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All the ingredients for a big year in deals are here.
Financing is cheap, corporate bank accounts are brimming, confidence is on the rise and so are stock markets. Already, 2013 has seen takeover bids such as the planned buyouts of Dell Inc. and H.J. Heinz Co., deals that top $20-billion apiece.
Whether Canada can keep up with what may be the beginnings of another global surge in mergers depends on whether this country has what the world wants. Over the past few years, it has, and then some. Canadian resource plays have attracted international attention, and Canada has punched above its weight in generating fees for bankers and lawyers. Deals last year such as the takeovers of Nexen Inc. and Progress Energy made Canada the second-biggest source of deal fees in the world, and building on that strength at home, the large Canadian securities firms have been moving up the rankings of the world’s investment banks.
However, looking at 2013, some of the sectors that were driving Canada’s outperformance have gone from hot to not.
“It’s going to be a good year but not nearly as good as the American M&A year will be, which could be really good,” said Clay Horner, an M&A specialist at the law firm Osler Hoskin & Harcourt LLP.
Significant oil sands deals are tougher to do in the wake of new government regulations. Miners are largely healing self-inflicted wounds from overpriced acquisitions of years past. The areas that are busy in M&A are simply not as big in Canada as mining and energy, or, like financial services and telecommunications, face regulatory barriers.
“Activity should pick up in industrials, financial services, real estate and consumer and retail,” said Darryl White, head of global investment banking at Bank of Montreal’s capital markets unit. “There are stable, supportive trends in each of these.”
There are some other impediments, including recalcitrant targets. In that environment, look for more hostile bids and proxy contests.
“It’s still difficult and time-consuming for buyers to really get deals done with target boards,” said Shlomi Feiner, a partner at Blake Cassels & Graydon LLP.
There also remains the spectre of government. The cap on large foreign takeovers in the oil sands has been well accepted by buyers. Still, there is a risk that a blockbuster bid in some other industry could cause the government of Prime Minister Stephen Harper to step in again.
“Harper’s policy begs the question ‘what’s next?’ ” said Phil Evershed, global head of investment banking at Canaccord Genuity.
For all the focus on people buying things in Canada, it’s easy to overlook the fact that purchasers in this country snapped up just as much or more outside the country in many years. Strong Canadian buyers, from pension funds to banks, keep looking abroad for cheap assets. Europe is drawing more eyeballs, even outlying areas that had basically been written off as too troubled.
“There’s an interest in Europe that is starting to percolate, outside even the U.K. and Germany,” said Bruce Rothney, who heads the investment banking business of Barclays in Canada. “People are searching for the next opportunity and taking a little more risk slowly but surely.”
One of the themes with big implications for the securities business is the debate over the so-called great rotation – the notion that money is at last flowing out of bonds into equities. In Canada, so far it is less of a rotation than a simple equalization, with investors willing to consider stocks but also far from giving up on bonds.
“We’ve seen no evidence of that,” said Greg Lawrence, managing director and head of investment-grade debt at Bank of Nova Scotia’s securities unit. “People are still very comfortable with the bond market.”
So comfortable, in fact, that investors are increasingly willing to finance new assets. Miners are selling high-yield bonds, something that would have been mostly unheard of a few years ago, and in recent weeks, more than two dozen investors signed up to buy the bonds of a Canadian wind project. That marked a first for the Canadian bond market.
“The right advice to any debt issuers if they need the money is fill your boots,” said Patrick Meneley, head of investment banking at Toronto-Dominion Bank’s securities arm. One area he expects to be busy is leveraged loans, because they are traditionally floating-rate loans, and that protects against rising rates.
On the equity side, initial public offerings are rebounding. There are numerous IPOs in the works, including the sale by grocery chain Loblaw Cos. of a stake in its real estate, and increasingly confident investors are willing to trade a bit of the yield they have been focused on for growth.
“This is as good a pipeline as we’ve had in years,” said Dan Nowlan, co-head of equity capital markets at the securities arm of Canadian Imperial Bank of Commerce. For Mr. Nowlan, the resumption of the IPO market is a very positive sign.
“That’s the ultimate risk-on trade.”