Recent activity such as Suncor Energy Inc.’s hostile bid for Canadian Oil Sands Ltd. belies the quieted landscape in energy mergers, compared with a year earlier.Todd Korol/Reuters
Natural resource deals are hoped to make a comeback after a muted 2015 – but it is expected to take more desirable assets to get bidders off the bleachers.
Mergers and acquisitions (M&A) involving Canadian companies climbed to $279-billion (U.S.) this year, according to data from Thomson Reuters, as fast-moving pension funds snapped up international assets and deals piled up in financial and industrial industries.
But recent activity such as Suncor Energy Inc.'s hostile bid for Canadian Oil Sands Ltd. belies the quieted landscape in energy mergers, compared with a year earlier. The number of energy and power deals fell from 2014 to 2015, making up a smaller portion of the Canadian total.
Investors are waiting for the right time to deploy billions of capital into energy investments across North America, suspecting that many companies will soon be forced to sell more important assets, rather than lesser fringe ones, said John Armstrong, head of Canadian M&A at BMO Nesbitt Burns.
"As you start to see the pain level increase, and you start to see people cutting into the muscle, there's this dry power perched ready to jump," Mr. Armstrong said.
BMO estimates there is about $150-billion in private equity money to be deployed across North America, and another $25-billion from the pension funds. That could start to move later in 2016.
It's no wonder some investors are taking a wait-and-see-approach, given the trouble sliding oil prices have caused – the value of Royal Dutch Shell PLC's deal for BG Group lost nearly $20-billion in value last year, for example.
And a smaller group of bidders may be taking the same approach to mining investments, "holding back because they believe the better assets are still to come," Mr. Armstrong said. He estimates this could start to change in six to 12 months.
Despite the dry spell for resource M&A, energy financings were well represented in the 2015 deal-making tables. RBC Dominion Securities was the top bank for equity last year, leading on large deals for Cenovus Energy Inc. and Encana Corp. A flurry of IPOs in other sectors, such as the Ontario government's sale of 15 per cent of Hydro One Ltd., contributed more than $4-billion (Canadian).
RBC was also the top bank in debt underwriting last year, raising more than $33-billion for clients.
M&A deal values over all were at the highest since 2007, with one deal worth more than twice the size of last year's Timbit-and-Whopper tie-up. That's Canadian Pacific Railway Ltd.'s hostile bid for Norfolk Southern Corp., valued at $36.6-billion (U.S.), although the merger is still being reviewed and may not be completed.
While not as large, Element Financial's $7.2-billion acquisition of part of General Electric Co.'s fleet management business stood out as a key purchase to some, thanks to the deep dip into the equity markets that accompanied it.
"They financed in virtually every asset class that they could have, and they pulled it off," said Roman Dubczak, head of global investment banking at CIBC World Markets. "We tend to sell ourselves short in Canada, that we're all resource based, but some of the great stories that have evolved in the last couple of years– Element, CGI, WSP and Canada Goose on a smaller scale – these are great Canadian stories that are world-beaters now."
Beyond energy, he expects volatility in foreign exchange markets stemming from the U.S. Federal Reserve's increase in rates that will drive clients to seek to reduce their risks through hedging and other capital markets activities in the coming year.