Professional Documents
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January 2012
Bulletin
2012 Trends in Canadian Mergers and Acquisitions
MArk Adkins, MiChAeL GAns, JAson Gudofsky, ChrisToPher kozuB And Jeff LLoyd
With 2011 now closed, we can reflect on a turbulent 12 months characterized by international political gridlock, sovereign debt concerns, tepid growth and economic uncertainty. Canadas sound financial sector and relative fiscal restraint have helped it weather an otherwise volatile period. As Canadas solid economic performance attracts international attention and Canadian companies look beyond the border for investment opportunities, there is no better time to discuss the M&A trends we see unfolding in 2012. M&A MArkeT reCoVery wiLL Be GrAduAL And refLeCT eConoMiC And PoLiTiCAL deVeLoPMenTs Although M&A activity in Canada remains relatively robust as compared to the rest of the world, geopolitical and macroeconomic uncertainty had an impact on M&A results in 2011. The number of deals over C$1-billion decreased marginally, with 33 such deals valued at C$87.3-billion in aggregate announced in 2011, as compared to 37 deals valued at C$118.5-billion in aggregate announced in 2010. Of note, the years highest-profile announced transactions included the C$7.3-billion acquisition of Equinox Minerals by Barrick Gold; the pending C$3.8-billion acquisition of TMX Group by Maple Group; the C$8.6-billion acquisition from Bank of America of MBNA Canadas credit card business by TD Bank; and the pending C$1.32-billion joint acquisition by BCE and Rogers Communications of a majority stake in Maple Leaf Sports and Entertainment (owner of the Toronto Maple Leafs and Toronto Raptors) from Ontario Teachers Pension Plan. Facing uncertainty in Europe and a looming U.S. election in late 2012, we believe many M&A participants will remain cautious until additional comfort regarding the political and financial future is available. There are, however, reasons to be optimistic that Canadian M&A activity will rise in 2012. Mid-market transactions, which by virtue of their size are resistant to decreasing
2012 Blake, Cassels & Graydon LLP NEW YORK
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January 2012
when reviewing proposed foreign take-overs, and that the Canadian economy should not be entirely owned and operated essentially from headquarters and offices based in every place but Canada. However, the Prime Minister also characterized the review of the abandoned PotashCorp transaction as unique and not indicative of Canada becoming less hospitable to foreign investment. It has become a practical reality under the Investment Canada Act that foreign investors acquiring direct control of Canadian businesses that exceed a prescribed financial threshold must provide binding undertakings to the Minister as a condition to receiving transaction approval. The December 2011 dispute settlement between U.S. Steel and the Minister of Industry is a reminder that such undertakings, often in place for years after a transaction closes, are enforceable, even if the economy worsens. Following its acquisition of Stelco in 2007, U.S. Steel implemented staffing reductions in response to changes in the economic climate. In response, the Minister of Industry alleged that U.S. Steel had breached certain undertakings related to employment and production. Under the terms of the settlement, U.S. Steel agreed to remedial undertakings, including to operate two former Stelco facilities until 2015 and to make further capital expenditures in its Canadian facilities.
Industry Classification
Resource Sectors
Oil & Gas/ Energy (30%) Mining (44%) Consumer (2%) Technology & Communications (2%) Real Estate (4%) Financial Services (6%) Industrial/Utilities (12%)
% 50 40 30 20 10 0 2007/8 2008/9 2009/10 2010/11
30% 32% 20% 40% 36% 32% 30% 44%
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As Asia grows, Asian companies have looked abroad for strategic resource investments in Brazil, India, Russia, Africa and, increasingly, Canada. Asian demand for commodities has continued to be strong despite some early indications that Chinese economic growth may be softening. Over the past five years, Chinas sovereign wealth fund and a variety of state-owned enterprises have acquired nearly C$30-billion of Canadian assets, including in Canadas oil and gas, mining and agricultural sectors. While these transactions have generally been structured as minority investments and joint ventures (in part to address the Canadian governments concerns over foreign control in these sectors), Sinopecs announced 100% acquisition of Daylight Energy Ltd. for C$2.2-billion reflects a more ambitious investment strategy in Canada. Also of note, Athabasca Oil Sands Corp. followed up its 2010 sale to PetroChina of a 60% stake in the MacKay River oil sands project by exercising its sale option in early 2012 on the remaining 40%, giving PetroChina full ownership of the project. CAnAdiAns wiLL foCus on inTernATionAL ACQuisiTions In recent years, Canadian businesses have acquired approximately two foreign companies for every Canadian company acquired by foreigners. With the Canadian dollar hovering around par with the U.S. dollar and interest rates remaining low, the value of Canadian outbound M&A transactions in 2011 was approximately 1.21 times that of foreign inbound activity. While Canadian businesses are increasingly looking to expand outside North America, over 55% of Canadian outbound M&A in 2011 still involved U.S. targets, such as Milwaukee-based Marshall & Ilsley, acquired last year by BMO Financial Group. PuBLiC TrAnsACTions wiLL reMAin reGuLATed By ProVinCes And TerriTories Public M&A and other securities transactions in Canada are regulated on a provincial and territorial basis and each jurisdiction has its own securities legislation. Although a substantial degree of co-ordination and co-operation exists among the provinces and territories and a significant portion of securities laws have been harmonized across Canada, each jurisdiction retains authority over securities regulation within its borders. In 2010, the Canadian federal government published a proposed national Securities Act, to be administered by
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Each of these new trusts owns or will acquire an underlying energy business carried on in the U.S. However, there is generally no restriction on other types of businesses being owned by the trusts, provided they are not Canadian. Owners of U.S.-domiciled energy or other businesses, including corporations and privateequity funds, may find that the new generation of trusts provides an attractive monetization opportunity for stable, long-lived income generating energy and other assets. As with the prior generation of income trusts, we expect these new trusts to take advantage of quick access to the Canadian capital markets and make additional foreign acquisitions, particularly in the energy sector. iMPACT of ACTiVisT inVesTors wiLL ConTinue To Be feLT In 2011, activist investors took aim at some of Canadas most recognized corporations, including Canadian Pacific Railway, Research in Motion and Maple Leaf Foods. Investors are increasingly leveraging Canadas relatively liberal corporate laws, which permit shareholders holding 5% of the votes to call special meetings and seek to replace directors, to force change and maximize value. Meanwhile, the implications of Magna International Inc.s plan of arrangement in 2010, which terminated the companys multiple voting share structure at a significant premium for its controlling shareholder, continue to be considered by Canadian market participants and regulators. In October 2011, the Canadian Coalition for Good Governance announced that it would be preparing guidelines addressing dual class share structures. Then in November 2011, the deputy director of the Ontario Securities Commission remarked that OSC staff is considering proposing new rules for related party transactions which would require the supervision of a special committee of independent directors. A special committee, which is recommended but not required in connection with related party transactions under existing law, would be required to negotiate or oversee the negotiation of transaction terms and either (i) recommend that the board support the transaction and that shareholders vote in favour of it, or (ii) determine that the transaction is fair to minority shareholders, but provide no recommendation. The changes would also lower the size threshold at which
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The new regime as postulated would represent a more significant change in approach than was reflected in the Pulse Data and Neo decisions, as both of those cases involved relatively unusual situations in which target company shareholders had approved a rights plan in the face of an unsolicited offer. The new regime would go further, and would allow a rights plan to remain in place indefinitely following an unsolicited offer provided that the plan had been approved at the targets most recent annual general meeting, even if such approval was not granted in the face of the unsolicited offer. inTense CoMPeTiTion BureAu reViews In 2011, the Competition Bureau continued to expend considerable resources reviewing strategic mergers. In addition to issuing new merger enforcement guidelines in October 2011, Bureau staff sought an increasing level of documentary and data production as part of many merger reviews, both formally through Canadas supplementary information request process and through informal information requests. The Bureaus focus on strategic mergers was evidenced by two merger challenges that the Commissioner of Competition brought this past year, the first since 2005. Importantly, neither of the challenged transactions was notifiable under the Competition Act but, as the Commissioner recently noted, the Bureau is proactively monitoring closed and non-notifiable transactions. The Bureau will also be focusing on acquisitions by stateowned enterprises, and in particular examining whether state-owned enterprises owned by the same foreign state should be considered to be affiliates under the Competition Act. This determination will have important implications on whether the relevant transaction thresholds are exceeded, the scope of information required by the Bureau and the Bureaus competitive effects analysis. We anticipate increasingly intense Bureau reviews in 2012. Pre-transaction antitrust review and the management of internal documents will be essential to minimize later complications, even for transactions that do not require a formal notification.
or any member of our Business Group, Securities Group or Competition, Antitrust & Foreign Investment Group.
NEW YORK
* Associated Office
MONTRAL OTTAWA TORONTO CALGARY VANCOUVER CHICAGO LONDON BAHRAIN AL-KHOBAR* BEIJING SHANGHAI*
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