Mergers and acquisitions in Canada continued to be very active in 2018, notwithstanding the introduction of volatility in the markets domestically and globally. The S&P/TSX composite index had an up and down ride throughout the year, starting in a decline after a strong 2017 year end, bouncing back in the second quarter, staying flat in the third quarter and materially declining in the fourth quarter, essentially eliminating all gains for the year.1 At the same time, starting in 2017 and carrying on through 2018, the Bank of Canada raised interest rates three times,2 including in the fourth quarter of 2018. It has held the rate since then based on a general slowing of the domestic economy in the early part of 2019.
The Canadian dollar started the year at just over $0.81 to the US dollar but dropped to just over $0.73 to the US dollar by the end of the year. The Canadian dollar is affected by the price of oil, because of the significance of this export. A spread in the Canadian dollar from the US dollar will then tend to lift other exports, including forest products and manufactured goods.
In 2019, there are several dark clouds on the horizon that have created both an uncertainty in the market, and a general decline in corporate confidence.3 In Western Canada, the British Columbia provincial government has attempted to halt the completion of the Trans Mountain Pipeline expansion project which will expand the transportation capacity of oil from Alberta to tidewater in BC by approximately three times the volume. As of the time of writing, the Federal government has approved the expansion project, but there are still a number of challenges that the project will face before it sees completion.
Much of the federal government’s foreign policy attention in 2018 was devoted to the re-negotiation of the North American Free Trade Agreement (NAFTA), culminating in the USMCA (United States/Mexico/Canada) trade agreement (referred to in Canada officially as the CUSMA agreement) in the fall of 2018. The trade agreement has yet to be ratified in either the United States or Canada with challenges to such ratification in the US from a divided Congress. While the threat of ‘ripping up’ NAFTA has diminished in 2019 from the rhetoric of early 2018, it is far from certain that the new agreement will be ratified in 2019, which may affect the confidence of Canadian companies, in particular including in respect of M&A.
Canada-China relations have dipped to a new low. China represents Canada’s second largest trading partner after the United States. Following the arrest in Vancouver of the Chief Financial Officer of Huawei Technologies Co. Ltd., China’s giant telecommunications company, as she was transiting through the country, China has detained two Canadian citizens on allegations of spying, arrests that are believed to be in retaliation and which Canada calls “arbitrary”. China has more recently implemented trade-related retaliation, including ceasing purchases of key agricultural products such as canola. Diplomatic overtures from senior levels of the Canadian government to engage in discussions have been spurned. The extradition case of Huawei’s CFO will not be heard until 2020 and is further complicated by mixed signals from statements made by both US and Canadian representatives as to the correct course to take. This souring of relations comes after other notable matters such as the federal government’s blocking of the proposed friendly takeover of Canadian engineering company AECOM by China’s CCCC International Holding Limited in May of 2018 on national security grounds under the Investment Canada Act.
Despite what appears to be a challenging environment, and apparent decline in the confidence of Canadian executives, mergers and acquisitions activity in Canada remains very active. Various sectors saw record-breaking transactions, and new sectors are emerging.
The mining and metals sector has been active in M&A in the last 12 months, it being the strongest period of activity since 2011. The landscape was dominated by large transactions. Most notable were Barrick Gold Corp’s acquisition of Africa-focused Randgold Resources for $6.5 billion and Newmont Mining Corp’s acquisition of BC headquartered Goldcorp Inc., with a deal enterprise value of $16.7 billion. Both the Barrick/Randgold and the Newmont/Goldcorp transactions are gold sector transactions with consolidation being driven by supply constraints from diminishing global gold reserves. Speculation for 2019 is that these transactions will spur more consolidation in the gold sector, particularly with a positive outlook for precious metals in the near term.
Lundin Mining made a hostile bid for Nevsun Resources, a copper/zinc mining company, which put it in play, ultimately striking a friendly deal with Zijin Mining Group Co. Ltd. of China for US$1.8 billion which completed in late 2018/early 2019.
Global geopolitical uncertainty may also, at least in the short term, provide countries like Canada and Australia with a greater proportion of investment dollars as companies seek low-risk, stable environments. For junior mining companies, a big driver of activity is access to capital, which has not returned to its pre-commodity downturn strength. However, majors might see the need to acquire juniors as a result of having curtailed exploration activities over the past several years.
M&A in the real estate sector was active in 2018 and in terms of value, was a significant contributor to overall M&A deal value in 2018. Brookfield Asset Management Inc.’s $13.8 billion acquisition of Forest City Realty Trust, a publicly traded US real estate company, was the most notable and a significant contributor to the overall value. Other significant transactions included Oxford Properties Group $3.3 billion acquisition of the Investa Office Fund, with a portfolio of office assets in Australia.
The major pension funds in Canada have a material presence in the acquisition of commercial real estate with both domestic and foreign acquisitions. There were two significant domestic acquisitions in Canada with Choice Properties’ acquisition of CREIT and Blackstone’s acquisition of PIRET. But individual deals were also significant, including office complex acquisitions of Parkway Place in Toronto by Tigra Visa Inc. and Hines/Oaktree Capital’s acquisition of an office tower in Calgary, as well as the undisclosed purchase price of the Bentall office towers noted below. Toronto is the most active real estate market in the country for acquisitions with Vancouver second. Both of those cities have the lowest vacancy rates in the country.
In terms of M&A deal volume (not value), technology was the most active sector in 2018; however, aggregate deal value was down in 2018 from 2017 and a high water mark in 2016.4 M&A transactions in the technology sector had a median transaction size of $7 million and an average size of $93 million, although some larger transactions influenced the numbers overall. Blackberry acquired Cylance in the fourth quarter of 2018 for US$1.4 billion, for example.
Technology companies are mobile, and talent can be easily moved to the United States, for example. As a result, a number of smaller technology companies are acquired and the key personnel moved to the US. California’s technology industry generates revenues that are more than double that of all of Canada’s tech sector combined.5 The total available capital to fund technology company growth is substantially greater in the US, and with high growth requirements, Canadian start-ups often get acquired at a relatively early stage in part because of the difficulty in accessing growth capital.
Exports of oil from Canada have increased in volume, notwithstanding the drop in oil prices that occurred in 2014 which have continued to be depressed from their pre-2014 highs. Energy demand is now coming from Asia with supply increasing in North America. The principal issue for the industry, based primarily in the Province of Alberta, is alleviation of market access constraints. The ‘lock-in’ of supply manifests itself in a material difference between the price of Western Canadian select heavy oil and West Texas intermediate oil. One of the biggest challenges for Canada and the Canadian economy is the difficulty in getting resources to market, and in particular, large-scale energy projects.
Excluding the Government of Canada’s purchase of the Trans Mountain Pipeline from Kinder Morgan for $4.5 billion, energy transactions in Canada dropped as a percentage of overall deal activity. Many smaller and midsize companies have struggled under the effects of low oil prices. The challenging economic environment in the sector in Canada has spurred consolidation and re-focus of larger players. Enbridge, for example, after making several large-scale acquisitions, has moved more towards a pure pipeline and utility business, and sold its natural gas gathering and processing business to Brookfield Infrastructure for $4.3 billion and some US natural gas assets for $1.4 billion to Arclight Capital Partners in 2018. Lower valuations have also been a trigger for hostile M&A activity, such as Husky Energy’s hostile bid for MEG Energy launched in the fall of 2018. Husky ultimately determined not to extend its cash and shares offer in early 2019 for lack of shareholder support. But Husky also cited in its decision that the Alberta provincial government’s curtailment of oil production, as well as lack of progress on pipeline construction, as reasons for abandoning its bid.
LNG Canada, a joint venture of Shell, PETRONAS, PetroChina Company Limited, Mitsubishi Corporation and Korea Gas Corporation announced its decision in 2018 that it would be proceeding with a $40 billion liquefied natural gas project in British Columbia. After a decade of pursuing liquefied natural gas projects, this is the first large-scale LNG facility to announce. What that may result in is a consolidation of shale and natural gas assets in BC.
On January 31, 2019, the Supreme Court of Canada in a majority decision ruled in Redwater,6 overturning the Alberta Court of Appeal’s decision, that well closure and reclamation obligations take priority over all other claims, including secured creditors, and are binding on a trustee in bankruptcy. Specifically, the Court held that the abandonment and reclamation obligations of the debtor, Redwater Energy Corporation, under Alberta provincial laws, were binding on a Trustee in bankruptcy, were neither “creditor” claims nor claims provable in bankruptcy and, therefore, did not conflict with the general priority scheme in the federal Bankruptcy and Insolvency Act and, as a result, the doctrine of federal paramountcy did not apply. While the decision reflects a general policy support for producer responsibility for environmental remediation, rather than the taxpayer, amongst other impacts, the industry believes that this will lead to a material tightening of lending. It may cause acquirers to be concerned about the potential risks associated with an acquisition of an asset package.
Cannabis. In October 2018, Canada became the second country in the world to legalise cannabis for recreational use. As a relatively new industry, it has been active in vertical integration of supply chains from growing/harvesting through to retail. The larger players that emerged prior to legalisation and in preparation for it were active acquirers in 2018 and into 2019. There were 48 deals alone in the first half of 2018 in the cannabis sector with a total disclosed value of $5.2 billion.7
Aurora Cannabis acquired MedReleaf Corp. in an all stock transaction worth more than $2.5 billion. Medreleaf has expertise in the medical marijuana space but likely the particular appeal to Aurora was Medreleaf’s contract with a large, national pharmacy retail chain, giving it a strong supply chain relationship.
One notable cannabis transaction which has just received acquirer and target shareholder approval is Canopy Growth Corporation’s cross-border acquisition of Acreage Holdings Inc., a US multi-state cannabis company with cultivation, processing and dispensaries. Canopy Growth had already received a significant $5 billion investment from Constellation Brands Inc., a wine and spirits company, giving the company a significant opportunity to undertake acquisitions. While Canadian cannabis companies may be further ahead in development based on the domestic legislative environment, the key market that they see for growth is in the United States.
Of note is the structure of Canopy Growth’s agreement with Acreage. The transaction will be completed by way of a plan of arrangement pursuant to the British Columbia Business Corporations Act. Canopy Growth will pay the Acreage shareholders $300 million under the terms of an arrangement agreement. However, the completion of the acquisition of Acreage shares and payment of the balance of value, of approximately $3 billion, will only be if, in Canopy Growth’s discretion, certain changes in US federal law permitting the general cultivation, distribution, and possession of cannabis or removing the regulation of such activities from the federal laws of the United States occurs or is waived by Canopy Growth.
Still with large amounts of private equity capital to be deployed, private equity firms have been actively acquiring. Large and notable transactions include Brookfield Asset Management’s acquisition of Johnson Controls International Plc’s batteries division for $13.2 billion as well as Forest City Realty for $11.5 billion, as well as Onex Corporation’s friendly take-over bid for western Canadian headquartered WestJet Airlines for $5 billion.
Overall M&A transaction value in Canada’s private equity market set a new record in 2018. The most active sectors within private equity were IT and media, consumer and manufacturing. Canadian private equity funds were principally focused on domestic transactions, but they were active in outbound deals as well.
Outbound vs inbound
Domestic transactions, Canadian acquirors of Canadian targets, were the driver of M&A activity in 2018. However, cross-border transactions, and in particular outbound, were material. Notwithstanding global geopolitical tensions, outbound transactions from Canada were strong in 2018 both to the US and internationally. A total of US$102.5 billion of outbound acquisitions represented by just over 800 transactions were announced in 2018,8 which represents an increase in the number of transactions, but decrease in value. Over half of those acquisitions were of United States-based target companies. The United States represents the largest inbound acquiror by far, at 80% of the acquirors of Canadian companies.
Projects in Canada, and Western Canada in particular, that involve an interest in lands, minerals, forestry, energy extraction or transportation or any right granted by a governmental authority (such as a permit to construct or operate) can be significantly impacted by Indigenous rights. Many Indigenous groups have constitutionally protected rights under the Constitution Act, 1982. But otherwise, in light of the government’s unique relationship with Canada’s Indigenous peoples, current Canadian case law requires that provincial and federal governments consult with and accommodate where appropriate the concerns of Indigenous groups who may be affected by a government action or decision. In British Columbia, where there are no treaties, this is particularly the case, and we expect in 2019 that a focus of the intersection of the interests and decisions of various levels of government and Indigenous peoples will be with respect to the Trans Mountain expansion project.
Chinese investment in Canada
With relations between Canada and China at a low point, whether Canada continues to be seen as a friendly market for acquisition by Chinese companies remains open. We also note certain changes in the Canadian market, including a sale by an acquirer of its assets in Canada. The Bentall office and retail complex in Vancouver was acquired by Anbang in 2016 for $1.06 billion and was subsequently put up for sale in 2018. There is an expectation that Retirement Concepts, which Anbang acquired for $1 billion in 2017, will also be put up for sale. The forced sale of Bentall came after the Government of China seized control of the company due to allegations of corruption and high debt load. Blackstone Group, together with Hudson Pacific, acquired the Bentall office/retail assets for an undisclosed amount.
It is interesting to note that the Canadian government approved Anbang’s 2016/2017 acquisition activity even though there was some public comment and concern expressed with respect to its acquisition of Retirement Concepts, a company that provides senior care living on a tax-supported, subsidised basis. Since 2016, however, there may be a shift in Canada’s overall approach with Chinese acquisitions in Canada. In early 2018, the federal government blocked the acquisition by CCCC International Holding Limited of Aecon Group on national security grounds under the Investment Canada Act. Under the ICA, the federal government reviews on a discretionary basis, and in addition to any applications for review that must meet a test of ‘net benefit to Canada’, proposed acquisitions by foreign-owned entities of Canadian business on national security grounds. The federal government lists nine factors in its determination of whether an acquisition will cause a national security concern, including: the potential effects of the investment on Canada’s defence capabilities and interests; the potential effects of the investment on the transfer of sensitive technology or know-how outside Canada; the potential impact of the investment on the security of Canada’s critical infrastructure essential to the health, safety, security or economic wellbeing of Canadians; and the effective functioning of government, as well as concerns focused on the acquirer and its purpose, such as the potential of the investment to facilitate the activities of illicit actors, such as terrorists, terrorist organisations or organised crime.
The first quarter of 2019 has shown a slight decline in overall M&A activity in Canada from the last quarter of 2018, but it is materially higher than Q1 of last year. Deal volume was particularly active in the technology, financial, consumer and energy sectors.
A volatile public market, a weak Canadian dollar to the US dollar, protectionist policies in particular in the United States and global uncertainty would not generally make for an enthusiastic M&A market, but some of these characteristics may bring opportunity. Canada is seen as a stable market politically and private mid-market companies that are family held continue to face a demographic issue as founders struggle with intra-family succession planning and opt to sell to management teams, third parties, or some combination.
Overall M&A has, over the past few years, been facilitated by significant dollars raised by alternative investment vehicles such as private equity funds, ease of access to capital and low interest rates. While it appeared, after interest rate increases by the Bank of Canada in 2018, that interest rates will stabilise for a period of time, global uncertainty has caused a slow-down in domestic economic activity.
1. S&P/TSX Composite Index https://www.tmxmoney.com/en/index.html.
2. Bank of Canada https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/.
3. Institute of Corporate Directors – Director Lens, April, 2019.
4. Q1 Capital Partners M&A Insights, 2018.
5. BC Tech Association, 2018 Report Card.
6. Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5.
7. PwC Canada 2018 Mid-Market M&A report.
8. Institute for Mergers, Acquisitions and Alliances https://imaa-institute.org/.
Originally Publish by Global Legal Insight
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