Deal-making continues extraordinary momentum in Canada

Neither inflation nor the prospect of a higher interests rates is expected to rain on M&A's 2021 parade
Deal-making continues extraordinary momentum in Canada

After 2020’s pandemic uncertainty hindered M&A activity, 2021 was a banner year. While M&A lawyers say 2022 will likely not break records, they predict a continuation of conditions such that deal-making will maintain its torrid pace. 

While inflation, a future rise in interest rates, and the rolling back of government assistance programs will add some weight to the other side of the scale, lawyers who spoke with Lexpert predict these pressures will not diminish activity significantly. Fuel-adding factors are vigorous private-equity activity with abundant dry powder, climbing commodity prices in the oil-and-gas sector, historically low interest rates, and Canadian companies exploring acquisitions abroad. Environment, social, and governance (ESG) factors also remain a crucial consideration for deal-makers in 2022, say lawyers.

Lexpert also spoke with lawyers just before the Russian invasion of Ukraine, which has added more uncertainty to 2022’s outlook.

Kim Le

“It was a huge year for M&A, 2021. The activity was at historic, all-time highs,” says Kim Le, co-head of the mergers & acquisitions and private equity groups at Stikeman Elliott LLP. “For M&A in 2022, I see a lot of confidence and a lot of optimism because the ingredients that made 2021 such a blockbuster year for M&A are all still here.”

Among the busy sectors in 2021 were technology, healthcare, oil and gas, mining, and clean tech, and none of these is showing signs of slowing down, she says. 

Chrystelle Chevalier-Gagnon

“The worry of inflation was very distant in 2021,” says Chrystelle Chevalier-Gagnon, a partner in the business law group at McCarthy Tétrault LLP. In the new year, she says, that changed as 2021 produced a 4.8-percent inflation rate, a 30-year high. 

“What we see currently is that it’s not having an impact on deal activity. And I don’t think it will until the interest rate rises to the point [where] it has an impact on returns and the availability of debt. I am not foreseeing that to arrive quickly.”

Brent Kraus, co-head of the corporate department and co-head of the mergers & acquisitions practice at Bennett Jones LLP, adds that inflation worries should be tempered with the understanding that capital has been cheap for a long time.

“There is a lot of discussion about inflation, but we have to remember we’re coming off historically low interest rates,” says Kraus. “It’s a factor, but … at least in the near term, we’re not seeing it as having a muting effect on the tempo of M&A.”

While inflation, rising interest rates, and supply-chain disruption have been topics of discussion in the market, Le does not see these factors slowing down activity.

“I think 2021 saw a lot of supply-chain disruption, and that didn’t slow the market at all,” she says. “The conversation around inflation has been in the news for quite some time. And we all knew the day was going to come on rising interest rates. 

“There is going to be some volatility, as people adjust to any type of uncertainty, but we have a lot of confidence that that is going to even out.”

Kristopher Hanc, Bennett Jones’ capital markets practice co-head, adds that the robust equity market in some sectors, combined with the prospect of more inflation, may ignite a push for more near-term M&A.

In 2021, the M&A market was also bolstered with “the rise of the Canadian champion,” as outbound M&A saw a resurgence after a slow 2020, says Hanc. One example was Canadian Pacific Railway Ltd., which acquired Kansas City Southern in a deal worth US$31 billion. 

Another was Bank of Montreal, which signed a deal to buy Bank of the West from BNP Paribas for US$16.3 billion.

The Canadian cloud-based software and technology company Dye & Durham was also active. The company announced an agreement to acquire Link Group, an Australian record-keeping technology and information company, for $3.2 billion this past December. Dye & Durham also inked a deal with Telus Financial Solutions to buy the payments business for $500 million that same month.

“For many years, there was talk about the hollowing out of corporate Canada,” says Hanc. “I think we are starting to see some real Canadian champions. And we expect that to continue in 2022 as Canadian companies look to invest abroad.”

Also in the resurgence category has been the “dramatic increase in commodity prices” in the energy sector in 2021, says Kraus. This increase resulted in some consolidation and higher confidence in deals. It has also produced more cash, and while some companies will focus on debt reduction, others on share-buybacks, this will inevitably lead to more money in the system for M&A opportunities, he says.

In the last four to five years, private equity has pulled back from oil and gas, but with optimism in the industry returning, the time is ripe for a redirection of that capital, says Kraus.

Hanc also expects a strong showing in basic materials, driven by continued investment in “green” metals such as copper, lithium, and other battery metals.

Private equity also had a big year in 2021. Of Canada’s approximately 3,000 transactions, worth USD$144 billion, 22 percent were private-equity-backed, according to Refinitiv. 

The chances are good this will continue, says Le, as there remain historic dry powder levels, boding well for pricing evaluations. 

It is “still a seller’s market,” she says, “as it has been for so many years. Private equity continues to innovate. They’re seeking out assets and alternative markets. They’re investing in earlier-stage companies, and they’re holding investments for longer than standard hold periods.”

According to Chevalier-Gagnon, private equity’s fundraising should remain strong as long as deal activity remains high. Over the last year, she says the most attractive sectors in Canada for private equity were business-to-consumer, energy, and information technology. “We expect a lot of activity in the technology sector in 2022.”

“An interesting point on sectors is, we’ve seen in the US, for example, a lot of deals in the health care sector,” says Chevalier-Gagnon, “which in Canada – for obvious reasons – is not as trendy. Nonetheless, we saw many deals happen in the health care sector, just of a much smaller magnitude.… It was 10 percent of all deals closed.”

In 2022, ESG will continue to grow in importance in M&A deal activity, says Kraus.

“The ESG aspects of M&A are now an integral component of selling a deal, both to investors and the market,” he says. “More and more companies, I would say, are looking at M&A as an opportunity to project and implement corporate social responsibility, be that an opportunity to address board diversity in their own company or, in some industries, to address emissions management and sequestration.”

“ESG has been on everybody’s radar and a part of every conversation,” says Le.

Whenever Stikeman is evaluating a company for a client, ESG takes centre stage among “the compelling reasons to acquire a business,” she says. 

For two prominent examples of the market’s ESG focus, Stikeman client TPG recently raised US$5.4 billion toward its Rise Climate fund, and, also in 2021, Brookfield Global Asset Management raised $7 billion for its Net Zero fund.

“Investors are taking ESG incredibly seriously,” says Le. “So it’s part of everyone’s conversation.”