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In 2018, Brookfield Asset Management did one of the year’s biggest deals, its US$6.8-billion acquisition of Cleveland-based Forest City Realty Trust.MARK BLINCH/Reuters

Canadian companies are hunting for merger and acquisition targets outside of their home base and the United States remains by far the preferred locale, despite its chaotic politics and trade uncertainty.

In an overall optimistic outlook for corporate deal-making in 2019, 96 per cent of corporate and private-equity M&A professionals surveyed by Citigroup Inc.'s Canadian unit and the Mergermarket data and publishing service said they expect an increase in the number of deals involving Canadian businesses buying foreign ones, known as outbound transactions, in 2019. A similar majority – 94 per cent – see a higher overall value of deals.

Nearly three-quarters in the study said they would be looking to the United States for targets. Six in 10 said Western Europe – but not Britain – was a possibility, followed by India at 45 per cent and Latin America at 36 per cent. Just 18 per cent are considering China, where Canada is dealing with intense diplomatic tension. Indeed, deal-makers say distrust that has followed the detentions of Canadian citizens in China, in apparent retaliation for Canada’s arrest of a senior Huawei Technologies Co. executive, is taking a toll on the deal flow.

Companies looking to expand can find takeover targets limited in Canada, necessitating a search for deals outside the country. Despite economic uncertainty, the United States remains the easiest leap from a geographic standpoint. In addition, its regulatory requirements are well understood, said Grant Kernaghan, managing director, Canadian investment banking, at Citi.

“Notwithstanding all the global macro things that are going on, be it trade disputes and political eruptions in the U.S., etc., people are still very much positive on the outlook for M&A,” Mr. Kernaghan said in an interview.

Indeed, political risks appear to have increased. The U.S. federal government shutdown, which began Dec. 22, has added to worries enveloping the United States, such as the threat of tariffs, a simmering trade dispute with China and an economy showing signs of weakness.

Citi and Mergermarket surveyed 50 executives, including 35 from corporations and the remainder from private equity and pension funds. The latter categories have been the most active buyers in the United States. In 2018, Brookfield Asset Management did one of the year’s biggest deals, its US$6.8-billion acquisition of Cleveland-based Forest City Realty Trust. Canada Pension Plan Investment Board teamed up with Encino Energy to buy Ohio natural gas assets from Chesapeake Energy Corp. for US$2-billion.

If the optimism pans out, outbound deals would exceed those in 2017, when 347 transactions worth US$89-billion were done. Canadian companies went abroad for 273 deals worth $75-billion in the first three quarters of 2018.

“We still have a growing economy, corporate earnings are strong, debt – although more expensive than it was – is still on a long-term basis cheap and available for sensible transactions,” Mr. Kernaghan said “And if you look at the breakdown of the deals, so much of the market is driven currently by the likes of Brookfield, Canada Pension Plan Investment Board and Ontario Teachers' Pension Plan. They have a much longer investment horizon and the ability to diversify risk.”

Last year, the Trump administration’s cuts to U.S. corporate tax rates had been feared as a potential dampener of Canadian buying in the United States, but it did not end up being the case, said John Emanoilidis, co-head of the merger and acquisitions practice at the law firm Torys LLP. Torys released an outlook on Thursday that was similar in its upbeat forecasts.

“Unpredictability tends to chill deal activity because it has the potential to affect confidence levels. But having said that, financing remains readily available, strategic buyers and private equity firms have a tremendous amount of cash to deploy and based on the deals we have in the pipeline, we’re quite optimistic that we’re going to see outbound activity,” Mr. Emanoilidis said.

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