From Dirt to Big Capital

<i>In the wake of huge global deals like Glencore's acquisition of Viterra, the national law firms are realizing what many regional firms already know: agribusiness holds promise</i> <br/> <br/>John Kosolowski remembers 30 years ago when he got a short, sharp education about agriculture's value to the Canadian economy and, potentially, to law firms. He was articling then with Cooke Shandling, which merged in 1986 with Duncan & Craig LLP, where Kosolowski is now a partner in the Edmonton office. His mentor back then was firm co-founder Allan Cooke. One day around 1983 Cooke asked Kosolowski what he thought was Alberta's most important economic sector. <br/> <br/>Naturally, Kosolowski replied “oil and gas,” like most everyone who lives in a province some have nicknamed “Saudi Alberta” would. That's when Cooke made a mock gesture to cuff Kosolowski in the back of the head. “He called me a wet-behind-the-ears, young articling student,” recalls Kosolowski. <br/> <br/>The correct answer? “It's agriculture,” Kosolowski now knows. “Agriculture makes a profit, farmers make a profit, farm businesses make a profit — and it goes right back into the community, right back into the economic engine. When the oil companies make profits, it goes south. It doesn't have the same economic impact as a healthy agricultural community.” <br/> <br/>
John Kosolowski remembers 30 years ago when he got a short, sharp education about agriculture's value to the Canadian economy and, potentially, to law firms. He was articling then with Cooke Shandling, which merged in 1986 with Duncan & Craig LLP, where Kosolowski is now a partner in the Edmonton office. His mentor back then was firm co-founder Allan Cooke. One day around 1983 Cooke asked Kosolowski what he thought was Alberta's most important economic sector.

Naturally, Kosolowski replied “oil and gas,” like most everyone who lives in a province some have nicknamed “Saudi Alberta” would. That's when Cooke made a mock gesture to cuff Kosolowski in the back of the head. “He called me a wet-behind-the-ears, young articling student,” recalls Kosolowski.

The correct answer? “It's agriculture,” Kosolowski now knows. “Agriculture makes a profit, farmers make a profit, farm businesses make a profit — and it goes right back into the community, right back into the economic engine. When the oil companies make profits, it goes south. It doesn't have the same economic impact as a healthy agricultural community.”

Seems obvious if you think about it. Isn't Canada known for its sweeping, wheaty vistas? Isn't a scene of combines trailing harvest dust at sunset a particularly iconic Canadian image? Drill rigs, not so much. Mine shafts? Hardly.

Then there are the hard economic numbers. According to the Conference Board of Canada, the food sector represents 9 per cent of Canada's GDP and employs 13 per cent of all Canadians. And both those numbers are increasing. Mining and oil and gas combined, however – though they steal the M&A and corporate law limelight – contribute only 4.5 per cent to our GDP.

Yet look at the websites of most medium to major Canadian corporate law firms and try finding those who list agriculture or agribusiness as a practice area. It's like looking for a pin in a haystack. “I don't go around advertising this,” says Kosolowski, who learned his lesson well enough from Cooke that he's now Duncan & Craig's agribusiness practice group leader, “but I think this is a real missed opportunity for law firms.”

He says Duncan & Craig – a 50-lawyer firm with offices in Edmonton, Regina and several small Alberta prairie towns like Vegreville and Drayton Valley – established its agricultural practice group 20 years ago. But many of the nationals may be missing the boat in the unassuming ag-sector. “They fail to realize that the legal issues that are facing farmers, ranchers, businesses are very broad,” says Kosolowski.

“They cut across the entire spectrum of different areas of the law. When we formed our practice group, the whole idea was to pull together lawyers in our firm with different specialties to meet and discuss what the issues in the sector are and how to tap into those legal needs.”

The bucolic, pastoral days of agriculture – think Van Gogh's Harvest at La Crau – are over just about everywhere in the world you care to look. Big farms, big tractors, advanced agricultural technologies are needed to keep an over-populated world from starving.

In 1960, there were just three billion people on the planet. There are some 6.8 billion of us now according to UN population estimates. By the year 2015, add perhaps another billion to that count. That's nearly eight billion appetites. And those appetites are changing as a growing and increasingly rural middle class in much of the developing world, such as Southeast Asia and the BRIC countries (Brazil, Russia, India, China), seek more protein, more brand names and more food varieties in their diets.

Kevin Grier, senior market analyst at the George Morris Centre, an agribusiness think tank, says this demand is the prime driver behind a rapidly evolving agricultural environment. One of the most critical elements of that evolution, he says, is a new, higher, pricing plateau for agricultural commodities: wheats, grains, vegetables, livestock. “Price levels are much higher than they were five to 10 years ago. And when I say higher, I am talking dramatically higher.” Corn, for example, is three times higher, thanks to US government subsidies for ethanol, a corn by-product.

The high price plateau, says Grier, “is a new reality and it's not going away.”

In his research at the George Morris Centre, Grier has seen the trend towards continually higher commodity prices wake up big capital. With the high prices comes volatility. Commodities have always been the nitro of the investment world. But this intensified volatility – the potential high-risk/high-reward quotients – are now attracting big private-equity players and even normally staid institutional investors like pension funds to the agribusiness sector.

Increasingly, says Grier, his centre has been working with lawyers and venture capitalist, doing their due diligence for possible agribusiness investments. For instance, the centre recently helped a VC firm that was scoping out Hylife Inc., Canada's biggest pork processor. Agriculture, he says, is now “an environment more suited to those who can withstand the risk, those with larger working capital, those who are capable of implementing and running risk-management programs.”

It's one reason M&A activity is ticking upward in the agribusiness sector, both in Canada and internationally. Another is that Canadian investors, who survived the credit crunch better than their US and European counterparts, have equity stashed away to make opportunistic investments in solid sectors like agriculture.

A PwC report on Canadian M&A activity in the first quarter of 2012 illuminates the shift. It reveals that, compared to the rest of the world, which suffered through the M&A doldrums last year (the slowest Q1 in 10 years, globally), Canadian deal values were up 24 per cent.

Secondly, PwC reported that, while M&A declined in the mining sector in the Q1 2012 (though possibly due to a breather after lots of deals in the previous quarter), Western Canadian provinces accounted for 67 per cent of all M&A in Canada. And they weren't all oil and gas deals, which shrank in volume. Where oil and gas once accounted for 80 per cent of all Alberta deals, these days the sector represents only 50 per cent of takeovers.

Meanwhile the agribusiness sector had a 15-per-cent share of Canadian M&A in Q1, putting it in PwC's top five industries list. That M&A market share for agriculture was, it needs to be said, bloated by one particular deal: Swiss-based Glencore International PLC's US$7.3-billion acquisition of Saskatchewan's Viterra Inc.

Patrice Walch-Watson, a partner at Torys LLP in Toronto, was in on that one. She represented Regina-based Viterra, a grain-handling and agricultural services company she's worked with for years. She and Torys helped Viterra – through a variety of strategic acquisitions – go from a once nearly bankrupt concern to the juicy target that attracted Glencore, the world's biggest commodities wholesaler.

For Canadian commercial law firms, the Glencore-Viterra deal should be the big flare signalling that agriculture isn't the hee-haw business some might think. “I agree that the agriculture sector in Canada and probably globally hasn't been seen as sexy from a legal perspective,” says Walch-Watson. “But I think that that tide is turning. There's been a whole lot of global consolidation. And I think that is still continuing.
“And the size of the deals are big,” she adds. “The issues are interesting, particularly with foreign investment and competition. And I think that people are seeing this as a sector to watch.”

David Woollcombe, a partner at McCarthy Tétrault LLP in Toronto, had a side hand in the Glencore deal representing Agrium Inc., which as part of Glencore's takeover, agreed to buy Viterra's agri-product retail business. “I think what this says is, there's really a global perspective to what we have often thought of as a local industry,” says Woollcombe. “To have a player like Glencore establish a significant presence in the Canadian commodities sector shows Canada is an important player in that sector.”

The Viterra takeover, to paraphrase Woollcombe, is a pinch on the behind for foreign investors that perhaps they've previously overlooked Canadian agribusiness opportunities. Canada has gobs of productive agricultural land and a stable economic, social and political environment. Africa has plenty of land too, but plenty of chaos, violence, instability and inertia that make it a very risky prospect. So Woollcombe expects more inbound than outbound work. “But that's not to say there won't be some Canadian players looking to beef up abroad.”

However, he's not expecting many more blockbuster deals in Canada the magnitude of Glencore-Viterra; there just aren't that many companies Viterra's size in this country. “But I do think you will see consolidation in the sector among smaller targets.”

Consolidations, of course, sprout legal work. Complicated work that large national law firms want. As this article was being written, there were a spate of deals and strategic investments supporting the premise that capital is beginning to flow so rapidly into Canadian and international agricultural sectors that it's carving them into new shapes.

Last year Japanese trading house Marubeni Corp. sealed a deal to buy US grain merchant Gavilon for $3.6 billion. That tucked Marubeni into position to capitalize on China's demand for imported corn from the world's biggest supplier.

In January, Toronto-based Hangfeng Evergreen Inc., a developer and producer of value-added fertilizer – a product in heavy demand as China and Southeast Asia rapidly modernize their agricultural production – announced a privatization proposal from its president and CEO, Xindo Yu, who wants to acquire all the company's outstanding shares. Hangfeng's board engaged Osler, Hoskin & Harcourt LLP as its independent advisor for that one.

That same month, Itochu Corp. – a Japanese holding company with interests in mining, textiles, minerals and much more, and operating in more than 60 countries – bought a 33.4-per-cent stake in Manitoba pork processor HyLife Ltd. for $56.5 million. The deal helps rapidly growing HyLife expand deeper into lucrative Asian markets.

Saskatchewan lawyer Jeff Grubb, who along with his Vancouver colleague Wendy Baker is a national co-chair of Miller Thomson LLP's agribusiness and agrifood group, has a unique perspective on the sector: he owns and operates a 600-acre grain and oilseed family farm near Balcarres, Saskatchewan. On the ground, and not just in sector boardrooms, he's seeing the global evolution of agriculture speeding right up Saskatchewan's country roads. Foreign interests – with big money – are out there.

“We are seeing the Chinese, the Americans, the Europeans, East Indians — we are seeing a lot of people from outside of the country looking to invest in Saskatchewan and Western Canada in terms of ag-land. And the market place for ag-land in Western Canada is really hot. It certainly is a seller's market.”

Miller Thomson formed its national agribusiness group back in 2009, though both Grubb and Baker have practised in the sector for nearly 20 years each. “It's not something new to us.” And what clients are looking for, he says, are not just lawyers who can look at their contracts or their litigation problems and give them legal solutions. “They are looking for someone who understands their industry. And that's where we've been able to excel over the last number of years.”

And that industry is as complex, challenging, stimulating and rewarding as anything corporate lawyers are tackling these days, adds Baker. “When you start looking beyond putting plants in the ground or animals in the field, you have all kinds of other things: primary and secondary processing, transportation, warehousing, retailing. And the legal issues that flow out of that are numerous. There are zoning issues, environmental issues and huge regulatory issues on the
supply management side. ... It goes on and on. It's a great area to practise in.”

Emanuel Pressman doesn't need convincing. “In the last 18 months in particular there's been a lot of interesting developments,” says the Co-Chair of Oslers' M&A specialty group. Pressman believes the big names in the agribusiness sector – Cargill, Archer Daniels Midland, Bunge – are all likely scouting for strategic acquisitions.

While Oslers, as with many top Canadian commercial law firms, doesn't have an agribusiness practice group, Pressman doesn't rule out the possibility. In light of current trends, he says, “We may see a shift towards agriculture expertise and agriculture practices.”

Many lawyers may not realize just how diverse agribusiness legal work can be. “It translates into a lot of different industries and sectors within agriculture in general,” points out Pressman. “There are grain handlers, there are fertilizer manufacturers and distributors, there's biotechnology in the sense that biotechnologies and genetically engineered technologies create advances in agriculture and crop production.”

And there are plenty more components: transportation, foreign ownership, marketing agreements, competition law, cross-border issues, to name a few. For lawyers, says Walch-Watson, it adds up to a lot of issues, challenges and stimulating work.

For instance, she says, “global consolidation is really bringing the anti-trust issues to the fore, because we are talking about food security eventually.” Regulators here and abroad are certainly paying closer attention to food-related M&As. In Saskatchewan, Premier Brad Wall pressured the federal government to ensure Glencore keep a promise to increase capital spending in Western Canada by $100 million over five years. Meanwhile, China's regulators have stalled their required approval of the Marubeni-Gavilon deal.

Back over on the Prairies, where he's done his share of agribusiness law as an original partner in the Calgary office of MacPherson Leslie & Tyerman LLP, Scott Exner agrees that many larger firms seem almost embarrassed to admit they do any work in the agricultural field. “Certainly I think, in Alberta, oil and gas is the focus for most law firms. Agribusiness was underserviced when you looked at the city of Calgary and to a lesser extent Edmonton. I think the lawyers who are in the space are in the smaller centres like Lethbridge, Red Deer, Medicine Hat.” (Besides Calgary, ML&T is in Edmonton, Saskatoon and Regina.)

“It's been a lot smaller firms working on agribusiness matters,” continues Exner. “But I wouldn't be surprised if that changes over time as people realize the amount of activity and legal work that is generated in that sector. I expect probably more competition,” adds Exner, who's been practising in the sector since 1994, mainly with grain-handling companies. Still, he believes the agribusiness sector, especially in Alberta when compared to Manitoba and Saskatchewan, remains underserviced.

Domestically, says Exner, one of the most critical evolutions in agribusiness has been the end of the Canadian Wheat Board's monopoly over grain sales in 2012. That's bound to trigger more consolidation among grain handlers as they vie for the CWB's former global business.
In Saskatchewan a loosening of restrictions on the sale of farmland several years ago has also triggered a wave of purchases of huge tracts of farmland. That's pushing up land prices and, at the same time, pushing out small farmer-run operations.

At Duncan & Craig, Kosolowski is seeing private-equity clients buy up large swaths as well. “Even non-farming investors are going out and acquiring huge, huge tracts of land,” says Kosolowski, who's done about half a dozen deals for one client who has snapped up no less than 15 quarter-sections of land at a time. “It's solely for the purpose of buying it and renting it out,” explains Kosolowski.

After the 2008 global financial crises, suggests Kosolowski, “people are struggling to put their money somewhere where they can get a reasonable rate of return. There's that old saying: you can't go wrong buying dirt because there is only so much of it. That goes a long way to give comfort to investors buying the land. The land is not going to disappear.” With the world's growing food needs, Canadian farmland has recently risen in value 3 to 4 per cent annually, markedly more than it used to, says Kosolowski.

When you have farms – which are revenue-generating businesses – with succession problems, “that's private-equity territory,” declares Jeremy Grushcow, General Counsel at Calgary-based Oncolytics Biotech (and a partner at Norton Rose Canada LLP at the time of this interview). “So we have a succession crisis in agriculture globally over the next 20 years.” So even as farms consolidate in the wake of that problem, finding qualified people to manage those operations will also be a problem. Demographic realities will force governments to bend land ownership rules, making it easier for private-equity and foreign firms to plant seeds in our agricultural sector.

That, too, will help drive innovative legal work in the agricultural world both in Canada and elsewhere. “In different parts of the world, you are facing different kinds of problems,” explains Grushcow. “In Canada our problem is how to work within the foreign-ownership restrictions. In Australia they have no foreign-ownership restrictions. So one problem our lawyers face is, how do you deal with political fallout of the food security issues around foreign purchases” of Canadian companies and land? “Each side of the regulatory seesaw has its own challenges.”

Blake, Cassels & Graydon LLP is – along with Norton Rose – one of the few major law firms to set up a specific agricultural practice group thus far. Michael Stevenson and Frank Guarascio co-ordinate Blakes' food, beverage and agribusiness group, set up in 2010 after researching the sector the previous year. “Our research clearly demonstrated the importance of agribusiness and law,” says Stevenson. “What we were seeing in global trends indicated a healthy forecast for the agribusiness sector. So based on that research it was easy for us to decide it was time for a national Canadian firm to take on a prominent role in the sector.”

During their research, says Stevenson, only four national firms used agribusiness as an identifier for their practices. Agribusiness has been seen as just too small a regional potato. “It hasn't really been the domain of larger national firms. But with the increased importance of agribusiness in the national picture, the globalization of it, and foreign investors coming in, and Canada with more interest abroad, I think that over the last three or four years you have found that the larger Bay Street firms have become or are becoming more interested,” says Stevenson. “You can't pick up the Globe or the National Post without seeing some article on agribusiness these days.”

And as deals become bigger and business goes international, agribusiness firms are looking more often for one-stop legal firms that can handle M&A, environmental work, intellectual property issues, cross-border challenges, financing, everything. But in Stevenson's view, that doesn't mean that smaller regional law firms will get completely squeezed out of the field. “The regional firms will always be a relevant part,” he predicts. Because, for instance, land registration is provincially regulated and municipally administered, regional firms have the advantage of contacts and familiarity. “It's just the nature of the beast.”

But, adds Guarascio, agribusiness is fast becoming more available to Bay Street firms. From 2009 to 2011, when the financial crisis began softening up M&A activity, Canada's banking, mining and energy sectors kept chugging along. “But if you looked at the M&A activity at that time, food and agribusiness were, I think in 2010, in the top four, by deal. And we noted this.”

From Stevenson's perspective, agribusiness is “not something that can easily be jumped into by any firm. When you are doing large M&A transactions, you need a broad range of practices. On any M&A transaction, food or otherwise, you need to bring a lot to the table. You need to bring in M&A expertise. And then there are additional areas of law, such as employment, pensions and benefits, such as intellectual property, environment.” A strong food regulations understanding is also critical.

Nevertheless, Guarascio thinks firms with a full portfolio of services can jump in. “Our five or six competitors are probably able to get into the space if they choose to pursue it.”

At Oslers, reveals Emmanuel Pressman, there are no specific plans to position the firm as having an agricultural specialty. “We are not branding or promoting any unique agricultural expertise or talent. But our experience in general, especially in mining and mergers and acquisitions and in corporate law, conditions us to take advantage of opportunities to stay in this sector. And we are obviously monitoring this sector very carefully.”

At Norton Rose, however, it's a different scenario. It strongly promotes its global agribusiness practice groups, which focus on areas including Africa, South America, North America, Europe and Australia — all the major food growing regions of the world. Prior to his appointment at Oncolytics Biotech in late February (after this feature was written), Jeremy Gruschcow headed the Canadian arm.

As a firm, says Grushcow, Norton Rose structures itself around industry verticals and groups rather than transactional specialties. In 2012, the firm did a survey called Food and Agribusiness: Securing supply in an uncertain world 2012. The firm surveyed 121 senior agribusiness executives from around the world. Topics included regulations, subsidies, the food-versus-fuel debate, the growing impact of the BRIC countries and the high risks of investment in Africa. The answers convinced Norton Rose of agriculture's rising prominence for the legal sector, and prompted it to beef up its agribusiness practice capabilities into one Grushcow describes as going from “potash to parliament.”

“It's hard to describe agribusiness as a new opportunity. It's not. It's one of the world's oldest industries. But on the services side, it's something that people are relatively new to.” Norton Rose, he says, wanted to get in front of the trend to make sure they have the capabilities to execute transactions in the sector.

“I would love to say our law firm saw this market opportunity before everyone else,” confesses Grushcow. “We didn't. One of the things that drove us to throw our expertise in this area was the attention that the investment banks are paying to the sector over the last few years; that private-equity clients and other financial clients have been paying to the sector.”

Seems the big firms are finally learning a lesson that John Kosolowski was nearly cuffed for 30 years ago.

Anthony Davis is a freelance business and investigative writer based in Calgary.