Canada: A Guide To Canadian M&A In The First Half Of 2013

Recovery Hits Roadblock: 2013 Sees Decline In Canadian And Global Deal Volume An

As we move into the second half of 2013, it seems appropriate to look back at what has gone on so far this year across the Canadian M&A landscape. Below we've highlighted some of the major news items and deals that have taken place so far.

First Half Sees Fewer and Smaller Deals. The first quarter of 2013 ended with the fewest number of Canadian M&A transactions in a particular quarter since Q1 2011. By value, it was the quietest quarter in three years. A first quarter Mergermarket report found an 11.4% reduction in deal volume (124 announced transactions) and a nearly 60% reduction in deal value (US $14.4 billion) over the same period last year when excluding deals under USD $5 million. The slowdown experienced in Canada is in line with international results as global deal volume declined, year over year, by 28% (to 1571 total transactions) and global deal value fell 32% (to US $269.4 billion), once again excluding deals under USD $5 million. Including those transactions, according to Bloomberg, Q1 saw 383 announced deals worth USD $20.9 billion, equivalent to a 51% decline in deal value over the same period in 2012. For the entire first half of 2013, Bloomberg reported there were 804 deals with a combined value of USD $44.3 billion, compared to CDN $66.5 billion worth of deals in the first half of 2012, a 23.4% reduction.

Miners Suffer Rocky Start to 2013. Not surprisingly, given commodity prices, the mining sector experienced what KPMG called "an ominous start to 2013" in their first quarter mining M&A newsletter. During Q1, equity indices fell approximately 10% more than the prices of gold and copper, both of which dropped approximately 5%. Beyond depressed valuations, perhaps the most notable development was a return to equilibrium in the competition between gold and copper transactions. After losing its long-held top spot to copper in the last quarter of 2012, gold transactions led the way once again for the mining sector in Q1 2013, accounting for 64% of deal value and 58% of volume. By contrast, copper transactions plunged from 58% of deal value at the end of 2012 to 5% in the first quarter of 2013, when only one transaction was in excess of $10 million.

The Silver Lining: Q1 Represents Return of the Mid-Market. Despite the slowdown in acquisition activity, some interesting trends developed in the first quarter. Most notably, as a result of improved liquidity in debt markets, M&A returned to the Canadian mid-market even as larger deals failed to materialize. According to PwC Canada, the strength of Canada's mid-market is the primary reason why first quarter results feature only a modest drop in year over year deal volume despite a substantial decrease in value. Of the 321 deals with disclosed values in the first quarter, 58 (or 18%) were in the $100-$500 million range compared with only 10 (or 3.1%) above that upper threshold. The remainder were under $100 million and the average value of all deals was $85 million.

Real Estate Remains Hot. The Canadian real estate market continues to be active and Real Estate Investment Trusts ("REITs") continue to play a prominent role within it. Per PwC and the Wall Street Journal, real estate accounted for nearly 37% of deal value in the first quarter, higher than any other sector, and contributed 16% of deal volume, second only to mining (22.8%). Of those transactions, REITs accounted for 91% by volume and 54% by value. Another significant trend is the acquisition of foreign properties by Canadian REITs. A representative list of such deals announced in the first quarter is available here.

Pension Funds Diversify Internationally. Canadian pension funds also remained active players. As in real estate, increasing international diversification of pension fund portfolio assets is a trend unlikely to reverse itself in the near term. The current goal for many pension funds, noted by PwC, is to divest Canadian assets and purchase foreign interests, particularly in infrastructure and transportation, in order to "diversify their holdings away from the historical over-weighting in Canada." Notable pension fund deals from the first quarter include:

The First Half's Significant Deals. Beyond the pension fund deals already mentioned, significant transactions from the first half include:

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