in the province that subsequently led to a reversal in Ontario’s deregulation policy and contributed to a change in the Province’s government. Add to the equation several brown-outs and the “Great Ontario Blackout” that practically shut down Toronto and environs in mid-August, and Bruce Power is definitely one of the deals that have defined 2003.
In the crystal ball: “It’ll be at least a year before we see another similar infrastructure deal in Ontario,” predicts Jeffery Barnes at Fraser Milner. Most observers agree that in the current political climate in Ontario (“Deregulation bad! Stay away!”) even this deal wouldn’t have happened if British Energy hadn’t been utterly broke.
10. CINAR Sale. Finally, winning hands down in the category of “we’ve got to close this deal before...”, is the US$143.9 million sale of beleaguered CINAR Corporation to an investor group consisting of Michael Hirsch, Toper Taylor and TD Capital Canadian Private Equity Partners. CINAR had been on the auction block for more than two years, after fraud charges and financial scandals almost put the company out of business.
Tiny compared to Manulife, in a non-mainstream industry, CINAR is nonetheless the leading candidate for the most complicated deal of the year...if it manages to close in 2003. At press, shareholders were to vote on the deal on December 11. “I don’t know if we’ll be able to paper the deal in time,” says Jonathan Levin, who’s leading the team at Faskens that’s representing TD Capital. Lawyers have had to prepare dozens of confidentiality agreements as part of the transaction, and US$1.2 million of the sale prices will be held in escrow pending arbitration of company founders Micheline Charest and Ronald Weinberg’s ability to execute 840,000 stock options. (Charest and Weinberg have been barred from any involvement in CINAR by the Quebec Securities Commission.)
An added complication: Hirsch is the founder and former CEO of Nelvana Ltd., while Taylor once headed Nelvana’s sales and development office in Los Angeles. The company was bought by Corus Entertainment Corp. in 2000, who retained Hirsch as a consultant even after he stepped down as Nelvana’s CEO, and with whom Hirsch had signed a non-competition clause. Oops. Corus wasn’t exactly supportive of Hirsh’s new venture. (“We are extremely disappointed that Michael has chosen to end his relationship with Corus and pursue the acquisition of CINAR….” reads an internal memo, reported in the National Post.) Hirsch’s lawyers had to work fast to get him out of hot water, but, fortunately, money (an undisclosed amount) does fix most problems.
“We will never see a year like 2000,” says Clay Horner at Oslers in Toronto. Most of his colleagues agree. Part of the “blah” factor in 2003 is the result of the legal profession (and the business world in general) adjusting from the merger-mania of 1998 to 2001 to the “new normal”. It’s a tough switch to make. “We aren’t sure if we’re back to normal, if this is normal, and we’ve gone through the deal cycle of a lifetime, which will never be repeated,” says Stephen Halperin at Goodmans. Barnes preaches tough love: “M&A is coming back, but it’s not blockbusters, it’s the middle. M&A is back, but it’s not at the 1998, 1999 levels, and it won’t be.”
Neither will IPOs. “Equity markets are not playing the role they used to play, and I don’t see them coming back to the level of accessibility they used to have,” explains Paré. “It’s not necessarily a matter of whether the investors are back. Rather, it’s a question of a higher burden in accessing the markets stemming from all the new governance rules, which place a significant weight on being a public issuer and an additional hurdle companies have to consider. Also, there is the added cost of auditing books, which is going up and up.”
Robert Paré believes public markets will come back to their usual role with the bigger issuers, but the small and mid-sized fry will continue to stay away. “The flip side is that the private equity pool is more vibrant. More companies are staying private longer, and exiting differently.... We should see more privatizations as well.” The onerous regulatory framework surrounding reprivatization issues is likely to provide lawyers with a lot of challenging work.
A number of companies turned their backs on the public markets in 2003, notably DuPont Canada, which was taken private when Delaware-based parent E.I. du Pont de Nemours and Co. bought out the subsidiary’s minority shareholders. The $1.46 billion DuPont deal leaves only three large cap stocks on the TSX controlled by foreign shareholders—Shell Canada Limited, Sears Canada Inc. and Imperial Oil Ltd. On the domestic front, the Phelan family is attempting to take food retailer Cara Operations private. In the oil patch, too, start-ups and juniors have been staying private.
Therefore, the new “normal”, means more privatizations, fewer IPOs, and a slower path to deals.
It also means more variety. While M&As were down, says J-P. Bisnaire at Davies Ward in Toronto, “There is a fair bit of private acquisition work, securitization has been very strong. Corporate finance—income trusts have been keeping us very busy. We get more than fair share of structured projects. Bankruptcies and restructurings are taking up a lot of time, and of course litigation.” Perry Spitznagel, head of the public market group at Bennett Jones, describes the new normal as a “potpourri” of work interspersed with large deals but full of smaller offerings and smaller transactions.
A deal that forms the bridge between the mega-mergers and smaller deals in what Spitznagel calls “the oil patch’s transition year” is the McKenzie Valley Pipeline Project, a unique and innovative partnership between the Aboriginal Pipeline Group—a very non-traditional Bennett Jones client—and a consortium of big players, which includes ConocoPhillips Canada, Exxon Mobil Corporation, Imperial Oil Resources, Shell Canada Limited and TransCanada. (Calgary’s Macleod Dixon LLP is project counsel; the Calgary office of McCarthy Tétrault is representing TCPL.) “It’s the little engine that could,” says Martin Lambert, a senior corporate partner with Bennett Jones.
Mega-mergers are cool. But the mid-sized and smaller deals that used to be the standard before the bubble, and which will be the standard again in the new normal, can be more fun. “These little deals are harder than the bigger ones. A $3.6 billion Conoco-Gulf merger is not that tough. It’s not nearly as tough as when a client says we have a little entity with no money but big aspirations. That’s tough,” says Lambert. He compares acting on the big deals to soaring over the jungle in a corporate jet equipped with the attendant luxuries and resources. Acting for the ambitious new juniors in the oil patch, he says, “is like clawing your way through the savanna with a knife in your teeth.”
Tough. But more fun than a trust conversion. “It’s been the year of the trust conversion,” says Grant Zawalsky, a senior M&A partner with Burnet, Duckworth & Palmer LLP. The biggest of these, in Calgary, was the $1.25 billion reorganization of Bonavista Petroleum Ltd. into Bonavista Energy Trust and NuVista Energy Ltd. “Bonavista was the most successful intermediate oil and gas company remaining, and even as a best performer, it could not compete with the trusts. Its conversion signalled the end of the intermediates as we know them,” says Zawalsky.
Trust conversions and income fund IPOs kept the pipeline flowing through much of the year at most Calgary law firms. Macleod Dixon did five trust conversions in 2003, one of the most notable of which was the $170 million IPO and $150 million bank financing of KeySpan Facilities Income Fund. Additionally, it’s been the trusts that have been buying, such as Provident Energy Trust’s $282 million for the Redwater NGL processing business from Williams Canada.
Lawyers in Toronto have been beholden to the trusts as well. (Weird ones, at that. Freezers? Buslines? The folks in Calgary who developed the concept for oil and gas clients are shaking their heads.) “Income trusts have been a godsend to us,” admits Stephen Halperin at Goodmans. It’s the trusts that have been doing IPOs, such as the recent $222 million IPO by Goodmans client Borealis Retail REIT (an arm of OMERS). More funds are expected to follow suit and monetize their non-core portfolio.
“Some of the biggest deals this year have been income trusts,” agrees Horner. But they leave him cold. “They’re boring,” he confesses, and many of the leading dealmakers agree. Says one lawyer off the record, “You just have to look at the lawyers involved and you’ll realize they’re not the best people at the firms. It’s not hard stuff. It’s not comparable to M&A. It’s barely real corporate finance.”
But it’s what’s been paying the bills because in the new normal. safety’s king. “In 1998, if it was a bad deal, the market would cover you,” explains Barnes. Today, it will punish you. As a result, despite the upturn in M&A activity, the trend of the deal-that-couldn’t continues. “The pipeline is in reasonable shape, people are looking at deals, but deals have a higher probability of not getting done,” says Barnes. Adds Halperin, “CEOs don’t see compelling reasons to grow through deals.” “There have been a lot of aborted deals, and that’s certainly a first for me,” agrees Maryse Bertrand. “There was an income trust acquisition we were working on that didn’t happen, and we held an auction, and no one came to the party.”
The deals that are getting done are taking longer. “Due diligence is stretched out. There is heightened concern regarding financial statements,” explains Halperin. Moreover, in 2003 most of the deals that got done most were of the sort that “had” to happen—they were dictated by necessity. Vendors, like Bombardier and British Energy, had to sell. Purchasers, like RONA inc. in its $350 million acquisition of Réno-Dépôt stores from Kingfisher in Quebec, had to get bigger or get out. On most of the deals they worked in 2003, lawyers had to roll up their sleeves, grit their teeth, and get a little dirty.
Scratch the surface of many deals on Lexpert’s Top 10 deals list, and you get a distressed company. Scratch that company, and you get a hairy backstory accompanied by litigation, scandal, mismanagement, or financial woes.
It’s not the restructurings that make it so. Air Canada, AT&T, Laidlaw, and the $800 million restructuring of Saskatchewan Wheat Pool are just the tip of the depressing iceberg. Even the wildly successful Yellow Pages Income Fund IPO has its roots in a distressed company—the Yellow Pages asset was monetized by BCE in late 2002 because it was distressed and BCE is still embroiled in related litigation.
But at least it’s not in CCAA protection. Yet. “In the telecommunications industry, other than incumbent Bell in the East and Telus in the West, virtually every competitor that tried to compete with the incumbents has had to go through a restructuring,” says Halperin. “You can probably drop the ‘virtually’,” he adds. And things haven’t been rosy at either Bell or Telus, the last of which, although it has not used the “R” word, has taken deliberate steps to tighten its belt. Nortel Networks Limited, too, saw its stock go under a buck, but it managed to successfully refinance its existing debt, and saw its stock go back up to $6 and change, without having to resort to a formal restructuring process.
“It’s interesting the number of deals that were restructurings without formal proceedings,” comments Riley. “It’s indicative of how much more mature we are—we now understand these proceedings are value-destructive.” Telus and Nortel are both clear examples, as is Bombardier. Its 2003 division divestiture was clearly part of its let’s-stay-out-of-CCAA overhaul. “Hopefully, the company is taking measures before the crunch comes,” says Pierre Raymond.
British Energy wasn’t so lucky, and the Bruce Power transaction took place because the vendor was in difficulty and had to sell its interest lease. “The only reason it got done in the current political climate is it had to be done given the financial position of British Energy,” comments Barnes. But that’s par for the course for 2003.
Many deals were driven by the need to consolidate domestically in industries in which the only competition that mattered was international—and cut-throat. Great-West and Manulife’s fight for Canada Life was one such example, and continental industry consolidation was the driver behind the sequential Moore-Wallace and Moore-Donnelley deals. Competition from international renovation retailers such as the Home Depot, drove the RONA/Réno-Dépôt deal.
Notably, the Canada’s Competition Bureau appeared to recognize the international pressures on RONA. “There were concerns whether the Competition Bureau would approve it,” says Raymond whose firm, Stikeman Elliott, acted for the vendor Kingfisher. “By allowing this transaction to go forward, the Bureau allowed a Canadian player to grow to a size necessary to be competitive internationally.”
Fording’s five-way-love-in solution to what started as a hostile bid is a prime example of necessity being the mother of co-operation. The various participants ultimately understood they all needed to get together to effectively take on the Aussies on the international coal market. “The bulk of Canadian coal is exported, and the driving goal was to make the coal industry more internationally competitive,” explains Peter Jewett. “Ultimately, all the parties sat down and said, look, it makes sense for all of us to be involved. Instead of setting it up for two major players, let’s rationalize the industry.”
In a year definitely not for the squeamish, it didn’t get much hairier than CINAR. The day before the sale was announced, Bay Street was rife with rumours that the RCMP had warrants out for Charest and Weinberg (it was just a rumour). The unfortunate founders of CINAR had other worries. The company had already paid $18 million in a negotiated settlement with the Quebec and federal governments to settle a dispute over fraudulent tax credit claims. Banned by the QSC from actively participating in CINAR, the founders were frustrated with the slow auction process. They tried to fire Robert Després, current CINAR chairman, and the man they previously hired as trustee of their majority stake in CINAR. (He wouldn’t quit, they sued—all while negotiations were ongoing.) The sale of CINAR to Hirsch and partners drove a wedge between the new CINAR proprietor and his former colleagues at Nelvana and Corus. If Air Canada is a saga, CINAR is in a league of its own.
CINAR’s additional claim to fame in 2003 is its domestic nature—it’s a Canadian company being bought by Canadian investors, with financing from Canadian banks. In 2003 deals as Canadian as CINAR and Great-West/Canada Life were thin on the ground.
Between the strong loonie and weak U.S. dollar, 2003 was the year in which Canadian companies redefined the meaning of “cross-border deal” and raised the interesting question—what makes a Canadian deal really Canadian? Especially from the legal profession’s somewhat mercenary view point?
“The definition of cross-border deals has been reversed,” says Stephen Halperin. “This year there is a whole long list of Canadian companies going outside of Canada, showing that Canadian companies really quickly run out of room to grow in Canada.” Alcan, Manulife, Couche-Tard, Maple Leaf Foods Inc., and however briefly, Moore Corporation Limited, have acquired foreign targets, grown substantially in competitive stature, and kept headquarters in Canada. “But is this good news for Canadian lawyers?” asks Halperin. He’s not sure.
Take two of the biggest deals of the year—Manulife/Hancock, twice the size of anything else going, and Montreal-based Alcan Inc.’s $6.25 billion bid for France’s Pechiney. Each of the buyers is Canadian. Each of the parties has retained Canadian counsel. But most of the legal work is taking place in foreign jurisdictions. “The number of hours Simpson Thacher & Bartlett LLP, Manulife’s U.S. counsel, will bill compared to all the Canadian law firms involved put together will be 500:1,” says Clay Horner. Indeed, a couple of the dealmakers Lexpert spoke with strongly questioned the appropriateness of showcasing either Manulife or Alcan as deals of the year for that very reason.
It’s a valid concern. From the purist’s point of view, Alcan and Manulife aren’t really Canadian deals—they may look good for a firm’s PR, but they don’t substantially contribute to the bottom line (i.e., billable hours and revenue). As one Toronto lawyer puts it, “We’re Canadian counsel to (one of the parties in these Canadian-content-lite deals). Big deal, whoop-dee-doo.” The Canadian lawyer doing the most work on each deal is the buyer’s in-house counsel—David McAusland at Alcan and Dale Scott at Manulife. These deals underscore the growing importance of corporate counsel. Says Horner, “They show how important in-house counsel can be, organizing armies of international lawyers.”
It doesn’t have to be that way. When Montreal-based convenience store retailer Couche-Tard decided to really spread its wings into the U.S. and snap up Circle K, it retained Davies Ward as its counsel. Period. No U.S. counterpart to share the glory (and the cash). And, in the US$1.3 billion sale by General Motors Corporation of its defence business to General Dynamics Corporation, Canadian lawyers did most of the work on both sides. “It’s significant for that reason, because a big U.S. company allowed Canadian lawyers to run the deal,” says Horner.
But it does happen. Peter Mendell of Davies Ward in Montreal recently closed an Australian $330 million (£135 million) transaction in which the only Canadian content was Davies Ward. The client, Amcor Limited, is an Australian company. The seller, Rexam PLC, was a London-based company. The division purchased had plants in the U.S., England, Ireland, France, Singapore, Puerto Rico and Brazil. Was it a Canadian deal? No. But it generated proportionately more work for Canadian lawyers than Alcan/Pechiney or Manulife/Hancock will.
Determining what makes a Canadian deal Canadian is becoming increasingly academic in the new economy. The year’s most exciting, “good news” deals—Manulife and Couche-Tard—are cross-border takeovers. The massive restructuring of Canada’s national airline is crawling with foreign players—it’s U.S. and Hong Kong money that’s bailing out the airline. Laidlaw was more of a U.S. reorganization with a Canadian component than a Canadian one with a U.S. component, regardless of Laidlaw’s Ontario origin. Bombardier’s “legacy asset” is now 50 per cent U.S. owned. Aggressive U.S. M&A player KKR is making money off BCE’s former golden goose. The list goes on. “It’s hard to do a significant deal without U.S., or other foreign, involvement,” agrees Peter Jewett at Torys. Disappearing borders? You bet.
Borders were already starting to disappear when Paul Reichmann’s development company, Olympia & York, built Canary Wharf in the 1980s. They were rapidly dissolving when O&Y went down in what remains one of Canada’s most spectacular bankruptcies, more than a decade ago. In 1995, Reichmann led a group of investors that bought back the development, and took it public in 1999.
Reichmann is now Canary Wharf’s chairman and minority shareholder, and he wants Canary Wharf back. Also in play are Brascan Corp. and a consortium led by Morgan Stanley. At press, Canary Wharf is still up for grabs, and the winning bid is expected to exceed $3.3 billion (£1.58 billion to £1.64 billion). It’s particularly appropriate that Canary Wharf should be in play, again, and that its builder would be at the centre of the battle in 2003—the year sins, desires and actions of the past came home to roost.
For Marvin Yontef at Stikeman Elliott, “The real saga at Air Canada starts with the September 11 [2001] disaster.” Other observers and participants go further back, to the ill-omened 1999 merger with Canadian, or even to the airline’s cushy days as a Crown corporation (you don’t lose those civil servant habits overnight—or, apparently, over a decade).
Air Canada is the most dramatic example, but many of the year’s deals had a long shelf-life. Manulife’s acquisition of Hancock came after a failed bid for domestic rival Canada Life, not to mention Ottawa’s unilateral squashing of its earlier flirtation with CIBC. Hancock itself was on the rebound from failed merger talks with Fleet Boston. Canada Life had a “bull’s-eye” on it because of the 2001 change in regulations over the Canadian insurance industry, and, after Sun Life Financial Inc. paired up with Clarica Life Insurance Company, was odd man out, there for the taking.
The battle for Fording Coal comprised the final chapter in the consolidation of Canada’s coal energy, which had started in 1997, when Luscar acquired Manalta, to be in turn devoured by Sherritt in 2001. In the AT&T Canada restructuring, AT&T Corp. shelled out more than $5 billion for the shares of a worthless company as a result of a 1999 agreement (again, way to go, Gilchrist). Bombardier’s sale took it all the way back to its founders. CINAR was on the auction block for two years.
Two deals with a particularly interesting backstory are Alcan’s bid for Pechney and Maple Leaf’s acquisition of Schneider Corporation from Smithfield Foods, Inc., both of which have more than a touch of déjà vu about them. “Maple Leaf has been on a six-year quest to acquire this rival,” notes Halperin, who represented Schneider when it sold to Smithfield. “It is evidently interesting that Smithfield came to Maple Leaf some years later and said, this business is worth more to you than to us,” muses Don Ross at Oslers, who represented Maple Leaf in both deals.
Alcan had tried to acquire Pechney in 1999 at the same time it was picking up Switzerland’s Alusuisse, and it walked away from the Pechney part of the equation as a result of the EU’s competition concerns. Alcan’s second go at Pechney, through a hostile bid across borders, illustrates how badly the company wants to be the world’s biggest publicly traded aluminum company.
But it’s likely that Air Canada will take us full circle, coming back to dominate headlines and legal workloads with a second restructuring before too long. The reorganization required to turn Air Canada into a competitive international air carrier is enormous and, even if there was the will to do it “all at once”, the operation would probably kill the patient. Between a company culture still mired with Crown corporation baggage and labour agreements that will never give it the flexibility the airline needs, Air Canada is poised for a restructuring encore even before it emerges from 2003’s CCAA protection.
Busy taking its lessons from Wal-Mart and Southwest Airlines—and implementing them poorly—Air Canada should perhaps take a look at the example of Continental Airlines, which had at one time earned itself the moniker “the world’s worst airline.” In 1994, Continental was nose-diving into yet another bankruptcy. “There’s not much time to think when your company’s failing,” Greg Brenneman, turnaround specialist, President and Chief Operating Officer of Continental from May 1995 to May 2001, writes in The Harvard Business Review. “Saving Continental wasn’t brain surgery.... In Continental’s case, we simply needed to fly to places where people wanted to go, when they wanted to go, in clean attractive airplanes, get them there on time with their bags, and serve food at mealtimes. The tough part…was getting all that done fast, right away, and all at once.”
“We gave the patient little or no anesthesia, and it hurt like hell. Then again, the patient is cured now, right?” continues Brenneman. The lessons of the mid-1990s turnaround stayed with Continental during 9/11. The airline furloughed 12,000 employees, stopped flying to 10 cities, and reduced its flight schedule by 20 per cent, within days of the disaster. Before the end of the month, the company’s chairman and president elected to forego all compensation for the remainder of the year. Post 9/11, the airline was posting losses, but they were not as dramatic as those of other airlines—and not nearly in the same league as Air Canada’s. “We remain focused on being a long-term survivor by further reducing our costs to achieve breakeven position in 2004,” says Gordon Bethune, Continental chairman and CEO.
But for all its problems, past and present, Continental had never been a Crown corporation, and that may have been its saving grace. Air Canada—and the nation—both believe that if push comes to shove, Ottawa will step in and save it. That attitude keeps it from making the tough decisions that are the hallmark of Laidlaw, AT&T, and even SaskWheat. One of Brenneman’s pulling out-of-a-nosedive lessons: “Clean house. The same team that leads a company into crisis is rarely able to get it back on track. The hard news about a turnaround is that you have no choice but to sweep out the old to make way for the new.” Yet part of Air Canada’s turn-around plan right now is to ensure CEO Robert Milton stays—and becomes a multimillionaire in the process.
Restructurings in 2003 outperformed “pure” M&A (merger and acquisition) transactions in interest, complexity, and, with the exception of the billion dollar plus financial services deals, size. In addition, a sizeable portion of the restructurings were the result of informal, out-of-court reorganizations. It was the year in which deals didn’t get done, the year of no blockbuster IPOs (initial public offerings), the year of long summer vacations, the year to lay off first-year associates, the year where the only thing Canadian lawyers were grateful for was that they weren’t American investment bankers.
“The investment bankers don’t get paid until the deals close, so 2003 is a write-off for them,” notes Barnes. “They’re looking to 2004 as the resurrection year.” Lawyers, fortunately, have experienced a bit of a lift in the third quarter. And, in the meantime, there were all those insolvencies and reorganizations to work on.
“If you’re a corporate law firm today you survived one of two ways: income trusts or restructurings,” says James Riley, a well-known corporate lawyer at Ogilvy Renault in Toronto. “This has been a very grinding year—not a year for the faint of heart.” It has also been the year of cautious decisions, prolonged due diligence and conservative management of balance sheets. “We’ve been working on big deals that haven’t happened and will never happen,” says Stephen Halperin, co-chair of the corporate securities practice at Goodmans LLP in Toronto. “People are taking forever to make decisions.”
Fortunately for the bottom line of law firms, hard times call for desperate measures and the clients who did manage to make decisions in 2003 presented their legal advisors with some hefty challenges. “The restructurings create the most interesting work in terms of creativity and complexity,” points out Sidney Horn, a partner with Stikeman Elliott LLP in Montreal. Between the bankruptcies and the blahs, 2003 also gave us the largest Canadian IPO by an income fund, Yellow Pages Income Fund, the first-ever cross-border equity offering by a Canadian energy trust, Pengrowth Royalty Trust, and the largest foreign acquisition by a Canadian company, Manulife Financial Corporation’s $15 billion bid for Boston-based John Hancock Financial Services, Inc.
Crediting the Manulife/Hancock deal with resurrecting the moribund North American M&A market may be excessive, but the dealmakers’ pipeline improved around the time Manulife’s chief executive officer, Dominic D’Alessandro, shared his good news. Still, as Barnes points out, “One multi-billion deal does not a recovery make.” Still, there was work. Just not the sort of work an M&A lawyer likes to crow about. Or, as Norman Steinberg, a senior corporate partner with Ogilvy Renault in Montreal puts it, “There were a lot of deals of importance, but not of stature.”
Lexpert| asked the legal profession’s top dealmakers to share their thoughts on the year’s most interesting, complex and challenging transactions—not necessarily the biggest. Nine of the selected top 10 deals are around or above the billion dollar mark. A couple of the transactions have even made history. One is a “feel good” story. But most are not for the squeamish. As Riley puts it, “None of these deals is clean. They’ve all got hair on them.”
Part 1: The Top 10 Deals of 2003
1. Air Canada Restructuring. There is a consensus among the majority of our legal dealmakers that this is the “top deal” of 2003. Air Canada’s restructuring is actually a series of deals, and thinking of it that way helps Toronto-based senior corporate partner Marvin Yontef, who’s heading the enormous Air Canada team at Stikeman Elliott, sleep at night. “The first transaction was getting the CCAA [Companies’ Creditors Arrangement Act] protection and stay, the second transaction was getting the DIP financing from GE Capital, which actually got signed in conjunction with the filing,” he explains. “There was the renegotiation of nine labour agreements. There is the renegotiation and restructuring of all the aircraft leases.” There is the ongoing question of how to reinvent Air Canada so that when it emerges from CCAA, its low-cost rivals don’t “eat its lunch” again. There is the troubling, and still unresolved, issue of the pension shortfall.
Earlier on, there was the heated battle around one of the airline’s few profitable ventures—Aeroplan One Corporation and the attendant Aerogold Visa partnership with CIBC, which involved Air Canada’s former nemesis Onex. Onex walked away when it couldn’t get the deal it wanted. CIBC, represented by Blake, Cassels & Graydon LLP, stayed but lost its exclusivity arrangement, with American Express getting the right to reward its users with Aeroplan points. “The exclusivity clause was obviously one of the most highly negotiated aspects of the new deal,” admits James Christie, chairman of Blakes and the lead lawyer on the CIBC team.
For Yontef, every one of the “smaller deals” is a milestone, but GE’s US$700 million loan is a Canadian record. “It is the largest DIP financing in Canadian history,” says Scott Horner, a corporate and financial services partner with Osler, Hoskin & Harcourt LLP in Toronto. Horner leads the legal team on the transaction for GE Corporate Financial Services. “It is also one of the most complex financing transactions ever done because of the number of stakeholders involved and their varying interests.”
Some participants in the restructuring were clinging to a 2003 emergence from CCAA, but with Victor Li’s equity investment (Trinity Time Investments) contingent on a number of conditions, including Air Canada sorting out its horrific pension shortfall, the deal inevitably will drag on into the first quarter of 2004. Throwing a further unknown into the equation is the mid-December counter equity offer of Cerberus Capital Management, a Wall Street hedge fund represented by Derrick Tay of Ogilvy Renault. Saving Air Canada is clearly the number one deal of 2003, but as this issue of Lexpert goes to press, it is far from clear as to who will be driving the bus at the end of the day.
Air Canada topped the lists of all but two of the dealmakers Lexpert consulted. For Jonathan Levin, a partner with Fasken Martineau DuMoulin LLP and director of the firm’s banking and restructuring group in Toronto, “It’s not a deal, it’s a saga.… There’s not even a meeting of minds yet.” True. Almost every “solution” seems to lead to new problems. At press the inclusion of huge retention bonuses for CEO Robert Milton and chief restructuring office Calin Rovinescu in Li’s $650 million injection is causing other stakeholders, including creditors, shareholders, and severely rolled back employees, to riot.
But let’s face it, the insolvency of the national carrier has contributed greatly to the solvency of a dozen or more Canadian law firms. Stikeman Elliott has 25 lawyers working full-time on the file on a slow week; busy weeks employ upwards of 50 lawyers. Even the Calgary office of Bennett Jones LLP is in the game, applying the expertise its lawyers received while trying to keep Canadian Airlines International Ltd. afloat to help Stikes and its client. “We’re doing the aircraft,” says Patrick Brennan, who leads the Air Canada team at Bennett Jones, which on busy weeks—and there are a lot of those—count 15 lawyers. “We’re acting in respect to what we call the fleet restructuring—the repudiation of aircraft leases, the return of suprlus airplaines, and the amendment, restructuring or refinancing of the leases on the leases on the aircraft remaining in the fleet.” And then, there are the armies of clients and lawyers on the creditors, lessors, bankers, and financiers’ side.
“If Calin Rovinescu walked into any room full of lawyers right now, he’d get a standing ovation,” says one lawyer. “They could rent Maple Leaf Gardens for some of these meetings.” All those lawyers don’t come cheap. “Work on the Air Canada restructuring is our biggest billable account this year,” says another lawyer whose firm represents one of the key parties in the restructuring.
“Half the lawyers in the country are working on this,” quips Jay Swartz, a partner with Davies Ward Phillips & Vineberg LLP in Toronto. Swartz and his team are working in tandem with U.K. law firm Freshfields on behalf of ECA Lenders, a group of European creditors. Davies is also representing Norddeutsche Landesbank-Girozentrale, an agent for a group of European banks that financed Air Canada’s spare engines, as well as the European equivalent of Export Development Canada. They could have done more. “We’ve turned down an awful lot of retainers because of conflicts,” says Swartz.
At Oslers, the situation is similar with different teams at the firm representing DIP lender GE Capital, Onex, the unsuccessful bidder for Aeroplan, and successful equity bidder Victor Li. The head of the Li team at Oslers, John Evans, is, incidentally, head of the firm’s conflicts and ethics committee. “So far, so good,” he says, but Oslers also could have had more retainers.
Davies and Oslers multi-role involvement in the Air Canada saga drives home the consolidation of the legal services market, particularly in Toronto and Montreal. The Air Canada restructuring is so huge, there actually aren’t enough tier-one firms to go around. “The market in terms of handling these major mandates is shrinking,” says Brian Levitt, co-chairman of Oslers. “There are no longer eight or ten firms capable of filling those roles.” Word on the street is more than one stakeholder isn’t sending his “first choice” law firm to court and the negotiation table. But, as the next deal shows, sometimes, not getting what you want the first time could be the best thing that ever happened to you.
2. Manulife’s Acquisition of Hancock. Manulife wanted Canada Life Financial Corp. (earlier, it wanted CIBC, but Ottawa nipped that one in the bud). Hancock wanted Fleet Boston Financial Corporation. Instead, they got each other in a transaction, slated to close in early 2004, that got lawyers, investment bankers, and other “dealmakers” crying that the sky had stopped falling. And there’s a lot to be excited about. It’s peanuts compared to Bank of America Corporation and Fleet Boston’s US$47 nuptial, but at $15 billion they don’t get much bigger north of the border. In fact, it’s the biggest foreign acquisition by a Canadian company, and it’s a cross-border transaction in which the head office stays in Canada.
It’s also in the financial services sector. “Anytime major players in the financial sector merge, it’s a big deal,” says James Riley. And, while the earlier domestic consolidation in the insurance industry had Bay Street wondering whether Ottawa was allowing insurers to bulk up in anticipation of bank mergers, this deal has provided ammunition for the other side. “Those who believe banks don’t need to merge domestically to compete in the U.S. see that deal as evidence,” says Levitt. A Montreal lawyer states, I query whether it means banks don’t need to merge and the doubters are right. In any event, it’s insurers stealing a march on the banks.”
“We’ve taken it for granted banks will acquire insurance companies. Well, maybe now it will be insurance companies acquiring banks,” comments Pierre Raymond, interim co-chair of Stikeman Elliott and an M&A partner in its Montreal office. It’s a deal that has everyone talking—even though most of the legal work will be done in the U.S., and by U.S. counsel. Still, both target and buyer will send at least some work to their Canadian lawyers—Stikeman Elliott in the case of Hancock, and Torys LLP and Oslers for Manulife. In a $15 billion deal, even a fraction of the available work will be a lot.
Not everyone’s a fan of the deal. “It’s big, but it’s a plain, vanilla transaction,” says Pierre-André Themens, a top-ranked corporate lawyer at Davies Ward in Montreal. Maybe. But $15 billion cross-border mergers in the financial sector don’t grow on trees, and it’s a relatively “good news” merger in a hairy year—a bold, and expensive, acquisition of a U.S. icon by an aggressive Canadian player in a year marked by defensive consolidation and necessity-dictated divestiture.
3. The Canadian Coal Wars. It ended with a five-way love-in and a complete restructuring of Canada’s coal industry, but the battle for Fording Inc. started as a nasty hostile bid, of all things, by pension funds. Sherritt Coal Partnership II and Ontario Teachers Pension Plan launched a $1.6 billion bid for control of Fording, Canada’s largest producer of metallurgical coal.
“It’s been a long time since we’ve seen such an aggressive takeover,” comments Norman Steinberg. Fording brought in Westshore Terminals Income Fund and Teck Cominco Limited as white knights, who proposed to convert Fording into an income trust. Sherritt and Teachers’ countered with their own income trust proposal, bumping the bid up to $1.8 billion. There was litigation, a proxy fight, corporate governance issues galore, inflammatory headlines, and a pension fund transaction that got seniors’ pulses racing. In the end, Westshore, Teck Cominco, Sherritt and Teachers’ all got together to buy Fording Inc. for $1.8 billion, completing the consolidation of the coal industry that had started several years earlier with also hotly contested battles for Manalta Coal Income Trust (buyer: Luscar Coal Income Fund) and Luscar (buyer: Sherritt and Teachers’).
“This is the one deal of the year that touches on everything,” says a Toronto investment banker. “There has been no other deal this year as unique as Fording.” Pat Finnerty, a securities and M&A partner with Blakes in Calgary calls it Calgary’s only “super deal” of the year. “It had so many twists and turns,” says David Smith, who shares time between Lawson Lundell’s Calgary and Vancouver offices. Lawson Lundell represented Westshore and CONSOL Energy Inc. on the deal. “In the end, everyone decided to bury the hatchet.”
Fording marked the resurgence of hostile bids, including Manulife’s failed bid for Canada Life Financial Corporation and Alcan Inc.’s so-far successful bid for French-based Pechiney SA. Interestingly, it was a hostile bid launched by institutions traditionally perceived as having low-risk appetites. “It shows they are going further out along the risk continuum,” suggests Brian Levitt.
Hmmm: the West’s deal of the year, done in Calgary, and who are the major legal players? The Calgary offices of Oslers and McCarthy Tétrault LLP, Torys’s Toronto office, Vancouver powerhouse Lawson Lundell, and Toronto and Vancouver-based Lang Michener LLP. Of the three independents that dominate the Calgary market, two are nary to be seen, and one is sidelined to competition issues. Are the nationals finally making in-roads, or was it just a freak pension fund thing?
4. Couche-Tard’s Acquisition of Circle K. It’s the story of the little depanneur that could—and did. Alimentation Couche-Tard Inc. started life as one convenience store in the Montreal suburb of Laval. It went public in 1986 with 86 stores. Fast-forward to October 2003, when the 2,575-store company announced it was buying the Circle K Corp. chain from Conoco-Philips for US$830 million (Can$1.12 billion), growing to 4,630 stores. Hearts in Quebec are, as one would expect, a-pounding.
“It has sizzle,” says Maryse Bertrand, a senior corporate partner with Davies Ward in Montreal. The firm has continued to represent Couche-Tard, a relationship that goes almost as far back as the company. “They went from a little depanneur in Laval to four thousand stores, these French Canadian guys taking over a U.S. company and becoming the fourth-largest convenience store retailer in North America.” Like the Manulife/Hancock deal, it’s a cross-border transaction in which a home-grown company is spreading its wings, and keeping headquarters in Canada. Better yet, it’s growing because it wants to, not in desperation or to preclude an unwelcome takeover.
So, it’s a good news story all the way—with, perhaps, one little smear. Couche-Tard was so determined to buy Circle K it financed the deal up front. While unusual, such a proceeding is certainly not unheard of. Most of the deal will be debt-financed in the usual way, but Couche-Tard also raised some $223 million of equity by selling class B subordinate voting shares through “private placement to a select group of shareholders.” And the unselected shareholders are not pleased, and exploring different ways of sharing this displeasure with Couche-Tard.
The really good news: Davies Ward Phillips & Vineberg is working the deal for Couche-Tard on both sides of the border. The not-so-good news? At press Circle K hasn’t bothered to retain Canadian counsel.
5. Yellow Pages Income Fund IPO. In a depressed M&A market in which lawyers were forgetting how to draft IPOs, U.S.-based Kohlberg Kravis Roberts & Co. (KKR) and partners monetized Teledirect International Inc.’s Yellow Pages asset, which they had acquired less than a year ago from Bell Canada Enterprises (BCE) and made out like bandits. The IPO was tenfold oversubscribed, gross proceeds exceeded $1 billion, and the debt-plus-equity value was $4.5 billion. The transaction was the largest IPO of the year, the largest Canadian IPO in three years, and the largest IPO ever for a Canadian income fund. And, it was done at the speed of light: less than six weeks to convert the Yellow Pages Group into an income trust and prep the IPO.
“Numerous income funds have gone to market in place of more traditional initial public offerings for which there has been no effective market for a couple of years,” says Peter Jewett, a senior corporate partner at Torys. The Yellow Pages IPO represents this trend, and stands outside it as the most successful. And, to some lawyers, it suggests the resurrection of the traditional IPO may be just around the corner. “It sent a clear message that with a quality asset you can do a successful IPO, even in this market,” says Raymond. “An IPO of an income fund is a tax assisted IPO. The structure has helped the transaction by a number of percentage points. But nonetheless, the transaction shows there’s room for quality IPOs.”
Neat trivia: Goodmans was retained by Yellow Pages Group Co. as underwriters’ counsel a month before the underwriters were appointed.
6. Great-West’s Acquisition of Canada Life. “Canada Life was road kill, waiting to be picked up,” says one Toronto lawyer of the $7.3 billion acquisition of Canada Life by Great-West Lifeco Inc. But it was road kill in the financial services sector, which, with Canadian bank mergers still in a holding pattern, makes it big news with most Canadian lawyers. “The deal reflected consolidation of the industry, and its ability to do deals that the banks could not do,” says Jeffery Barnes. It resurrected the spectra of bank mergers—several analysts (and lawyers) expect to see a Canadian bank merger, if not before the end of 2004, definitely by 2005.
The deal, along with the bigger and cross-border Manulife/Hancock deal, also suggested the rules on consolidation in financial services may not be written by banks. “With these deals, suddenly, the insurance companies are very much a part of that game. A bank/insurance company merger is certainly a possibility,” says Jewett at Torys. Great-West is now the largest life insurance company in Canada—a major player by any standard, the Manulife/Hancock merger notwithstanding. “Financial services are consolidating globally. We’re clearly going to see more mergers, domestically and internationally,” continues Jewett.
Additionally, the Canada Life takeover started life as a hostile bid by Manulife, and, as Garth Girvan, a senior partner with McCarthy Tétrault’s corporate finance and M&A group in Toronto, says, “Hostile bids are always interesting.” (And profitable) Plus, as a Toronto investment banker points out, it was a Canadian deal involving Canadian advisors—something that, in 2003, appeared to be an endangered species.
7. AT&T Canada Restructuring. It took AT&T Canada Inc. less than six months to emerge from CCAA protection as the debt-free Allstream Inc., its freely tradeable shares listed on the TSX and NASDAQ. As part of the transaction, Brascan Corporation. and CIBC Capital Partners bought AT&T Canada for $5.6 billion. But the really neat thing about this transaction is that erstwhile parent AT&T Corp. had to shell out $5.5 billion for the shares of its practically worthless former child, as a result of a deposit receipts agreement drafted in March 1999 when AT&T was looking to buy MetroNet Communications Corp. Regulation restrictions prevented AT&T from buying MetroNet, and the agreement provided for a future sale of the MetroNet sales—at an agreed value. Don Gilchrist at Oslers drafted the agreement in about a week, “and its guts were completely redrafted in the last 12 hours,” recalls partner Terrence Burgoyne, who was co-ordinating the MetroNet team at Oslers in the final week of the transaction.
In 2003, MetroNet and AT&T Canada, which combined in 2002, were valued at, well, nothing. But, according to the 1999 deposit receipts agreement, explains Burgoyne, “AT&T Corp. had this obligation to buy the shares or make whole at the earlier agreed price. Ultimately, AT&T paid $5.5 billion for the shares of a company that filed under the CCAA a week later. It says something about AT&T that it did that—it says a good deal about how honourable a corporation AT&T is that they lived up to their obligations under these circumstances.”
AT&T was simply accepting the inevitable—Gilchrist’s agreement was inviolate. According to one U.S. investment banker, “That agreement was walked up and down to every law firm on Wall Street, and no one could dent it.”
“Oslers did a nice job on it,” comments James Riley, referring to both the 1999 agreement and the subsequent restructuring. “All the telcos tended to have a lot of cash and a lot of debt. That was true of AT&T Canada, and they paid the banks in full and converted their remaining debt into equity.” Ogilvy Renault represented the banks in the deal, which was the biggest restructuring this year in a beleaguered industry.
8. Bombardier’s Sale of its Recreational Products Division. “In Quebec, every kid either owned a skidoo or wanted one,” says Norman Steinberg, and the name Bombardier continues to be synonymous with winter sports, not airplanes. Bombardier Inc.’s recreation products business was a “marquee asset”, a legacy of Quebec Inc., and a cultural institution. Its $1.225 billion sale to a consortium consisting of Bain Capital, LLC, the Bombardier/Beaudoin families, and (who else?) Caisse de dépôt et placement du Québec, ensured the legacy stayed, at least partly, in Québec hands. (Bain Capital, of course, is a U.S.-based player).
The deal also showed the metier of CEO Paul Tellier, who clearly was not going to let sentiment stand in the way of Bombardier’s transformation. What with this sale, its April public offering of $1.2 billion in common shares, and its other streamlining measures, Bombardier has spent 2003 effectively restructuring without resorting to the CCAA.
“Bombardier was in a difficult situation, and they executed successfully in several directions to re-stabilize company,” says Robert Paré at Fasken Martineau. The deal attracted a lot of attention nationally, but it was in Montreal that it hit closest to heart. Says Pierre Raymond, “It’s history that’s being sold here.”
Fun fact: It was Bain Capital who first looked at acquisition in June 2003, teaming up with the Caisse and the Beaudoin family at the end of the summer. Bain owns 50 per cent of the division.
9. Bruce Power L.P. In the vendor’s corner: the insolvent British Energy PLC, selling because it had to, it’s every action scrutinized by the British government. In the buyer’s corner: a consortium of purchasers with virtually nothing in common. At stake: a lease of Ontario’s largest independent power generator from Ontario Power Generation Inc., owned by the Government of Ontario. The added complication: a price cap on electricity for consumers and small users introduced by the government in the middle of the deal, totally changing the economics of the deal and requiring a renegotiation of price.
“It’s certainly one of the five most difficult deals I’ve ever done,” says Donald Ross, a partner with Oslers in Toronto, who represented the consortium of purchasers, which included Cameco Corporation, BPC Generation Infrastructure Trust (established by the Ontario Municipal Employees Retirement Systems (OMERS)), and TransCanada PipeLines Limited. In addition to sorting out the different objectives of the purchasers and making them one, there was the strained financial position of the vendor to contend with, and a deregulation-gone-bad debate in the province that subsequently led to a reversal in Ontario’s deregulation policy and contributed to a change in the Province’s government. Add to the equation several brown-outs and the “Great Ontario Blackout” that practically shut down Toronto and environs in mid-August, and Bruce Power is definitely one of the deals that have defined 2003.
In the crystal ball: “It’ll be at least a year before we see another similar infrastructure deal in Ontario,” predicts Jeffery Barnes at Fraser Milner. Most observers agree that in the current political climate in Ontario (“Deregulation bad! Stay away!”) even this deal wouldn’t have happened if British Energy hadn’t been utterly broke.
10. CINAR Sale. Finally, winning hands down in the category of “we’ve got to close this deal before...”, is the US$143.9 million sale of beleaguered CINAR Corporation to an investor group consisting of Michael Hirsch, Toper Taylor and TD Capital Canadian Private Equity Partners. CINAR had been on the auction block for more than two years, after fraud charges and financial scandals almost put the company out of business.
Tiny compared to Manulife, in a non-mainstream industry, CINAR is nonetheless the leading candidate for the most complicated deal of the year...if it manages to close in 2003. At press, shareholders were to vote on the deal on December 11. “I don’t know if we’ll be able to paper the deal in time,” says Jonathan Levin, who’s leading the team at Faskens that’s representing TD Capital. Lawyers have had to prepare dozens of confidentiality agreements as part of the transaction, and US$1.2 million of the sale prices will be held in escrow pending arbitration of company founders Micheline Charest and Ronald Weinberg’s ability to execute 840,000 stock options. (Charest and Weinberg have been barred from any involvement in CINAR by the Quebec Securities Commission.)
An added complication: Hirsch is the founder and former CEO of Nelvana Ltd., while Taylor once headed Nelvana’s sales and development office in Los Angeles. The company was bought by Corus Entertainment Corp. in 2000, who retained Hirsch as a consultant even after he stepped down as Nelvana’s CEO, and with whom Hirsch had signed a non-competition clause. Oops. Corus wasn’t exactly supportive of Hirsh’s new venture. (“We are extremely disappointed that Michael has chosen to end his relationship with Corus and pursue the acquisition of CINAR….” reads an internal memo, reported in the National Post.) Hirsch’s lawyers had to work fast to get him out of hot water, but, fortunately, money (an undisclosed amount) does fix most problems.
Part 2: The New Normal—Hard Decisions
“We will never see a year like 2000,” says Clay Horner at Oslers in Toronto. Most of his colleagues agree. Part of the “blah” factor in 2003 is the result of the legal profession (and the business world in general) adjusting from the merger-mania of 1998 to 2001 to the “new normal”. It’s a tough switch to make. “We aren’t sure if we’re back to normal, if this is normal, and we’ve gone through the deal cycle of a lifetime, which will never be repeated,” says Stephen Halperin at Goodmans. Barnes preaches tough love: “M&A is coming back, but it’s not blockbusters, it’s the middle. M&A is back, but it’s not at the 1998, 1999 levels, and it won’t be.”
Neither will IPOs. “Equity markets are not playing the role they used to play, and I don’t see them coming back to the level of accessibility they used to have,” explains Paré. “It’s not necessarily a matter of whether the investors are back. Rather, it’s a question of a higher burden in accessing the markets stemming from all the new governance rules, which place a significant weight on being a public issuer and an additional hurdle companies have to consider. Also, there is the added cost of auditing books, which is going up and up.”
Robert Paré believes public markets will come back to their usual role with the bigger issuers, but the small and mid-sized fry will continue to stay away. “The flip side is that the private equity pool is more vibrant. More companies are staying private longer, and exiting differently.... We should see more privatizations as well.” The onerous regulatory framework surrounding reprivatization issues is likely to provide lawyers with a lot of challenging work.
A number of companies turned their backs on the public markets in 2003, notably DuPont Canada, which was taken private when Delaware-based parent E.I. du Pont de Nemours and Co. bought out the subsidiary’s minority shareholders. The $1.46 billion DuPont deal leaves only three large cap stocks on the TSX controlled by foreign shareholders—Shell Canada Limited, Sears Canada Inc. and Imperial Oil Ltd. On the domestic front, the Phelan family is attempting to take food retailer Cara Operations private. In the oil patch, too, start-ups and juniors have been staying private.
Therefore, the new “normal”, means more privatizations, fewer IPOs, and a slower path to deals.
It also means more variety. While M&As were down, says J-P. Bisnaire at Davies Ward in Toronto, “There is a fair bit of private acquisition work, securitization has been very strong. Corporate finance—income trusts have been keeping us very busy. We get more than fair share of structured projects. Bankruptcies and restructurings are taking up a lot of time, and of course litigation.” Perry Spitznagel, head of the public market group at Bennett Jones, describes the new normal as a “potpourri” of work interspersed with large deals but full of smaller offerings and smaller transactions.
A deal that forms the bridge between the mega-mergers and smaller deals in what Spitznagel calls “the oil patch’s transition year” is the McKenzie Valley Pipeline Project, a unique and innovative partnership between the Aboriginal Pipeline Group—a very non-traditional Bennett Jones client—and a consortium of big players, which includes ConocoPhillips Canada, Exxon Mobil Corporation, Imperial Oil Resources, Shell Canada Limited and TransCanada. (Calgary’s Macleod Dixon LLP is project counsel; the Calgary office of McCarthy Tétrault is representing TCPL.) “It’s the little engine that could,” says Martin Lambert, a senior corporate partner with Bennett Jones.
Mega-mergers are cool. But the mid-sized and smaller deals that used to be the standard before the bubble, and which will be the standard again in the new normal, can be more fun. “These little deals are harder than the bigger ones. A $3.6 billion Conoco-Gulf merger is not that tough. It’s not nearly as tough as when a client says we have a little entity with no money but big aspirations. That’s tough,” says Lambert. He compares acting on the big deals to soaring over the jungle in a corporate jet equipped with the attendant luxuries and resources. Acting for the ambitious new juniors in the oil patch, he says, “is like clawing your way through the savanna with a knife in your teeth.”
Tough. But more fun than a trust conversion. “It’s been the year of the trust conversion,” says Grant Zawalsky, a senior M&A partner with Burnet, Duckworth & Palmer LLP. The biggest of these, in Calgary, was the $1.25 billion reorganization of Bonavista Petroleum Ltd. into Bonavista Energy Trust and NuVista Energy Ltd. “Bonavista was the most successful intermediate oil and gas company remaining, and even as a best performer, it could not compete with the trusts. Its conversion signalled the end of the intermediates as we know them,” says Zawalsky.
Trust conversions and income fund IPOs kept the pipeline flowing through much of the year at most Calgary law firms. Macleod Dixon did five trust conversions in 2003, one of the most notable of which was the $170 million IPO and $150 million bank financing of KeySpan Facilities Income Fund. Additionally, it’s been the trusts that have been buying, such as Provident Energy Trust’s $282 million for the Redwater NGL processing business from Williams Canada.
Lawyers in Toronto have been beholden to the trusts as well. (Weird ones, at that. Freezers? Buslines? The folks in Calgary who developed the concept for oil and gas clients are shaking their heads.) “Income trusts have been a godsend to us,” admits Stephen Halperin at Goodmans. It’s the trusts that have been doing IPOs, such as the recent $222 million IPO by Goodmans client Borealis Retail REIT (an arm of OMERS). More funds are expected to follow suit and monetize their non-core portfolio.
“Some of the biggest deals this year have been income trusts,” agrees Horner. But they leave him cold. “They’re boring,” he confesses, and many of the leading dealmakers agree. Says one lawyer off the record, “You just have to look at the lawyers involved and you’ll realize they’re not the best people at the firms. It’s not hard stuff. It’s not comparable to M&A. It’s barely real corporate finance.”
But it’s what’s been paying the bills because in the new normal. safety’s king. “In 1998, if it was a bad deal, the market would cover you,” explains Barnes. Today, it will punish you. As a result, despite the upturn in M&A activity, the trend of the deal-that-couldn’t continues. “The pipeline is in reasonable shape, people are looking at deals, but deals have a higher probability of not getting done,” says Barnes. Adds Halperin, “CEOs don’t see compelling reasons to grow through deals.” “There have been a lot of aborted deals, and that’s certainly a first for me,” agrees Maryse Bertrand. “There was an income trust acquisition we were working on that didn’t happen, and we held an auction, and no one came to the party.”
The deals that are getting done are taking longer. “Due diligence is stretched out. There is heightened concern regarding financial statements,” explains Halperin. Moreover, in 2003 most of the deals that got done most were of the sort that “had” to happen—they were dictated by necessity. Vendors, like Bombardier and British Energy, had to sell. Purchasers, like RONA inc. in its $350 million acquisition of Réno-Dépôt stores from Kingfisher in Quebec, had to get bigger or get out. On most of the deals they worked in 2003, lawyers had to roll up their sleeves, grit their teeth, and get a little dirty.
Scratch the surface of many deals on Lexpert’s Top 10 deals list, and you get a distressed company. Scratch that company, and you get a hairy backstory accompanied by litigation, scandal, mismanagement, or financial woes.
It’s not the restructurings that make it so. Air Canada, AT&T, Laidlaw, and the $800 million restructuring of Saskatchewan Wheat Pool are just the tip of the depressing iceberg. Even the wildly successful Yellow Pages Income Fund IPO has its roots in a distressed company—the Yellow Pages asset was monetized by BCE in late 2002 because it was distressed and BCE is still embroiled in related litigation.
But at least it’s not in CCAA protection. Yet. “In the telecommunications industry, other than incumbent Bell in the East and Telus in the West, virtually every competitor that tried to compete with the incumbents has had to go through a restructuring,” says Halperin. “You can probably drop the ‘virtually’,” he adds. And things haven’t been rosy at either Bell or Telus, the last of which, although it has not used the “R” word, has taken deliberate steps to tighten its belt. Nortel Networks Limited, too, saw its stock go under a buck, but it managed to successfully refinance its existing debt, and saw its stock go back up to $6 and change, without having to resort to a formal restructuring process.
“It’s interesting the number of deals that were restructurings without formal proceedings,” comments Riley. “It’s indicative of how much more mature we are—we now understand these proceedings are value-destructive.” Telus and Nortel are both clear examples, as is Bombardier. Its 2003 division divestiture was clearly part of its let’s-stay-out-of-CCAA overhaul. “Hopefully, the company is taking measures before the crunch comes,” says Pierre Raymond.
British Energy wasn’t so lucky, and the Bruce Power transaction took place because the vendor was in difficulty and had to sell its interest lease. “The only reason it got done in the current political climate is it had to be done given the financial position of British Energy,” comments Barnes. But that’s par for the course for 2003.
Many deals were driven by the need to consolidate domestically in industries in which the only competition that mattered was international—and cut-throat. Great-West and Manulife’s fight for Canada Life was one such example, and continental industry consolidation was the driver behind the sequential Moore-Wallace and Moore-Donnelley deals. Competition from international renovation retailers such as the Home Depot, drove the RONA/Réno-Dépôt deal.
Notably, the Canada’s Competition Bureau appeared to recognize the international pressures on RONA. “There were concerns whether the Competition Bureau would approve it,” says Raymond whose firm, Stikeman Elliott, acted for the vendor Kingfisher. “By allowing this transaction to go forward, the Bureau allowed a Canadian player to grow to a size necessary to be competitive internationally.”
Fording’s five-way-love-in solution to what started as a hostile bid is a prime example of necessity being the mother of co-operation. The various participants ultimately understood they all needed to get together to effectively take on the Aussies on the international coal market. “The bulk of Canadian coal is exported, and the driving goal was to make the coal industry more internationally competitive,” explains Peter Jewett. “Ultimately, all the parties sat down and said, look, it makes sense for all of us to be involved. Instead of setting it up for two major players, let’s rationalize the industry.”
In a year definitely not for the squeamish, it didn’t get much hairier than CINAR. The day before the sale was announced, Bay Street was rife with rumours that the RCMP had warrants out for Charest and Weinberg (it was just a rumour). The unfortunate founders of CINAR had other worries. The company had already paid $18 million in a negotiated settlement with the Quebec and federal governments to settle a dispute over fraudulent tax credit claims. Banned by the QSC from actively participating in CINAR, the founders were frustrated with the slow auction process. They tried to fire Robert Després, current CINAR chairman, and the man they previously hired as trustee of their majority stake in CINAR. (He wouldn’t quit, they sued—all while negotiations were ongoing.) The sale of CINAR to Hirsch and partners drove a wedge between the new CINAR proprietor and his former colleagues at Nelvana and Corus. If Air Canada is a saga, CINAR is in a league of its own.
CINAR’s additional claim to fame in 2003 is its domestic nature—it’s a Canadian company being bought by Canadian investors, with financing from Canadian banks. In 2003 deals as Canadian as CINAR and Great-West/Canada Life were thin on the ground.
Between the strong loonie and weak U.S. dollar, 2003 was the year in which Canadian companies redefined the meaning of “cross-border deal” and raised the interesting question—what makes a Canadian deal really Canadian? Especially from the legal profession’s somewhat mercenary view point?
“The definition of cross-border deals has been reversed,” says Stephen Halperin. “This year there is a whole long list of Canadian companies going outside of Canada, showing that Canadian companies really quickly run out of room to grow in Canada.” Alcan, Manulife, Couche-Tard, Maple Leaf Foods Inc., and however briefly, Moore Corporation Limited, have acquired foreign targets, grown substantially in competitive stature, and kept headquarters in Canada. “But is this good news for Canadian lawyers?” asks Halperin. He’s not sure.
Take two of the biggest deals of the year—Manulife/Hancock, twice the size of anything else going, and Montreal-based Alcan Inc.’s $6.25 billion bid for France’s Pechiney. Each of the buyers is Canadian. Each of the parties has retained Canadian counsel. But most of the legal work is taking place in foreign jurisdictions. “The number of hours Simpson Thacher & Bartlett LLP, Manulife’s U.S. counsel, will bill compared to all the Canadian law firms involved put together will be 500:1,” says Clay Horner. Indeed, a couple of the dealmakers Lexpert spoke with strongly questioned the appropriateness of showcasing either Manulife or Alcan as deals of the year for that very reason.
It’s a valid concern. From the purist’s point of view, Alcan and Manulife aren’t really Canadian deals—they may look good for a firm’s PR, but they don’t substantially contribute to the bottom line (i.e., billable hours and revenue). As one Toronto lawyer puts it, “We’re Canadian counsel to (one of the parties in these Canadian-content-lite deals). Big deal, whoop-dee-doo.” The Canadian lawyer doing the most work on each deal is the buyer’s in-house counsel—David McAusland at Alcan and Dale Scott at Manulife. These deals underscore the growing importance of corporate counsel. Says Horner, “They show how important in-house counsel can be, organizing armies of international lawyers.”
It doesn’t have to be that way. When Montreal-based convenience store retailer Couche-Tard decided to really spread its wings into the U.S. and snap up Circle K, it retained Davies Ward as its counsel. Period. No U.S. counterpart to share the glory (and the cash). And, in the US$1.3 billion sale by General Motors Corporation of its defence business to General Dynamics Corporation, Canadian lawyers did most of the work on both sides. “It’s significant for that reason, because a big U.S. company allowed Canadian lawyers to run the deal,” says Horner.
But it does happen. Peter Mendell of Davies Ward in Montreal recently closed an Australian $330 million (£135 million) transaction in which the only Canadian content was Davies Ward. The client, Amcor Limited, is an Australian company. The seller, Rexam PLC, was a London-based company. The division purchased had plants in the U.S., England, Ireland, France, Singapore, Puerto Rico and Brazil. Was it a Canadian deal? No. But it generated proportionately more work for Canadian lawyers than Alcan/Pechiney or Manulife/Hancock will.
Determining what makes a Canadian deal Canadian is becoming increasingly academic in the new economy. The year’s most exciting, “good news” deals—Manulife and Couche-Tard—are cross-border takeovers. The massive restructuring of Canada’s national airline is crawling with foreign players—it’s U.S. and Hong Kong money that’s bailing out the airline. Laidlaw was more of a U.S. reorganization with a Canadian component than a Canadian one with a U.S. component, regardless of Laidlaw’s Ontario origin. Bombardier’s “legacy asset” is now 50 per cent U.S. owned. Aggressive U.S. M&A player KKR is making money off BCE’s former golden goose. The list goes on. “It’s hard to do a significant deal without U.S., or other foreign, involvement,” agrees Peter Jewett at Torys. Disappearing borders? You bet.
Borders were already starting to disappear when Paul Reichmann’s development company, Olympia & York, built Canary Wharf in the 1980s. They were rapidly dissolving when O&Y went down in what remains one of Canada’s most spectacular bankruptcies, more than a decade ago. In 1995, Reichmann led a group of investors that bought back the development, and took it public in 1999.
Reichmann is now Canary Wharf’s chairman and minority shareholder, and he wants Canary Wharf back. Also in play are Brascan Corp. and a consortium led by Morgan Stanley. At press, Canary Wharf is still up for grabs, and the winning bid is expected to exceed $3.3 billion (£1.58 billion to £1.64 billion). It’s particularly appropriate that Canary Wharf should be in play, again, and that its builder would be at the centre of the battle in 2003—the year sins, desires and actions of the past came home to roost.
For Marvin Yontef at Stikeman Elliott, “The real saga at Air Canada starts with the September 11 [2001] disaster.” Other observers and participants go further back, to the ill-omened 1999 merger with Canadian, or even to the airline’s cushy days as a Crown corporation (you don’t lose those civil servant habits overnight—or, apparently, over a decade).
Air Canada is the most dramatic example, but many of the year’s deals had a long shelf-life. Manulife’s acquisition of Hancock came after a failed bid for domestic rival Canada Life, not to mention Ottawa’s unilateral squashing of its earlier flirtation with CIBC. Hancock itself was on the rebound from failed merger talks with Fleet Boston. Canada Life had a “bull’s-eye” on it because of the 2001 change in regulations over the Canadian insurance industry, and, after Sun Life Financial Inc. paired up with Clarica Life Insurance Company, was odd man out, there for the taking.
The battle for Fording Coal comprised the final chapter in the consolidation of Canada’s coal energy, which had started in 1997, when Luscar acquired Manalta, to be in turn devoured by Sherritt in 2001. In the AT&T Canada restructuring, AT&T Corp. shelled out more than $5 billion for the shares of a worthless company as a result of a 1999 agreement (again, way to go, Gilchrist). Bombardier’s sale took it all the way back to its founders. CINAR was on the auction block for two years.
Two deals with a particularly interesting backstory are Alcan’s bid for Pechney and Maple Leaf’s acquisition of Schneider Corporation from Smithfield Foods, Inc., both of which have more than a touch of déjà vu about them. “Maple Leaf has been on a six-year quest to acquire this rival,” notes Halperin, who represented Schneider when it sold to Smithfield. “It is evidently interesting that Smithfield came to Maple Leaf some years later and said, this business is worth more to you than to us,” muses Don Ross at Oslers, who represented Maple Leaf in both deals.
Alcan had tried to acquire Pechney in 1999 at the same time it was picking up Switzerland’s Alusuisse, and it walked away from the Pechney part of the equation as a result of the EU’s competition concerns. Alcan’s second go at Pechney, through a hostile bid across borders, illustrates how badly the company wants to be the world’s biggest publicly traded aluminum company.
But it’s likely that Air Canada will take us full circle, coming back to dominate headlines and legal workloads with a second restructuring before too long. The reorganization required to turn Air Canada into a competitive international air carrier is enormous and, even if there was the will to do it “all at once”, the operation would probably kill the patient. Between a company culture still mired with Crown corporation baggage and labour agreements that will never give it the flexibility the airline needs, Air Canada is poised for a restructuring encore even before it emerges from 2003’s CCAA protection.
Busy taking its lessons from Wal-Mart and Southwest Airlines—and implementing them poorly—Air Canada should perhaps take a look at the example of Continental Airlines, which had at one time earned itself the moniker “the world’s worst airline.” In 1994, Continental was nose-diving into yet another bankruptcy. “There’s not much time to think when your company’s failing,” Greg Brenneman, turnaround specialist, President and Chief Operating Officer of Continental from May 1995 to May 2001, writes in The Harvard Business Review. “Saving Continental wasn’t brain surgery.... In Continental’s case, we simply needed to fly to places where people wanted to go, when they wanted to go, in clean attractive airplanes, get them there on time with their bags, and serve food at mealtimes. The tough part…was getting all that done fast, right away, and all at once.”
“We gave the patient little or no anesthesia, and it hurt like hell. Then again, the patient is cured now, right?” continues Brenneman. The lessons of the mid-1990s turnaround stayed with Continental during 9/11. The airline furloughed 12,000 employees, stopped flying to 10 cities, and reduced its flight schedule by 20 per cent, within days of the disaster. Before the end of the month, the company’s chairman and president elected to forego all compensation for the remainder of the year. Post 9/11, the airline was posting losses, but they were not as dramatic as those of other airlines—and not nearly in the same league as Air Canada’s. “We remain focused on being a long-term survivor by further reducing our costs to achieve breakeven position in 2004,” says Gordon Bethune, Continental chairman and CEO.
But for all its problems, past and present, Continental had never been a Crown corporation, and that may have been its saving grace. Air Canada—and the nation—both believe that if push comes to shove, Ottawa will step in and save it. That attitude keeps it from making the tough decisions that are the hallmark of Laidlaw, AT&T, and even SaskWheat. One of Brenneman’s pulling out-of-a-nosedive lessons: “Clean house. The same team that leads a company into crisis is rarely able to get it back on track. The hard news about a turnaround is that you have no choice but to sweep out the old to make way for the new.” Yet part of Air Canada’s turn-around plan right now is to ensure CEO Robert Milton stays—and becomes a multimillionaire in the process.
Lawyer(s)
James A. Riley
Jeff Barnes
Stephen H. Halperin
Sidney M. Horn
James R. Christie
Derrick C. Tay
Jon Levin
Calin Rovinescu
Patrick J. Brennan
Jay A. Swartz
John T. Evans
Brian M. Levitt
Pierre A. Raymond
Pierre-André Themens
Norman M. Steinberg
Pat C. Finnerty
Maryse Bertrand
Peter E.S. Jewett
Garth (Gary) M. Girvan
Terrence R. Burgoyne
J-P. Bisnaire
Perry Spitznagel
Grant A. Zawalsky
David L. McAusland
Peter Mendell
Donald J. Ross
Firm(s)
AT&T Canada
Dentons Canada LLP
Laidlaw Inc.
Norton Rose Fulbright Canada LLP
Goodmans LLP
Stikeman Elliott LLP
Yellow Pages Income Fund
Pengrowth Energy Corporation
Manulife Financial
John Hancock Life Insurance Company
Onex Corporation
Blake, Cassels & Graydon LLP
Osler, Hoskin & Harcourt LLP
Cerberus Capital Management, LP
Cerberus Capital Management, LP
Norton Rose Fulbright Canada LLP
Fasken Martineau DuMoulin LLP
Bennett Jones LLP
Davies Ward Phillips & Vineberg LLP
Freshfields Bruckhaus Deringer LLP
Export Development Canada
Canada Life Financial Corporation
Sherritt Coal Partnership II
Ontario Teachers' Pension Plan Board
Westshore Terminals Income Fund
Teck Resources Limited
Lawson Lundell LLP
Lawson Lundell LLP
CONSOL Energy Inc.
Kohlberg Kravis Roberts & Co.
Torys LLP
MetroNet Communications Corp.
Bombardier Inc. - Corporate Office
British Energy plc
Ontario Power Generation Inc.
Cookie Jar Entertainment Inc.
E.I. du Pont Canada Company
E.I. DuPont De Nemours
ConocoPhillips Canada Resources Corp.