Global investors are hot for Canada, keeping M&A lawyers busy. How long will the good times last?
By Sonali Verma
From the Spring/Summer 2011 issue of Nexus.
There are two bubbling sounds in the offices of Bay Street law firms these days. One is the baritone burble of coffee makers late into the night as young lawyers work feverishly over a slew of merger and acquisition cases. The second comes much later — the quieter, sibilant fizz of champagne to celebrate the resurgence in takeovers.
“There’s certainly a lot of M&A activity,” says Jean Fraser, JD 1975, partner, corporate, at Osler, Hoskin & Harcourt LLP. “Your phone rings more often. You always have more deals on your desk than you did last year.”
Sharon Geraghty, partner at Torys LLP, agrees, pointing out that M&A mania sometimes verges on the ridiculous.
“First, Inmet wants to merge with Lundin. Then Equinox bids for Lundin. Then Minmetals bids for Equinox. Then Barrick bids for Equinox,” she says, rattling off names of mining companies involved in what was ultimately a US$7.7-billion deal.
“You just have to look at that and laugh: companies are falling over themselves to scoop up these deals to the point where there are multiple offers for the same company.” (She had barely finished saying this when a consortium of Chinese bidders stepped up and threw its hat into the ring as well.)
Tory LLP’s Jamie Scarlett: Blocking foreign buyers can have repercussions,
as Canada is also shopping abroad.
The reasons for the revival in deal-making are simple. The recovering global economy has swept commodity prices higher and resource-rich Canada’s fortunes with them. Resource producers are flush with cash, and companies are more comfortable taking on debt and issuing equity to finance acquisitions because growth appears more certain than it did three years ago.
And Clay Horner, LLB 1983, chair of Osler, says it’s only just starting. “One reason we’re seeing a lot of M&A is, for a couple of years, we saw very little. Companies are getting on with growth plans and strategies, as the world continues to internationalize at a great rate.” And the outlook appears robust as well, says Horner. “It reflects pent-up demand for transactions that didn’t get done because of the financial crisis.”
That’s because credit had dried up for all but the biggest companies in 2008 and 2009, and uncertainty over when a recovery might take place made buyers wary of pulling out their wallets.
“In the market meltdown, you couldn’t get anyone to finance an acquisition,” says Jamie Scarlett, JD 1981, co-head of the mining practice at Torys. “Secondly, there was the problem with values. It was like selling your house in a falling market — you are always pricing it wrong. You couldn’t get heads together on price.”
Two years later, markets appear more stable and companies more confident. And it is corporate Canada and its advisers that are the biggest beneficiaries. In 2010, mergers and acquisitions in Canada totaled $177-billion, according to Thomson Reuters data. That compares with $146-billion a year earlier. The biggest deals included Toronto Dominion Bank’s $6.3-billion purchase of Chrysler Financial, Kinross Gold’s $6.1-billion acquisition of Red Back Mining and Sinopec’s $4.7-billion stake in Syncrude.
Keep the coffee percolating, says Clay Horner, chair of Osler:
"One reason we're seeing a lot of M&A is, for a couple of years, we saw very little."The twin themes that dominated the year just past were mining and marketplace consolidation. They appear closely intertwined in the most high-profile case of 2011 as well: The London Stock Exchange Group Plc’s proposal to take over the TMX Group, which runs the Toronto Stock Exchange. And since then, Maple Group Acquisition Corp., a consortium of Canadian banks, pension funds and financials, has also launched a bid.
“It is staggering how large the TSX is,” says Scarlett. “If you take out the biggest four or five mining companies on the London Stock Exchange, its market capitalization of mining issuers would be smaller than Toronto’s.”
The proposed deal reflects the international community’s growing hunger for resource companies, for which Canada has earned a global reputation as a powerhouse. Not bad for a country with a longstanding history of being exploited as ‘hewers of wood and drawers of water.’ But it’s also a story about survival and competitiveness for the two exchanges.
“The great strength of TMX in the natural resource space was a tremendous attraction for the LSE. Canada has done a very good job of creating a space for natural resource companies, where they can thrive,” Horner says.
And it’s not just Canadian companies that the LSE is after. Almost 200 of the listings on the Toronto Stock Exchange or the Venture Exchange don’t even have operations in Canada, Scarlett points out. Their management teams and mines are in Australia, Africa or other resource-producing regions.
Yet it is a listing in Toronto that draws them like a magnet. Trading on the Toronto Stock Exchange is likely to translate into an analyst following as well as providing several comparable peers, which makes it easier for resource plays to attract investors.
“The market is seen as being receptive to small new companies. Canada has more people who are willing to take a punt on new projects. Some lose and some win, but those who win, win big,” Scarlett says.
And with more than half of the world’s publicly-listed mining companies traded on the TSX, it’s no wonder strategic buyers are looking to Canada, says Richard Clark, JD 1974, chair of Stikeman Elliott LLP’s Toronto mergers and acquisitions/private equity group.
Increasing demand for natural resources from China, India and most industrialized economies amid limited supply is only stoking investors’ appetites. “It’s easier and usually cheaper to buy through M&A transactions than develop it yourself,” he says.
Clark points to India’s Tata Group, one of the world’s largest steel producers, and its recent decision to help New Millennium Capital Corp. develop some of its iron ore properties in Quebec and Labrador. That came weeks after its rival ArcelorMittal won control of iron ore deposits in Nunavut that had been owned by Baffinland Iron Mines Corp.
And control is the point, Scarlett says. “The resources sector is incredibly international. What are the Chinese investing in? What about the sovereign wealth funds from the Middle East? They are all putting money into oil and gas and commodities and agriculture. You have to feed people.”
It’s a win-win situation, because Canada has the resource-rich land mass that appeals to those with the capital to exploit it. “That has to come from somewhere,” he adds.
And although it’s the mega deals that grab headlines, the hallmark of the mining sector has been smaller deals, which have come roaring back, says Neill May, LLB 1990, partner at Goodmans LLP.
“In the mid-tier and junior level, activity has been phenomenal,” May says, citing conferences held “for the sole, unvarnished purpose” of sourcing, soliciting and sealing the deal, sort of sector-specific speed-dating events for companies. Miners that miss out on finding a match at one conference are always primping themselves for the next, while even those that score a partner are perpetually on the lookout for another.
Opportunities abound, but foreign buyers can be in for a rough ride. Case in point—the one that didn’t make it past regulators in 2010: BHP Billiton’s $38.6-billion proposal to buy Potash Corp. of Saskatchewan. The government rejected it on the grounds that it was a strategic asset that should not be controlled by foreign companies. This has now made the politics of approval an important issue for any prospective buyer.
“From the perspective of the legal industry, the BHP-Potash transaction puts a premium on not only structuring a transaction properly financially but on positioning it properly and dealing with political and regulatory issues way out front,” says May. “It puts a premium on getting competent and capable advisers engaged early in the process.”
The BHP-Potash case should serve as a warning to the LSE Group, he says. “Potash is a unique issue in the political environment of Saskatchewan. The TMX Group is a unique animal in the Ontario and Canadian landscape.”
The other point to keep in mind is foreign mergers and acquisitions are a two-way street, Scarlett says. Canada needs to be careful about putting up walls, because Canadian companies are also shopping abroad.
“Should we let strategic or cultural assets fall into the hands of foreigners? Of course not,” he says. “But what is strategic or cultural? It’s a good debate to have. Potash Corp. didn’t seem strategic to the government of Saskatchewan when they privatized it.”
Still, the debate over foreign acquisitions is long overdue, Horner says. “We were late to the party of thinking strategically about economic advantages. Whether it is the BHP Billiton-Potash case or the LSE-TMX case, there is a lot of debate and commentary, and that’s a terrific thing.”
And the government’s decision to reject the BHP-Potash marriage won’t put a damper on other mining companies’ ambitions, May says. “There is no obvious abatement on the horizon,” he points out, citing a crush of deals that are already in the pipeline, at various stages of completion.
The Potash proposal, which signaled a great revival in acquisitions, appears to have set the stage for the year ahead as well. A Blake, Cassels & Graydon LLP report says concerns over food scarcity will make agricultural commodities and fertilizer — and the Canadian companies that produce them — increasingly attractive. The pursuit of deals worth more than a billion dollars will continue to strengthen, even though smaller transactions made up 90 per cent of the deals struck in 2010.
But even mega-deals will be a little smaller than the Potash case, Scarlett says. “You won’t see a lot of deals the size of Potash, simply because there aren’t a lot of deals the size of Potash. Will we see a large number of $1-billion to $5-billion deals? If the market for commodities stays strong, we will,” he says.
If it reminds M&A lawyers of the euphoria that surrounded takeover activity at its peak about a decade ago, fresher memories of the financial crisis should make companies more circumspect. Osler’s Fraser says she has seen “sensible and more disciplined” decision-making in the latest round of deals. “It’s pretty busy, but I’d like to think that the experiences of the last Great Recession left everybody involved in the f inancial business generally aware of what can happen,” she says.
Yet buyers can sometimes get carried away by the possibilities, as the money being thrown at Equinox has shown. Many observers believe that Barrick Gold, whose bid was the eventual winner, paid a rich premium for the copper miner and that it will have to eat crow if copper prices fall steadily, as is widely expected, over the next five years.
“It is a little harder to find the values you want after the bull run we’ve had. Assets could be too expensive. There is always a price to buy a company that is too much,” Scarlett says. “When buyers start talking about strategic value, it may mean ‘I’ve paid more than the economic assessment said I should have.’”
May points out that deal-making momentum seems to take on a life of its own as bidders put more and more money on the table, setting expectations even higher for takeovers that follow. “A high level of activity often begets a higher level of activity. It may just be history feeding expectations,” he says.
Torys’ Geraghty agrees deals can sometimes get out of hand. “There is this constant feeling of ‘This is something big that I’m working on’—and then it gets trumped,” she says. “It reminds me of 2006, 2007, 2008, when the unthinkable kept on happening. No deal was seen as too big to imagine—and they just kept on happening.”
One deal that few M&A lawyers themselves had imagined was a merger in the legal industry earlier this year, when iconic Montrealbased national law firm Ogilvy Renault LLP agreed to combine with London’s Norton Rose.
The merger sparked rumours of similar agreements across the legal industry, with Baltimore-based giant DLA Piper LLP, Chicagobased Baker & McKenzie LLP and Britain’s Clyde & Co LLP all indicating interest in Canada.
This has renewed debate over whether a standalone Canadian legal market is sustainable, May says. “Our economy and our market participants are obviously integrated with their counterparts across the border. A very small industry has sustained an independent legal system.”
But for now, Bay Street’s lawyers are holding their own, rolling up their sleeves—and keeping the coffee brewing—as the international deals roll in.
“Everybody works harder,” Fraser says. “You just grind it out, harder and faster, and you delegate more. A lot gets pushed down to relatively young people—which is terrific for associate lawyers. They get really great experience in a hell of a hurry.”
Photography by Jeff Kirk
