The decision by Ontario Teachers' Pension Plan to sell its stake in Maple Leaf Sports and Entertainment Ltd. points to a solid rebound in M&A activity in the Canadian private-equity market.
The deep freeze on deal-making imposed by the financial crisis is thawing to the point that sellers are cautiously sticking "for sale" signs on prized assets once again.
It's a trend throughout the market, from mid-sized family-run companies to billion-dollar-plus businesses. Low-interest rates and bolder banks are allowing potential bidders to access relatively cheaper loans, thus enabling them to pay more.
MLSE is one of the few sports-based properties whose purchase bidders could potentially finance with debt, because it's more diversified that most sports companies and also has a solid market position, bank sources said.
Many private-equity buyers have large reserves of available capital. But in today's market they are often outbid by so-called strategic buyers - players within the same industry as the company up for sale - that have amassed significant cash balances while sitting out the recession and are once again looking for growth.
Sources close to Teachers say the fund has received numerous expressions of interest recently for its 66-per-cent stake in MLSE - which owns the Toronto Maples Leafs, Toronto Raptors, Toronto FC soccer team, and the Air Canada Centre. That interest led to Teachers' decision to officially put its stake on the auction block.
Teachers has other motives, including a funding shortfall that stood at $17.1-billion when the pension plan last reported its financial results. But its decision to test the market is being mirrored at businesses across the country.
"Now that the valuations are up, you're seeing a lot more transactional activity, maybe even in the secondary market where one private-equity fund sells to another private-equity fund," said Paul Renaud, chief executive officer of OMERS Private Equity, an arm of the Ontario Municipal Employees Retirement System. He declined to comment on the Teachers sale specifically.
"You'll certainly see more competition on transactions, not only from the financial buyers [such as private-equity firms or hedge funds] but you'll see more strategic buyers as well," he said. In addition to hoards of cash, stronger stock prices are helping public companies make bids.
"In auctioned deals you are seeing pricing higher than what you would normally expect to see at this time in the cycle for quality assets," said Steve Lister, managing partner and co-founder of Toronto-based private-equity fund Imperial Capital. "Strategics are back, but they're more discriminating."
Steve Somerville, president of BMO Capital Corp., said more and more transactions are coming to the market. Bank of Montreal's mid-market M&A group, which advises buyers and sellers on deals with price tags under $100-million, is seeing 65-per-cent more deal flow than 18 months ago.
"The other thing is the stuff that you saw a year ago wasn't as good quality," Mr. Somerville added. "There are better companies that are in the market now … The good deals get a big audience, and it creates a pretty good auction environment for a seller at this stage."
Bank of Nova Scotia quietly created a mid-market group in recent months that will advise on mergers and acquisitions, in order to capitalize on the trend.
Potential sellers had been reluctant to put assets up for sale since the financial crisis of late 2008. "People didn't want to sell at a discount from what they thought they could have got in 2007," said Al Sellery, co-founder of Ironbridge Equity Partners, adding that he's seen more deal flow in the past couple of months than in several years.
Teachers' paid $180-million in 1994 to buy into what became MLSE. It's looking to sell its stake for $1.5-billion, according to sources. At this stage, any future growth the pension plan could reap from its stake is limited and mostly confined to soccer, said one source familiar with the sports and entertainment company.
The company has been investing of late - for instance, partnering with all three levels of government to build BMO Field for a total $69.2-million about four years ago, and paying $5.5-million last year to replace the turf with natural grass and upgrade Allan Lamport Stadium; and partnering up with Cadillac Fairview and Lanterra Developments on the Maple Leaf Square condo project in Toronto. It would be possible for owners to squeeze better returns by curtailing spending, some of which will taper off naturally.
But there are a variety of reasons why a strategic bidder - either in Canada, or elsewhere - might see more value in MLSE. There has been a push recently for telecom companies, for instance, to sew up lucrative deals with the dwindling number of unattached sports franchises in Canada. Sports content offers telecom providers a chance to entice consumers to their wireless, cable and Internet services with exclusive content.
With files from Boyd Erman and Iain Marlow
BY THE NUMBERS
Teachers financing shortfall as of Jan. 1, 2010.
The amount Teachers paid in 1994 to buy into what became MLSE.
The amount Teachers is seeking for its 66-per-cent stake in MLSE.