As Canadian companies attempt large takeovers in mature markets, winning approval for deals from competition watchdogs is becoming as important as gaining support from investors.
Consider the hoops that Laval, Que.-based Alimentation Couche-Tard just jumped through Monday in announcing the $4.4-billion (U.S.) acquisition of convenience store chain CST Brands. Texas-based CST has extensive Quebec and Ontario operations in cities and towns that Couche-Tard already dominates, along with 2,000 locations in the U.S. Southwest. Rather than risk the wrath of the Competition Bureau by trying to knit together Canadian chains, an exercise that offers mouth-watering synergies, Couche-Tard cut a side deal with Parkland Fuel that will see the Red Deer, Alta.-based upstart snap up CST's Canadian stores for $975-million (Canadian).
The same dynamics drove the structure of BCE's recent $3.9-billion bid for Manitoba Tel. To smooth the approval process with federal regulators, BCE announced it would hand over a third of Manitoba Tel's wireless customers to arch-rival Telus for a yet-to-be-determined price.
George Cope, CEO of BCE, was clearly talking to Ottawa when he said in a news release: "This transaction with Telus enhances wireless competition to the benefit of Manitobans."
While competition issues have always figured prominently in Canadian takeovers, a handful of watershed transactions in recent years showed that deal makers take the regulators for granted at their peril. In 1998, CEOs at Royal Bank of Canada and Bank of Montreal acted as if federal approval of their merger was a foregone conclusion when they launched a transaction that would consolidate the domestic market. In 2010, BHP Billiton had the same reckless confidence when it took a run at Potash Corp.
Once the shock of these failed mergers passed, Bay Street's finest changed their tactics and gave competition experts prominent roles in structuring deals. At Couche-Tard, they were taking advice from the lawyer who wrote the rules on Canadian competition law. Davies Ward Phillips & Vineberg partner Adam Fanaki is a key member of the team advising on the CST takeover, and his résumé includes a stint at the regulator as the former senior deputy commissioner of the federal Competition Bureau's mergers branch. On Davies's website, the law firm explains that during Mr. Fanaki's time as a civil servant, "Adam held primary responsibility for the review of significant mergers [and] the development of merger policy in Canada." Couche-Tard also looked to U.S. law firm Faegre Baker Daniels for advice on the CST acquisition.
For policy makers in Ottawa, and for investors, seeing Parkland Fuel step up as a buyer of approximately 490 CST stores is a dream comes true, as it preserves competition while creating a strong, publicly traded Canadian retailer.
Parkland was founded in 1977 and has grown through acquisitions in much the same manner as Couche-Tard, snapping up 20 companies in the past 10 years. The prospect of increasing the size of the company by a third, to 1,555 outlets, lit a fire under the stock, with Parkland shares jumping 15 per cent Monday to $29.
Investors and lenders showed that they buy into Parkland's growth strategy by committing the money needed to pay for the CST acquisition now. Parkland raised $200-million on Monday by selling what's known as subscription receipts at $24.50 each – when the CST transaction closes, the receipts can be exchanged for Parkland shares on a one-for-one basis. This was a bought-deal financing, led by TD Securities and National Bank Financial, and it flew out the door. The two investment banks also led a new $545-million credit facility and $300-million bridge loan for Parkland.
Again, this is the dynamic of a mature Canadian market, with relatively few growth companies. As one of the bankers working for Parkland put it Monday, investors look at Couche-Tard and "wish they bought that stock a decade ago," in part because Couche-Tard generates so much cash that it no longer needs to do equity offerings. By taking advantage of a rival's issues with competition regulators, Parkland offered an opportunity for the public to climb on to a soon-to-be-national retail chain, and investors jumped aboard.