Canadian businesses are chasing massive deals abroad to fuel growth, undeterred by the low loonie, rising stock prices and political uncertainty in the United States and Europe.
In recent years, the United States has been a hotbed for multibillion-dollar acquisitions by Canadian companies. In January, AltaGas Ltd. announced a deal to acquire Washington-based WGL Holdings Inc. for $8.4-billion (U.S.), including the assumption of debt. MacDonald Dettwiler and Associates Ltd., meanwhile, agreed last month to acquire Colorado's DigitalGlobe Inc. for $3.6-billion including debt.
These tie-ups come weeks after a record year for outbound mergers-and-acquisition (M&A) activity, with Canadian entities buying U.S. pipeline operators, a sanitary service firm and a gas-station chain in five of the six largest deals that were disclosed in 2016.
Last year saw 633 deals in which Canadian companies acquired firms outside Canada for a record amount of $128.1-billion, according to data compiled by Thomson Reuters. The value of deals is 12 per cent more than the $114.5-billion worth of outbound deals that were disclosed in 2015. The past two years have seen a sharp increase in these types of tie-ups. In 2014, just $58-billion worth of them made it to market. The figures do not include venture-capital transactions.
Canadian pension funds, asset managers and companies continue to expand into other countries through deal-making. But some of the bankers who advise on these transactions expect the overall outbound flow to decline this year, noting 2016's high-water mark would be difficult to top.
"Although outbound activity will continue to be strong, I don't expect to see the number and size of mega deals repeated in 2017," said Bill Quinn, co-head of M&A at TD Securities. "I would be surprised if that was replicated this year."
Instead, he predicts a surge in the number of Canadian energy companies that will be sold to either foreign or domestic acquirers over the coming months, as firms in the oil patch adapt to more stable crude prices. Domestic energy companies are shifting their focus to increasing their capital budgets as opposed to merely surviving by selling non-core assets and slashing costs.
The next wave of consolidation might not be far away.
Mike Boyd, global head of M&A at CIBC World Markets, agrees that activity in the energy sector could heat up this year, adding that increased deal flow in the mining industry might not be far behind.
"Both of those sectors have improved considerably from where we were last year," he said, adding that pricing stability usually spurs deals in resources. "Any time you have stronger commodity markets, you tend to see more M&A."
In the past, lenders and equity investors have shown a willingness to help Canadian companies pay for acquisitions. Debt is still relatively cheap and many buyers are able to issue their own shares at or near all-time highs. The outlook for global growth also appears to be rosy.
These conditions will spur deal flow in the infrastructure and industrial sectors, says John Armstrong, head of Canadian M&A at BMO Nesbitt Burns.
"I think the stage is set for another robust year in M&A," Mr. Armstrong said. "In general, there's a high level of confidence in boardrooms and amongst the executive ranks out there on the back of those equity valuations and that growth outlook."
A soaring stock market is also prompting more companies to go public. According to CIBC, there are more than a dozen candidates pursuing an initial public offering, with several also weighing an outright sale. Entrepreneurs may prefer to go public to raise money to facilitate future growth, while purely financial backers are more likely to seek a full exit at the highest valuation possible.
"A number of potential IPOs are unlikely to be completed because there will be strategic transactions," explained Peter Jelley, head of investment banking for Canada at National Bank Financial. He said a lot of stock sales are being driven by financial sponsors. The activity for both IPOs and M&A "will be widespread and it is going to be across sectors if confidence holds up," he added.
But this trend can abate if markets take a turn for the worse, the Canadian and U.S. economies worsen or the new U.S. administration doesn't do what it says it will.
"There's a little more uncertainty now as opposed to six or 12 months ago," said Peter Buzzi, co-head of M&A at RBC Capital Markets, referring to political flux in countries including the United States, France and Germany. "Those are the things clients are starting to think about. People are wondering how long these good times in capital markets are going to last."
Many of the biggest Canadian deals struck during the last two years have aimed to diversify and reinvigorate businesses that were either challenged by languishing commodity prices or facing pressure to find new avenues for growth amid a maturing economy at home. Flush with cash, pension funds are seeking to deploy these pools of capital globally. On the other hand, for Canada's largest companies, buying another Canadian company that's large enough to really move the needle can be arduous, Mr. Buzzi says.
"If you're Enbridge, how do you grow inside Canada? If you're Royal Bank of Canada, how do you grow inside Canada? There are not that many opportunities," he added. "The growth outside of Canada is being driven by necessity. That's really the only logical place where you can grow."