Add another thing to the list of things that Canadians pay more for than Americans: break fees on takeovers.
Target companies in Canada are increasingly agreeing to hand over more to would-be friendly acquirers in the form of termination fees, or cheques cut to compensate the buyer if an agreed-upon deal falls through.
When you are talking breakfast cereal or books, there are exchange rates and transportation costs and the expense of printing in two languages to explain the cross-border discrepancy. Still, there's a sneaking suspicion for most people that the real reason is Canadians are suckers who don't complain loudly enough.
It is harder to come up with many plausible reasons for rising Canadian break fees, especially when U.S. termination fees are going the other way.
The rationale behind a break fee is simple: It's an inducement to get a bidder to commit the time and resources to making an offer.
But many investors gripe about them, and with good reason. They don't often bear any relation to the cost of making a bid, and when combined with other help given to friendly bidders in the form of clauses prohibiting negotiations with anybody else and right-to-match clauses, they can shut down auctions.
There's a reason deal makers refer to such devices as "protection" – because they are designed to protect a buyer from being beaten.
Shareholders have generally placidly accepted the steady encroachment of deal protection. But every so often a break fee comes along that can still raise eyebrows.
The fee agreed to by Primaris Retail REIT to white knight bidder H&R REIT is one of those. Many Primaris shareholders are upset. Analyst Michael Smith of Macquarie called it "punitive."
The fee works out to 3.8 per cent of the value of the bid for Primaris shares. To some, that seems big when compared to the premium in the cash and stock H&R offer, which is currently worth 4.8 per cent more than the $26-a-share cash bid that hostile suitor KingSett Capital had put on the table.
What's more, the fee is not just cash but includes an option to buy two Primaris properties – the Dufferin Mall in Toronto and a package of real estate on Yonge Street in the same city – at a discount to appraised value, a rarely seen structure that H&R sought and to which Primaris agreed.
Mr. Smith suggested that the value of the option is bigger than Primaris is letting on because appraisals don't factor in redevelopment potential of what he called "strategic assets."
The Primaris side counters that the fee was necessary to get H&R to the table.
"If we had not offered this break fee, we would not have a two-horse race," said Graham Gow, a partner at McCarthy Tétrault LLP who works with Primaris. "The only bid for all would have been KingSett's, and maybe they would have paid another 25 or 50 cents to clear the market [or] maybe not."
Mr. Gow disputed the idea that the properties at issue are strategic.
"To call it the crown jewel of the company, nobody's ever done that before."
There is a precedent for a termination payment that includes asset options, and the stated value of the fee is within the generally accepted 2 to 4 per cent range, he said.
Even accepting that Primaris's fee is 3.8 per cent, it's close to the top of the range. And more and more Canadian break fees are blowing past 4 per cent.
The median break fee in Canada has gone from 3.1 per cent of the equity value of a takeover in 2007-08 to 3.5 per cent in 2010-11, according to a study by law firm Blake Cassels & Graydon LLP. About a third of transactions in recent years had a fee in excess of 4 per cent.
Meantime, in the U.S., the median fee was 3.3 per cent in 2008 and by 2011 was down to 3.2 per cent, according to a study by investment banking firm Houlihan Lokey. In 2011, less than 20 per cent of deals had a fee greater than 4 per cent.
One explanation is that it's a buyer's market. It's hard to see how that's more true in Canada than in the U.S.
Another answer, which holds some weight, is that Canadian deals are smaller than those in the U.S. Smaller transactions tend to have higher break fees as a percentage of deal value.
A third is that acquirers here have been getting away with larger and larger fees, so they just keep pushing.
At what point does this fee creep become too much for regulators? Securities regulators like to avoid setting hard limits on termination fees, saying each case needs to be assessed individually. If giving up a fee is a necessary tradeoff by a target to garner a higher bid, then it might be worthwhile.
The only way to stop break fee inflation is for shareholders to push back when they think a company has given up too much. Sooner or later, boards and watchdogs will get the message.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)