A wave of big deals in recent weeks has financial players predicting 2021 could be the most active year in recent memory for Canadian corporate mergers and acquisitions as the economy starts to shake off the brutal effects of COVID-19.
After a second-quarter collapse in 2020, when many deal talks broke off in response to the pandemic, the recovery in activity began. Many businesses disrupted by restrictions on movement and weighed down by debt became targets, while others thrived in an environment in which more people worked from home, and those winners sought new assets.
A new cycle has begun, said Manny Pressman, a lawyer who specializes in M&A at Osler Hoskin & Harcourt LLP. The activity is being driven by a mix of sources: companies seeking strategic growth in their sectors, private equity deploying capital and special purpose acquisition companies eyeing targets in Canada.
“The switch flicked on in November in terms of when deals started to hit the tape and when they started to get real traction,” he said.
Anticipation of the rollout of coronavirus vaccines has injected optimism about the economy. In addition, record low interest rates, equity markets that can be easily tapped for financing and a mountain of private capital to invest are expected to propel activity.
“This is probably the best market for M&A financing that I’ve seen in my career, which is 25 years now,” said Mike Boyd, head of global M&A at CIBC World Markets.
“For three or four months this year, all our capital was on the sidelines. Now it’s back out and looking to be deployed, and I think there is a consensus view that the economy is going to get stronger as we get through the pandemic,” Mr. Boyd said.
According to the investment banking boutique Crosbie & Co., the number of announced deals picked up in the third quarter of 2020, although the dollar value was well under historical norms. A total of 804 deals were announced with an aggregate value of $18-billion.
That was a sharp rise from the second quarter, when there were 600 transactions worth a total of $14.2-billion. Still, in terms of dollar value, it paled compared with the third quarter of 2019, when $45-billion worth of deals were announced.
Canada lagged the global recovery in M&A early in the second half, but that is changing, said Peter Buzzi, co-head, global mergers & acquisitions for Canada at RBC Dominion Securities.
“Part of that is pent-up demand for companies that were looking to run sale processes in the first half and deferred them,” he said. “But I think more of it is just we have an exceptional environment for financing M&A transactions now.”
Mr. Buzzi and others pointed to the energy sector for consolidation opportunities next year, as the industry seeks to gain efficiency and scale and thereby rekindle the interest of major institutional investors. Like mining and precious metals, this could mean more all-stock transactions that offer investors little or no price premium.
In December, Whitecap Resources Ltd. announced just such a deal: a $565-million purchase of fellow Alberta and Saskatchewan crude producer Torc Oil & Gas.
Among some of the biggest deals announced in 2020 were Cenovus Energy Inc.’s $3.8-billion takeover of Husky Energy Inc. and SSR Mining Inc.’s $2.4-billion buyout of Denver-based miner Alacer Gold Corp.
Natural gas producers such as Canadian Natural Resources Ltd. and Tourmaline Oil Corp. bought up rivals in B.C. and Alberta resource regions such as the Montney and Deep Basin.
In November, Intact Financial Corp. and Denmark’s Tryg A/S teamed up to offer $12.4-billion for British rival RSA Insurance Group PLC, a deal that would make Intact the dominant property and casualty insurer in Canada. West Fraser Timber, meanwhile, is adding to its product lines with its $4-billion friendly offer for Norbord Inc., also announced that month.
In tech, Nasdaq Inc. announced in November it is buying St. John’s-based Verafin for US$2.75-billion in a deal that will expand the reach of Verafin’s fraud-detection software to banks around the world. Shortly afterward, British private equity firm Hg Capital announced it will buy a controlling stake in Calgary-based Benevity Inc., a deal that valued the corporate-giving software provider at US$1.1-billion.
Such deals in the tech sector show no sign of tailing off, said Shevaun McGrath, partner at McCarthy Tétrault LLC, and co-head of the law firm’s national private equity group. “I think the focus on data and the privacy regulatory landscape will be something that will be a big focus next year, and I suspect the year after as well,” she said.
But a proposed marriage that fell apart during the pandemic also points to what will be a sharpened focus on the fine print of transactions, Ms. McGrath said. Much has been made about material adverse event clauses, which spell out what unexpected factors could render an agreement void.
Cineworld Group PLC’s decision to scrap its deal to buy Cineplex Inc. as movie theatres remained shut in June showed the importance of interim covenant clauses. They spell out the requirements to operate within set parameters until a deal closes.
Cineworld, which signed the deal in late 2019, alleged in court documents that Cineplex failed to meet conditions to keep its debt below a set ceiling and maintain payments to suppliers and landlords. In its legal response, Cineplex said its suitor got cold feet as brutal industry conditions persisted. The case is scheduled to go to trial next September.
“We’re learning as we go here in terms of the art of the possible, and now drafting differently, certainly, than we did prior to the pandemic,” Ms. McGrath said.
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Jeffrey Jones