Go with the (capital) flow in cross-border M&A

Global mergers and acquisitions increased substantially in 2015, with the total value of deals well surpassing US$3 trillion. In this period of international growth, Canadian M&A experienced an overall decline in aggregate value. This occurred alongside significant growth in outbound investments, with Canadian deal-makers seeking high quality opportunities around the world.

In 2016, we expect Canadian buyers to follow the flow of capital, both abroad and at home.

We expect domestic buyers will continue to be active in large-scale acquisitions in foreign markets. Additionally, we believe investors will look to capitalize on domestic opportunities emerging from recent weakness in the Canadian economy.

Growing outbound M&A activity

Deals involving domestic buyers and foreign targets dominated Canadian M&A trends in 2015. This year, M&A activity in excess of $96 billion involved outbound deals. Examples included Canada Pension Plan Investment Board’s $14.8 billion buy of Antares Capital, a U.S.-based mid-market sponsored lending unit, from GE Capital; and Borealis Infrastructure’s $8.9 billion buy of Sweden’s Fortum.

Canadian institutional investors and private equity firms have been the principal drivers of the growth in outbound activity.

Some of this year’s largest deals involved a financial sponsor or investor. A number of Canada’s largest pension funds, Onex Corp and Brookfield Asset Management were all actively engaged in foreign M&A deals in 2015.

In addition to the CPPIB and Borealis acquisitions, notable examples included CPPIB’s co-sponsorship of the $6.7 billion buy of U.S.-based Informatica; the Caisse de dépôt’s et placement du Québec‘s US$1.1 billion buy with Hermes Infrastructure of a stake in Eurostar; and the joint acquisition by OMERS Private Equity and AIMCo of U.K.-based Environmental Resources Management for US$1.7 billion.

Another major transaction, RBC’s US$3.2 billion acquisition of City National, showed that the trend was not limited to PE industry players. However, we expect that Canadian pension funds and PE firms will continue to dominate outbound M&A deal-making in the months ahead.

Domestic revival

The total value of deals involving a Canadian target fell to $46 billion in 2015 from $160 billion the year before. We expect this decline in M&A activity in Canada will not last; instead, macroeconomic factors will likely create more favourable opportunities for deal-making by both foreign and domestic strategic buyers in 2016.

Current market conditions have forced some Canadian businesses to consider divestitures of non-core assets to improve balance sheets. We have also seen distressed M&A opportunities developing, particularly in the oil and gas, mining and retail sectors.

Competitors with strong balance sheets and access to financing are well positioned to take advantage of these opportunities. This was well illustrated in 2015 by Crescent Point’s $1.5 billion buy of Legacy Oil + Gas.

A relatively weak Canadian dollar is likely to drive an increase in inbound acquisitions of Canadian targets by foreign buyers. American companies in particular, given moderate returns at home and a strong U.S. dollar, will be encouraged to look to foreign markets, including Canada.

Rules change on the horizon

As foreign investors turn their focus to Canada, they should expect M&A targets to wield more leverage than in the past in deal negotiations. Canadian takeover bid rules are changing to empower boards and redefine bid dynamics between targets and hostile bidders.

Under Canada’s proposed new takeover bid regime, all non-exempt takeover bids will have to stay open for acceptance for a minimum duration of 120 days (subject to a target board’s ability to shorten the timeframe to as little as 35 days in certain cases).

The proposed rules will also allow a hostile bidder to shorten its bid period if the target enters into a white knight transaction.

Energy: a sector to watch

Despite a significant decline in the number of energy-related M&A deals in 2015, due to weak industry fundamentals, the value of activity remained relatively high. That’s because both strategic and financial buyers looked to take advantage of discounted assets, a trend that appears to be set to increase in the year ahead.

Some of the largest domestic M&A deals in 2015 were in the energy sector. They included Cenovus Energy’s sale of its interest in Heritage Royalty to Ontario Teachers’ Pension Plan for $3.3 billion; Apache’s sale of Quadrant Energy to Brookfield Asset Management and Macquarie Capital for $2.6 billion; and the previously mentioned Crescent-Legacy deal.

With continuing depressed commodity prices in the year ahead, more divestitures of attractively priced assets will drive greater M&A activity in oil and gas.

Conclusion

To sum up: Canadian investors show no sign of slowing their activity in global M&A deal-making in 2016. Additionally, with consolidation in the domestic energy sector, there will be opportunities for both investors and strategic buyers to deploy more capital in Canada. We anticipate that growth, both in outbound deals and in renewed vigour on the domestic front, will define trends over the next 12 months.

The original version of this story (including charts) is found in Torys LLP’s M&A Top Trends 2016 report.

Jared Fontaine, a partner in Torys’ corporate transactional law practice, wrote this article in collaboration with Ian Arellano, co-head of the firm’s international initiative and a partner in its capital markets practice, and Neville Jugnauth, a partner focused on private equity, corporate finance and M&A transactions. Fontaine is based in New York, Arellano in Toronto, and Jugnauth in Calgary.

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