The deals are back. After a slow period near the start of 2010, the market for mergers is rolling, with conditions that remind bankers of the golden years of the mid-2000s.
The underpinnings for recovery began to line up last summer, after the European sovereign debt scare faded, with cheap financing and signs of an improving economy.
All it needed was a spark. It came in August, when BHP Billiton Ltd. launched an almost $40-billion hostile bid for Potash Corp. of Saskatchewan, a proposed transaction that dwarfed anything seen in years.
It was, as one banker put it, the most important deal in Canada since the downturn, even though it was never consummated. The proposal was eventually scotched by the government, in a move that still reverberates with policy implications for deal makers. Still, the mere announcement of a transaction that big, funded with a huge lending commitment, marked a full-on revival of the deal market. For those mulling whether markets were right to launch a transaction, the BHP bid was a giant green light.
"It all really came together with dramatic effect in the summer when we saw the BHP bid for Potash. At that point the whole transaction side of the business got moving," said Geoff Belsher, head of investment banking at CIBC.
In all, even without the Potash transaction, 2010 mergers and acquisitions totalled $177-billion (U.S.), according to Thomson Reuters, up from $146-billion in 2009. Resources dominated, but there were also large transactions in sectors such as media, infrastructure and banking.
Two months into 2011, there are more big deals on the table, including TMX Group Inc.'s plan to combine with London Stock Exchange PLC, and numerous resource deals.
"It's become an all-systems-go market," said Tom Milroy, chief executive officer of BMO Nesbitt Burns Inc., which was the busiest adviser on merger deals measured by dollar value in 2010, and the biggest underwriter of stock sales. "There is pent-up demand for deals. A lot of people had been on the sidelines for some time."
The resurgence coincided with fading concerns about a global double-dip recession, and a realization that while the world economy wasn't great, it wasn't likely to fall off another cliff. There was enough stability to start planning for growth. And that means buying.
"There were relatively good values in the market and people were feeling more optimistic about the economic outlook," said Jack Curtin, CEO of the Canadian arm of Goldman Sachs Group Inc., which was the No. 2 adviser on mergers in Canada last year. "Some of the acquirers wanted to be sure they were on the bus for the rebound."
But if conditions now resemble the golden years like 2005, when mergers were surging and markets were supportive, some worry about a repeat of the excess that followed those years - and which tipped into the financial crisis.
Already terms on loans are getting much easier, leading Gerry Schwartz, head of buyout firm Onex Corp., to marvel in late 2010 at the remarkable turnaround. He said he was being pitched ideas that many thought had largely disappeared in the wake of the crisis, such as payment-in-kind bonds, where the borrower can pay interest by issuing more debt - the corporate version of a negative amortization mortgage.
"Covenants are getting looser south of the border in the loan market," said Doug Guzman, head of global investment banking at RBC Dominion Securities Inc. "The pricing isn't as crazy as it was pre-crisis, but it has come a really long way back."
On top of that, there remain concerns about mounting government debts and stability in Africa and the Middle East.
"It would be a mistake to overlook the potential risk introduced by factors such as the developments in the Middle East and the overall fiscal debt burdens," said Pat Meneley, head of investment banking at TD Securities.
Still, the market looks sane so far. Companies have lots of cash, which reduces their need to borrow.
The debt-heavy private-equity mega-buyouts that marked 2007 have yet to return to Canada. Fancy derivative structures such as collateralized loan obligations, which created demand for loans and fed buyout activity, are for the most part still dead and buried.
For the most part, bidding wars such as those that drove up prices for companies such as Inco and Alcan Inc. are absent. There are lots of targets to go around, and executives are leery of overpaying.
"It's very risky," said Egizio Bianchini, co-head of mining banking at BMO. "The companies are figuring that out."
Coupled with that, arbitrageurs, the money managers who buy up shares of target companies and try to force a higher price, are keeping a much lower profile. During the boom years, they had huge influence but were hit hard in the crisis. Some closed up shop. Those that remain are chastened.
"They are not as greedy as they used to be," said Wes Hall, CEO of Kingsdale Shareholder Services, which helps companies in takeovers deal with their shareholders. "Before it was 'cash is king, cash is king.' Now they're not looking for the additional 30-per-cent premium to the offer price."
So for the moment, it's a goldilocks deal economy.
Canadian companies are feeling confident, buoyed by the country's strong economic performance and currency. Buyers are increasingly looking abroad and finding targets like Chrysler Financial, snapped up by Toronto-Dominion Bank, and U.S. bank holding company Marshall & Ilsley Corp., purchased by Bank of Montreal.
Where will the deals be in 2011? Again, it will be resources. Bankers flag base metals such as copper and bulk commodities such as potash as continuing hot spots, with gold miners also likely to continue to buy up choice assets.
There's also likely to be more coming in financial services, some deal makers said. Banks are more free to acquire as the capital handcuffs put on by regulators have come off and there are signs the brokerage industry is likely to consolidate, something that started last year when Canaccord Financial Inc. bought Genuity Capital Markets to become a bigger player in the securities business.
Asset managers are likely to be targets, said Gary Girvan, a partner at McCarthy Tétrault LLP who specializes in mergers and acquisitions. Bank of Nova Scotia spent $2.3-billion to purchase mutual fund company DundeeWealth Inc. in a deal cut in November, and other banks may look to acquire asset managers because it's a low capital business with nice fee income.
"The banks have more confidence now in looking around, saying, 'How do we grow our business in Canada?'" Mr. Girvan said.
For companies that want to do business, there are investors eager to finance them, especially if there's a regular payout in it for yield-starved backers.
That's led to the creation of whole new asset classes in Canada, including a high-yield bond market that produced $3.8-billion of issuance. For years, bankers have talked about a high-yield bond market, but in 2010 it really happened. There are predictions from banks that issuance could top $5-billion this year.
There's also a wider market for bonds issued by public-private partnerships. Loans to help governments build hospitals and other public buildings were once the preserve of insurance companies.
But since a bond deal for McGill University Health Centre last year showed that a wider range of investors, including mutual funds, would be interested, the market has boomed, said Greg Woynarksi, global co-head of credit capital markets and fixed income at Scotia Capital Inc., the lead underwriter on the McGill deal.
"It's not a small thing that two new asset classes were created in Canada last year," he said.
TOP 25 DEALS OF 2010
Last year saw a resurgence in mergers and acquisitions activity as financing markets opened, the world economy improved and chief executives became more confident. Total mergers and acquisitions volumes were up about 21 per cent. They could have been up much more had Industry Minister Tony Clement not quashed the biggest deal of them all, BHP Billiton's blockbuster bid for Potash Corp. of Saskatchewan, which alone was almost as big as the next 10 deals combined.
RANK / ACQUIRER / DEAL / TARGET / VALUE
0 / BHP / Unsuccessful bid / Potash Corp. / $38.6-billion
1 / TD Bank / Acquisition / Chrysler Financial / 6.3
2 / Kinross Gold / Acquisition / Red Back Mining / 6.1
3 / Sinopec / Acquisition / Syncrude stake / 4.7
4/ Onex and CPPIB / Acquisition / Tomkins / 4.6
5 / Biovail / Acquisition / Valeant Pharmaceuticals / 4.6
6 / BMO / Acquisition / Marshall & Ilsley / 4.1
7 / Borealis and OTPP / Acquisition / HS1 / 3.4
8 / Goldcorp / Acquisition / Andean Resources / 3.3
9 / Brookfield Asset Management / Acquisition / General Growth stake / 3.3
10 / Apache / Acquisition / Canadian assets from BP / 3.3
11 / CPPIB / Acquisition / Intoll / 3.1
12 / BCE/ Acquisition / CTVglobemedia / 2.9
13 / Walter Energy / Acquisition / Western Coal / 2.6
14 / PTTEP / Acquisition / Statoil's Canada asset stake / 2.3
15 / Petrobank / Spinoff / Petrominerales / 2.2
16 / AbitibiBowater / Restructuring / 2.1
17 / Shaw / Acquisition / Canwest assets / 2
18 / KingSett / Acquisition / ING Summit Industrial Fund / 1.9
19 / Undisclosed acquirers / Acquisition / Talisman assets / 1.9
20 / Bank of Nova Scotia / Acquisition / DundeeWealth / 1.8
21 / Agrium / Acquisition / AWB / 1.8
22 / Total E&P Canada / Acquisition / Suncor assets / 1.7
23 / Gerdau S.A. / Acquisition / Gerdau Ameristeel / 1.6
24 / Quad Graphics / Acquisition / World Color Press / 1.4
25 / RBC / Acquisition / Blue Bay Asset Management / 1.4
Total Canadian mergers and acquisitions
THE GLOBE AND MAIL // SOURCES: THOMSON REUTERS; GLOBE AND MAIL RESEARCH
THE PLAYERS / THE BIGGEST DEALS OF 2010
BIGGEST CANADIAN MERGERS, ACQUISITIONS AND RESTRUCTURINGS 2010
|Value (US$-bil)||Deal||Target Advisers||Acquirer Advisers||Target Legal Advisers||Acquirer Legal Advisers|
|6.3||TD Bank buys Chrysler Financial||CitiJP Morgan||Goldman SachsTD Securities||Schulte Roth & Zabel||TorysSimpson Thacher & Bartlett|
|6.1||Kinross Gold buys Red Back Mining||Scotia CapitalCIBC World Markets||BMO Nesbitt BurnsGMP SecuritiesRothschildMorgan Stanley||Blake Cassels & Graydon||Osler Hoskin & HarcourtStikeman ElliottMcCarthy TétraultSullivan & CromwellSkadden, Arps, Slate, Meagher & Flom|
|4.7||Sinopec buys Syncrude stake||Credit Suisse Group||Deutsche Bank AG||Osler Hoskin & Harcourt||Blake Cassels & Graydon|
|4.6||Onex and CPPIB buy Tomkins||JP Morgan CazenoveMorgan Stanley||CitiRBC Dominion SecuritiesUBSBarclays CapitalBank of America Merrill Lynch||Slaughter & May||Latham & WatkinsFreshfields Bruckhaus DeringerAllen & OveryTorys|
|4.6||Biovail buys Valeant Pharmaceuticals||Goldman SachsJefferies||Morgan StanleyLincoln International||Skadden, Arps, Slate, Meagher & FlomOgilvy RenaultCleary Gottlieb Steen & HamiltonDebevoise & Plimpton||Cravath, Swaine & MooreBlake Cassels & GraydonOsler Hoskin & HarcourtGreenberg TraurigSullivan & Cromwell|
|4.1||BMO buys Marshall & Ilsley||Bank of America Merrill LynchMorgan Stanley||BMO Nesbitt BurnsJP Morgan||Wachtell Lipton Rosen & KatzGodfrey & KahnDewey & LeBoeuf||Sullivan & CromwellOsler Hoskin & HarcourtCravath, Swaine & Moore|
|3.4||Borealis and OTPP buy HS1||UBSCiti||JP Morgan CazenoveRBC Dominion SecuritiesLexicon Partners||Herbert SmithCMS Cameron McKenna||Linklaters|
|3.3||Goldcorp buys Andean Resources||BMO Nesbitt Burns||CIBC World Markets||Fraser Milner CasgrainCorrs Chambers WestgarthJohnson Winter & Slattery||Cassels Brock & BlackwellMallesons Stephen Jaques|
|3.3||Brookfield Asset Management buys General Growth stake||UBSMiller BuckfireHoulihan Lokey||Goldman SachsBarclays Capital||Weil Gotshal & Manges||Willkie Farr & Gallagher|
|3.3||Apache buys Canadian assets from BP||Standard Chartered PLC||JP MorganGoldman SachsCitiBank of America Merrill Lynch||Sullivan & CromwellCMSAlston & BirdFreshfields Bruckhaus DeringerGardere Wynne Sewell||Bracewell & GiulianiDavis Polk & WardwellSimpson Thacher & BartlettOsler Hoskin & HarcourtSlaughter & May|
|3.1||CPPIB buys Intoll||UBSErnst & Young (Australia)||Goldman Sachs||Mallesons Stephen Jaques||Allens Arthur RobinsonStikeman ElliottTorys|
|2.9||BCE buys CTVglobemedia||Bank of America Merrill LynchBMO Nesbitt BurnsCIBC World Markets||TD SecuritiesRBC Dominion Securities||Osler Hoskin & HarcourtBlake Cassels & GraydonStikeman ElliottTorys||McCarthy Tétrault|
|2.6||Walter Energy buys Western Coal||RBC Dominion SecuritiesDeloitte & ToucheCenkos Securities PLC||Morgan Stanley||GoodmansPaul, WeissRifkind & WhartonTrowers and Hamlins||Simpson Thacher & BartlettOsler Hoskin & Harcourt|
|2.3||PTTEP buys Statoil's Canada asset stake||Morgan StanleyTD Securities||JP Morgan||Blake Cassels & Graydon|
|2.2||Petrominerales spun out from Petrobank||TD Securities|
|2.1||AbitibiBowater restructuring||BMO Nesbitt BurnsMoelisLazardBlackstone Group LP||Fasken Martineau DuMoulinDavis Polk & Wardwell|
|2.0||Shaw buys Canwest assets||RBC Dominion SecuritiesGoldman Sachs||TD Securities||Osler Hoskin & HarcourtMcCarthy TétraultOgilvy Renault||Davies Ward Phillips & Vineberg|
|1.9||KingSett buys ING Summit Industrial Fund||TD SecuritiesMoelis Advisors||RBC Dominion Securities||Stikeman ElliottBlake Cassels & GraydonDLA PiperTorys||Osler Hoskin & Harcourt|
|1.9||Undisclosed acquirers buy Talisman assets||RBC Dominion SecuritiesScotia Waterous||TD Securities|
|1.8||Bank of Nova Scotia buys DundeeWealth||GMP SecuritiesDundee Securities CorporationTD Securities||Scotia Capital||Fasken Martineau DuMoulinStikeman Elliott||Torys|
|1.8||Agrium buys AWB||Deutsche Bank AG||Barclays CapitalGoldman Sachs||Freehills||Clayton UtzMcCarthy TétraultPaul, Weiss|
|1.7||Total E&P Canada buys Suncor assets||Blake Cassels & Graydon|
|1.6||Gerdau S.A. buys Gerdau Ameristeel||RBC Dominion Securities||JP Morgan||TorysGowling Lafleur Henderson||Simpson Thacher & BartlettGoodmans|
|1.4||Quad Graphics buys World Color Press||Morgan StanleyUBSBMO Nesbitt Burns||JP Morgan||Sullivan & CromwellOsler Hoskin & Harcourt||Foley & LardnerTorys|
|1.4||RBC buys Blue Bay Asset Management||Credit Suisse GroupSpencer House Partners LLP||Perella Weinberg Partners LPRBC Dominion Securities||Herbert Smith||Freshfields Bruckhaus DeringerAllen & OveryOsler Hoskin & Harcourt|