Canada’s Fast-moving M&A Market

An 80¢ dollar and the cannabis rush have lured investors to Canada from around the world.
With so many large iconic Canadian companies from Alcan, Seagram’s, Inco and Stelco, to Molson, Tim Horton’s and Hudson’s Bay sold to foreign buyers, Canada has become a mid-market economy. And the deal landscape reflects that, not just in who’s buying but how deals are going down, M&A practitioners say.

“There are a lot of companies here ripe for investment by US companies and private-equity firms that can write checks for C$300 million to C$500 million,” says Emmanuel Pressman, chair of the corporate department at Osler, Hoskin & Harcourt LLP.  “There are billion-dollar deals to be sure, but they are fewer and far between. They’re not driving business.”

US private-equity funds bloated with new financings are beating the bushes in Canada, competing with domestic funds. A Canadian dollar at US80¢ is very attractive for American investors.

The same factors are attracting foreign strategic buyers, says Marc Barbeau, a corporate partner and chair of Stikeman Elliott LLP. “If I look at our deal list I see a balance of both, which creates an interesting market for sellers.”

Interesting, and crazy busy. “It’s been insane,” says Patricia Olasker, an M&A and corporate partner at Davies Ward Phillips & Vineberg LLP in Toronto. “I’ve been going seven days a week for months.”

David Allard, a partner at Lawson Lundell LLP in Vancouver, calls 2018 “the biggest, broadest-based transactional year” he can remember.

“Buyers are feeling the pressure to get deals done faster,” he says. “I did a deal a while ago that five years ago never would have happened in the way it happened, in the risk that was taken by the buyer — a very sophisticated buyer and a very large transaction. They just went for it.

“When you’ve got attractive assets out there and a lot of investors looking for good transactions you’ve got a very active market. People see being able to lock a deal up fairly quickly as a competitive advantage.”

The pressure for speed extends to due diligence.

To get deals closed, clients want due diligence more condensed and focused than in the past. 

Marc Barbeau of Stikeman Elliott in Montréal says that coincides with the growing presence of third-party representations and warranties insurers on a transaction, “which is having an impact on due diligence.”

The insurers essentially enhance or replace the indemnification given to the buyer by the seller. “It has been used widely in private M&A and is heading into the public M&A space,” says Barbeau.

He attributes it, in part, to a broader understanding and acceptance of this type of insurance and to new players who have made pricing more competitive.

Rep and warranties insurers generally don’t do independent due diligence before writing a policy; they work with the client and their counsel to review the work already done. And they aren’t shy about asking the lawyers to dig deeper if their antennae go up.

As more buyers chase a finite number of deals, another result is a proliferation of team-ups and consortium between global private-equity sponsors and Canadian pension funds, says Pressman of Osler.  

He points to BC Partners and the Ontario Teachers’ Pension Plan Board acquisition of GFL Environmental Inc.; the Blackstone-led consortium including the Canada Pension Plan Investment Board and global investment firm GIC for control of Thomson Reuters financial and risk business; the Blackstone and Ivanhoe Cambridge acquisition of Pure Industrial REIT.  

“There will be more creative solutions to the limited supply of deals, and the vast number of private capital pools chasing those same deals,” he predicts.

So what sectors are hot for transactions? Pressman names one that might surprise you: mining. Mining was a dirty word with investors for years, but it’s making a comeback. 

“Mining and, in particular, gold mining has obviously been on a tear with the Barrick Gold Corp. and Randgold Resources Ltd. closing in the first quarter,” he says from Toronto. The $6-billion deal created the world’s largest gold producer, and Barrick didn’t stop there. It did a friendly joint venture with Newmont Mining Corp. as Colorado-based Newmont swallowed up Goldcorp Inc. in a $10-billion transaction.

In March, Australia’s Newcrest Mining announced a C$806.5-million deal with Vancouver-based Imperial Metals to acquire a 70 percent joint venture interest in a British Columbia copper and 
gold mine.

Most Canadian M&A lawyers don’t see just a gold rush. They also see a green gold rush: cannabis.

Canada legalized cannabis for medical use in 2001, and the country developed cannabis companies and markets for cannabis listings in anticipation of recreational use being legalized in 2018. Olasker calls it possibly the hottest area in cross-border M&A right now.  

“I think in the coming year we’ll see the entry of more non-cannabis companies into the cannabis space. You saw [New York-based] Constellation Brands really affecting very nearly a change-of-control at Canopy Growth through a C$5-billion private placement. You saw [Virginia-based] Altria Group, the tobacco company, do the same thing at Cronos Group,” through an $1.8-billion investment.

“The kinds of deals we’re hearing about are other kinds of US companies, whether consumer products or alcohol or beverage or tobacco, looking to get a toehold in the industry by acquiring a Canadian company. So I think that’s where we’re going to see the action.”

There are implications for top US corporate law firms, which generally don’t touch cannabis transactions, she says. “I think those firms are going to be driven into it when they get a call from their big client Pfizer or their big client Coca-Cola saying they want to acquire a Canadian cannabis company.”

Moving from the gold rush and the green-gold rush, there’s also black gold: oil. And there the story’s not entirely as rosy.

Noralee Bradley, a partner at Blake, Cassels & Graydon LLP in Calgary, says deals remain challenging in the oil patch. “US private-equity funds are still sniffing around up here, but their timeframes are such that they want to see a bit more certainty.

“The sector is under some challenges, but valuations are quite good for people looking to add this type of company to their portfolio. The issue continues to be the gap, and whether people are willing to sell at that price. For buyers, I think it depends where they think the cycle is. And people may have lingering questions about whether our egress to market is going to get resolved.”

Canada’s difficulties getting the Trans Mountain pipeline expansion built, in the face of Indigenous and environmental challenges, has become emblematic of the problems getting its massive landlocked Alberta reserves straight to the Pacific for export to Asia.  

The Canadian government bought Trans Mountain from Kinder Morgan in 2018 expressly to try to shepherd it through all the regulatory processes and litigation. Many people are waiting to see how Prime Minister Justin Trudeau, a strong supporter of Aboriginal rights, handles it if native groups blockade pipeline work, as expected.

If the government succeeds in getting Trans Mountain built, says Bradley, energy deals will likely come gushing back. 

For now, she says, the interest is in midstream energy-infrastructure companies that move oil and natural gas via pipelines, store both and engage in ancillary activities such as improving the quality.

A lot of Canadian companies in the energy space are finding it hard to access capital, but that doesn’t mean they’re prepared to sell at today’s valuations. There are Canadian rules, she says, that provide a way to bring them to the table.

The rules permit investors to take stakes in a company through private agreements with existing shareholders. “Many companies have significant shareholders, they may even hold over 10 percent, who may be looking for monetization opportunities,” she says. “And as long as you’re buying from no more than five sellers, you can negotiate with them directly and buy up a pretty big stake. … Big enough to bring the company to the table to discuss a transaction.”

Other uniquely Canadian rules that come as a surprise to some US investors are in Canada’s takeover bid regime, says Patricia Olasker of Davies. 

Under 2016 amendments, bids are subject to a mandatory minimum tender of more than 50 percent of the outstanding securities of the class subject to the offer. Canada’s regime now requires, with just a couple of exceptions, bids remain open for 105 days. And even when tendering requirements and all other conditions have been satisfied, bids must still be extended another 10 days.

“Trying to deal with the amendments to our bid regime, in a hostile context, are causing a fair bit of indigestion for US acquirers. It’s something US counsel should be aware of,” says Olasker. “Many are surprised to learn of the 105-day bid rule and that unlike the US, where a bid can be made subject to financing, in Canada you can’t do that.

She says the amendments make it costlier and more difficult to get financing. “I think it’s having a bit of a chilling effect on cross-border M&A where financing is an essential component, a cash deal or where there’s a leveraged-finance component.”