The slogan for 2011 for Canadian dealmakers is obvious: this was the year of rocks, with mining deals grabbing the spotlight.
"People predicted resources would drive the M&A market in 2011 and they were right," says Jeff Barnes, a partner with Borden Ladner Gervais LLP. "We’ve seen some non-resource deals coming up, but they tend to be more vulnerable to market swings" – and 2011 could also be characterized as a year of market swings – "and trying to keep them going is harder."
Six of the year’s Top Deals are resource plays; four of them mining deals. (Think there are too many mining deals on the list? Consider this: "Together iron ore and coal are the main inputs to steel production, which is vital to the development of infrastructure in the world’s burgeoning economies," says John Smith, a partner with Lawson Lundell LLP in Vancouver.) Each of the remaining four deals represents a different sector and a different theme: the strength of Canadian banks versus their troubled US counterparts; the rise of the importance of intellectual property in M&A; the importance of infrastructure projects and public-private-partnerships in the Canadian economy; and the cross-border battle for the pockets of the Canadian consumer.
Globalization is the backdrop for every deal: there isn’t a single purely domestic play here. But if globalization is the backdrop, what casts the shadow is the very domestic role and clout of Canadian regulators, and their ability to affect deal timelines and even deal viability.
"Regulatory risk is a hot topic in Canadian M&A right now," says Sharon Geraghty, a partner with Torys LLP. "There was a time when people took regulatory approval for granted." Not anymore. "And that changes how people are doing deals." It drags out the timing of deals — and it means helping clients manage regulatory risk is atop the deal agenda from day one.
Now, it’s not as bad as folks feared it would be in the wake of the federal government’s derailment of BHP Billiton’s $39-billion run at Potash Corporation of Saskatchewan in late 2010. The overall deal message in 2011, as exemplified by several Chinese and other Asian plays in the oil patch, as well as more run-of-the-mill US resource acquisitions, has been that "Canada is open for business," notes Kristian Knibutat, Canadian Deals Leader with PricewaterhouseCoopers LLP. But with each of Canada’s provincial regulators, and, when appropriate, its Competition Bureau, Investment Canada, or players such as the Office of the Superintendent of Financial Institutions willing to get involved, ask for more information, and make unpopular decisions, it’s also meant no deal’s a slam dunk — not even when it’s a friendly supported one.
Which means just getting a deal done in 2011 is quite an accomplishment. Perhaps no completed deal illustrates this better than this year’s Deal of the Year (below), challenged only by the year’s as-yet-uncompleted Deal Story of the Year (Sidebar 1).
1. Rocks, rocks, rocks: Barrick takes Equinox ($7.3 billion)
Timeline: January 12, 2011: Lundin and Inmet announce $9-billion merger of equals * February 28, 2011: Equinox launches $4.8-billion hostile bid for Lundin, disrupting Lundin/Inmet deal * April 3, 2011: China’s Minmetals Resources Ltd. announces $6.3-billion hostile bid for Equinox Minerals Ltd., disrupting Equinox/Lundin deal * April 25, 2011: Barrick Gold announces $7.3-billion bid for Equinox * July 19, 2011 Barrick and Equinox deal closes In the Year of the Rocks, the deal of the year must be a mining deal — and what a mining deal. A soap opera the likes of which the markets haven’t seen since the 2005–2006 Inco-Falconbridge-Teck-Xstrata-Vale five-way, featuring hostile bid upon hostile bid, three would-be disrupted mergers and China playing a first – a hostile bid for outright control of a company – and while failing at the acquisition, proving to the world it doesn’t have bottomless pockets. "There was a view that sovereign wealth funds and in particular China would buy things at any price," says PWC’s Knibutat. "This deal clearly showed there is some discipline there."
This transaction, better than almost any other, highlights Canada’s prominence in the global metals space: Inmet, Lundin, Equinox and Minmetals have between them virtually not a single asset in Canada, but the game was fought under Canadian rules — and by Canadian lawyers.
On for Barrick — Norton Rose OR. "It was a typical Canadian deal," says Terence Dobbin, the Norton Rose partner heading the deal. "You know — assets in Zimbabwe, management team of the target in Australia. Just another day in a Canadian office."
On for Equinox, as it shifted from disruptor to disrupted — Osler Hoskin & Harcourt LLP. "Whenever you get involved in a significant transaction where you’re the bidder, you’re aware that having raised your flag high you become a target yourself," says Clay Horner, the partner leading the Osler team. "That was something we were well aware of: that what we were doing to break up the Lundin deal could
in fact get done to us."
Good thing they were prepared.
2. Intellectual property stakes: Nortel patents go to RIM, Ericsson, et al. (US$4.5 billion)
Announced June 30, 2011. Closed July 29, 2011.The Nortel patent sale is the end of, as one lawyer put it, "the saddest Canadian business story ever told." But it also marks the rise of a new type of deal: intellectual property M&A, in which IP is a driver of global M&A activity.
The $4.5 billion bought participants 6,000 patents in 1,000 patent families covering nearly every aspect of telecommunications, from fiber-optics through to Internet searches and social networking (no wonder Google had its eye on them). Don’t expect to see a single patent portfolio of this magnitude again. But do expect more IP-driven M&A — and, given its price tag, more club deals to acquire it.
3. Canadian banks rock: TD Bank/MBNA: Bank of America sells MBNA Bank Canada’s credit card business to TD Bank Group ($8.5 billion)
Announced August 15, 2011. Closed December 1, 2011. On the face of it, a straightforward, albeit darn large, asset swap; below the surface, TD Bank’s acquisition of Bank of America’s credit card business is the story of struggling US and international banks repatriating cash to strengthen their balance sheets ... and Canadian banks seizing those opportunities to grow: a reminder that despite the preponderance of natural resources activity in 2011, there is more to the Canadian economy than raw materials.
4. China ups the resource game: Sinopec/Daylight: Sinopec International Petroleum bids for Daylight Energy Ltd. ($2.2 billion)
Announced October 9, 2011. Closed December 23, 2011. China’s – Asia’s – appetite for Canada’s natural resources is, of course, nothing new. Burnet, Duckworth & Palmer LLP’s Grant Zawalsky sounds almost cynical when he characterizes 2011 in the oil patch as "the Asia wave continues." But with the play for Daylight by Sinopec, the stakes got higher: China’s taken out an entire upstream natural gas company with Canadian assets. That means regulatory scrutiny like a China deal’s never gotten before. But — it closed without major hiccups. The message? Canada’s open for business.
5. China to the rescue? CNOOC Ltd. buys OPTI Canada Inc. (US$2.4 billion)
Deal announced July 20, 2011. Closed November 28, 2011.Troubled junior oil sands player OPTI announced its CCAA filing on July 13; a week later, it was inking a deal with China’s CNOOC. The deal, and the CCAA filing, were the culmination of a more than 18-month-long strategic review process, and CNOOC had been in OPTI’s data room a year earlier. But it didn’t bite until OPTI had already inked a deal with its bondholders on a major recapitalization. That meant CNOOC found itself in tri-partite negotiations, with bondholders firmly at the table —willing to get the M&A deal done, but keeping the recap Plan B in play too just in case the deal didn’t happen.
6. Strange bedfellows: ArcelorMittal/Nunavut Iron Ore Acquisition Inc. take-over of Baffinland Iron Mines Corporation ($590 million)
Timeline: Sometime in 2010: ArcellorMittal and Baffinland in confidential talks re: joint venture * September 2010: Energy & Minerals Group launches hostile bid for Baffinland * November 8, 2010: ArcelorMittal counters with $433 million offer * January 25, 2011: joint bid announced * March 25, 2011 closing. Starting with a hostile bid by a US private equity player through to the bidding war between the original bidder and global mining giant ArcelorMittal, and wrapping up with the two competitors deciding to cooperate on taking Baffinland out together, the deal continued to develop Canada’s deal jurisprudence around poison pills, with the Ontario Securities Commission reiterating that its Neo decision did not create new law and a target board of directors cannot use a poison pill to "just say no."
"The Commission used Baffinland to clear up some growing confusion around shareholders’ rights plans stemming from Neo," says BLG’s Jeff Barnes. "The markets should be grateful."
7. Iron in the soul: Cliffs Natural Resources Inc. buys Montreal’s Consolidated Thompson Iron Mines Limited ($4.9 billion)
Announced January 11, 2011. Closed May 12, 2011. The biggest Canadian iron deal ever, the biggest deal in mining globally during the quarter it was announced — so big, it affected the exchange rate for the Canadian dollar. And it showed North American players that Chinese investors will act like other prudent investors, with sovereign-owned enterprise Wuhan Iron and Steel selling its 19 per cent investment in Consolidated and entering into a support agreement with the American acquirer.
China. It’s everywhere.
8. Black as coal: Walter Energy buys Vancouver-based Western Coal ($3.3 billion)
Announced November 18, 2010. Closed April 3, 2011.
This cross-border take-out of Western by Alabama-headquartered Walter created the world’s leading publicly traded "pure play" metallurgical coal producer. That’s the ho-hum part of the deal. Western was put into play by UK hedge fund Audley Capital – think Carl Icahn with a British accent – which wanted an exit from its 23 per cent stake in Western and decided to execute it by selling 19.8 per cent of it to Walter Energy. But not all at once — first 10 per cent, and the rest of the stake upon completion of Walter’s merger with Western. Confused? So were Western’s remaining shareholders who did not want to sell the company, having survived a near-death experience back in 2007, and now enjoying a ride up on rising coal prices. But it was Audley who saved Western back in 2007, and helped engineer its strategy in the interim, so it was fitting that Audley put them into play — and ensured the deal got done at the absolute peak coal prices.
9. And now for something completely different: Centre hospitalier de l’Université de Montréal (CHUM) Public-Private Partnership (P3) reaches financial close ($2 billion)
Timeline: Announced in 2007 * Bids due January 27, 2011 * Financial close on June 30, 2011 * 59-month construction period for Phase 1 * 47-month construction period for Phase 2 * Lifetime of Project: 38.8 years. How’s this for a series of firsts: not only is CHUM the first P3 to make Lexpert®’s Top 10 Deals list, it is the largest P3 project in Canadian history as well as the largest P3 bond financing issue in Canadian history. It will have the longest construction period of any Canadian P3, as befits one of the largest and most complex hospital projects currently under construction in the world. And, it’s the Canadian P3 debut for each of Laing O’Rourke PLC, Obrascón Huarte Lain S.A. and Dalkia — the participants in the successful consortium. In the category of things only lawyers get excited about: deal structure permitted equity distribution on deeply subordinated debt during the second construction phase.
10. Retail wars: US retailer Target Corporation acquires up to 220 Zellers leaseholds ($1.8 billion)
Announced January 13, 2011. Closed September 26, 2011.
Target’s entry into Canada via its innovative lease deal with Zellers is perhaps the most interesting development in the Canadian retail landscape since Wal-Mart came north some 20 years ago. The innards of the highly structured and intensively negotiated transaction gave Target considerable flexibility on timing and deployment of stores, while maximizing deal certainty for the seller: a taut balance that’s tough to achieve. Plus, it’s a deal that had Main Street appeal. As Stikeman Elliott’s Brian Pukier puts it, "Target’s entry to Canada is one of the few deals this year that impacts, in a significant way, the average Canadian."
The Selection Process
Lexpert®’s Top 10 Deals of the Year list, published annually since January 2004, is unique and distinct from league tables prepared by accountants, investment banks and financial analysts and ranked, for the most part, by size of the transaction. This list is based on an extensive canvass by Marzena Czarnecka of Canadian M&A, securities and corporate finance lawyers, conducted in October and November 2011. To be considered, deals must be announced between Nov. 1, 2010, and Nov. 1, 2011, and closed or expected to close early in 2011, preferably by January 2012. There is no minimum size or preferred structure — this list’s definition of "deal" is anything Canadian lawyers worked on that they considered to be significant. The Canadian legal content of the deal must be significant, and most importantly, the deal must stand for more than itself: represent a trend, illustrate some aspect of the year’s economic climate or be a portent of things to come.
The Deal Story of the Year: The Battle for TMX ($3.8 billion)
Timeline: February 8, 2011: TMX and LSE confirm plans for $6-billion merger of equals * May 15, 2011: Maple makes $3.8-billion counterbid * June 29, 2011: TMX and LSE deal falls apart * October 7, 2011: Maple bid submitted to regulators * October 31, 2011: Maple and TMX sign support agreement * Last quarter of 2011/first quarter of 2012: regulatory review
The deal story that dominated Canadian headlines – and the attention of much of the battle – over 2011 and well into 2012 was the battle for future of the TMX Group, Canada’s own recently consolidated stock exchange. The attempted friendly merger of equals between TMX and the London Stock Exchange was a poster child for financial globalization. The disruptive hostile counter-bid by Maple Acquisitions Group was the poster child for the counter-trend of national concern. The cooperation required to pull together 13 of Canada’s largest financial institutions into the Maple consortium was unprecedented. As one lawyer underscored, "It is highly unusual to get the Canadian banks to do anything together, let alone a consortium unsolicited deal."
If, in Canadian deal-making, 2011 was a year defined by regulatory risk, this is the deal predicated on regulatory risk. Maple’s bid for TMX is, at press, live, and extended again until July 31, 2012 — but unconsummated. It involves four of Canada’s major securities commissions (each elbowing the others out to make itself more relevant) and Canada’s Competition Bureau, all of which are making Maple work hard to prove its case. (when LSE was in the picture also Investment Canada – faced, much too soon after its 2010 decision to kibosh the BHP acquisition of Potash Corporation of Saskatchewan – with a deal it might have had to make a tough call on).
If this deal happens, it will produce "seismic changes in the financial marketplace," says one advocate. Another nominator characterizes the TMX deal as having "all the ingredients of the Canadian deal of the century." Davies Ward Phillips & Vineberg LLP’s Vincent Mercier sums it all up from the perhaps partisan view of Maple’s co-counsel: "The TMX transaction is important because it is about the future of Canada’s capital markets. The legal issues are novel and complex, but the implications for Canada’s trading markets is what matters. The Maple investors and TMX believe that by transforming the TMX into a vertically integrated exchange and clearing group through the acquisitions of CDS and Alpha Group, we can enhance the TMX Group’s global competitiveness and make Canada’s capital markets stronger and more efficient."
But it ain’t a deal yet.
Marzena Czarnecka is a freelance writer.