Two of Blake, Cassels & Graydon’s M&A partners have identified some noteworthy trends that they expect will have an impact on the Canadian M&A landscape in 2010.
STRATEGIC BUYERS AT THE FOREFRONT
With the credit crunch gradually easing and markets appearing to stabilise, strategic buyers are on the lookout for attractive deals at reduced multiples. As affordable debt for leveraged transactions remains difficult for financial buyers to obtain, the pace of buyouts will continue to be slow in Canada.
INNOVATIVE DEAL STRUCTURES
Cash will again be king in 2010. Buyers with weak cash positions will need to be more flexible in structuring deals to overcome the current credit environment. We expect to see more transactions that incorporate earn-outs, contingent value rights, convertible debt instruments and high or full-equity transactions. The refinancing of existing debts of targets may continue to be challenging and the financial position of the purchaser, including its relationship with lenders and its ability to issue new debt, will be key.
MORE DISTRESSED TRANSACTIONS
Historically, insolvencies and restructurings have continued to escalate even after signs of economic recovery, a pattern that may recur in 2010. As distressed debt continues to offer a high risk-adjusted return and cheap route to control, it will remain an attractive option for investors.
PREPARING FOR THE TURNAROUND
Asset divestitures and spin-offs will increase as strategics raise capital to shore up balance sheets and prepare for acquisitions. We expect larger companies to divest non-core assets and focus on fundamental sectors and strengths. As the recovery accelerates, companies whose balance sheets are in shape will be at the front of the line for new M&A opportunities.
INCREASED ANTITRUST SCRUTINY
In 2009 the government adopted a new supplementary information request (SIR) process for mergers and appointed a new Commissioner of Competition. The Commissioner has indicated an intention to undertake comprehensive examinations of those transactions that could raise competition issues, and a desire to bring responsible litigation in appropriate cases.
MORE HOSTILE DEALS
In 2009 depressed valuations and economic challenges created the strongest buyer’s market in decades. Despite signs of recovery, the continued gap between buyer and seller expectations will lead to further unsolicited, opportunistic bids for public companies. The new SIR process under the Competition Act has timing implications for bids that raise competition issues and will need to be considered carefully in strategic planning.
GREEN TECH TARGETED
The demand for renewable energy assets will grow as participants in carbon-heavy industries seek to pre-empt regulation and reduce their total carbon footprint by acquiring renewable energy and other green assets. Government incentive programmes, such as the feed-in tariff (FIT) programme introduced by the Ontario Power Authority that provides favourable pricing for renewable electricity generation, will prompt developers to undertake new renewable energy projects that will be ripe for acquisition by strategics.
STRONG CURRENCY WILL LEAD TO ACQUISITIONS IN US
Recently the preferred targets of takeovers by foreign entities, Canadian companies will likely take advantage of the strengthening Canadian dollar and acquire US businesses at relatively low prices.
CONTINUED MIDDLE-MARKET ACTIVITY
Middle-market deals will continue to get done, while more aggressive transactions requiring significant financing will have difficulty finding traction until credit conditions further improve. Private equity activity in the sector will increase modestly, with a focus on distressed investments.
SIGNIFICANT SHAREHOLDER ACTIVISM
Reacting in part to the volatility in the capital markets, institutional shareholders have shown an increasing willingness to voice their displeasure with management, boards and corporate policy. We expect to see proxy contests continue and a renewed push for best-in-class governance standards. Potential acquirers will need to negotiate simultaneously with both the board of a target and its key security-holders – a recognition of the power of institutional shareholders.
PUSH FOR DEAL CERTAINTY
Still stinging from the lessons of 2008, buyers and sellers will continue to focus on deal certainty and will carefully negotiate ‘material adverse change’ and ‘specific performance’ provisions. Buyers will continue to push for financing outs and sellers will look for certainty of closing.
BOARDS WILL TURN TO SHAREHOLDERS TO BLOCK UNWELCOME BIDS
Historically, while a Canadian target board may use a shareholder rights plan, or ‘poison pill’, to delay an unsolicited takeover bid while it seeks out competing offers, in Canada it has always been a question of when, not if, a pill must go. The recent decision by the Ontario Securities Commission (OSC) in Neo Material Technologies Inc signals a possible change in approach, as the OSC refused to ‘cease trade’ of a poison pill in the face of a partial, opportunistic bid where the target’s shareholders had ratified the pill in the face of the offer. We expect to see boards turn to their shareholders for similar defensive measures and test the scope of the Neo decision.
END OF INCOME TRUST ERA
In 2006 Canada’s Minister of Finance announced changes to the taxation of publicly traded income trusts and partnerships that will effectively eliminate the tax advantages such structures have had over traditional public companies. As a result of these changes, income trusts will start to pay the equivalent of full corporate tax in 2011. With almost 170 income trusts still listed on the Toronto Stock Exchange, we expect Canadian pension funds and strategic buyers to target the best remaining trusts in 2010.
NATIONAL SECURITY REVIEWS
In 2009 the government adopted a formal national security review mechanism under the Investment Canada Act. While the new provision will not operate as a barrier to foreign investment, it may delay closings for certain classes of transactions, particularly investments by state-owned entities and sovereign wealth funds in sensitive or strategic areas of the Canadian economy.