www.pwc.com/ca/deals
Capital Markets
Flash
October 2013
Perspectives from your
leading global mid-market
M&A advisor
Canadian M&A Deals Quarterly
Q3 2013
ii
Capital Markets Flash: Q3 2013
92 days, 587 deals, $55 billion
Nice value, shame about the volume
But volumes did not accompany the value
rise, with the number of announced
transactions down 6% on the previous
quarter and 2% below Q3 2012. Overall,
M&A in Canada’s key industry sectors
followed the pace they set over the first
half of the year, with pension funds and
commercial real estate giving the deal
pipeline substantial volume and retail
pulling some $1B+ rabbits out of the hat
while natural resources—both mining and
the oil patch—remained quiet.
The quarter’s largest deal and arguably most
engaging story came, as in Q2, from the
food retail sector, as Loblaw topped Sobeys’
Q2 acquisition of Safeway’s Canadian assets
with its much larger acquisition of Shoppers.
And that wasn’t all the retail sector had to
offer. US PE fund Ares Management teamed
up with the CPPIB to acquire the shares of
Dallas-based luxury retailer Neiman Marcus
Group for $6.1B in the second largest deal
of the quarter and Hudson’s Bay Company
paid approximately $2.7B for Saks Fifth
Avenue to take the number five slot by size.
1
Capital Markets Flash: Q3 2013
Quarterly Canadian M&A volume & value (consecutive quarters)
70,000
1,000
900
60,000
800
50,000
700
600
40,000
500
30,000
400
20,000
300
VOLUME
VALUE (US$ MILLIONS)
Deal value rose sharply in the third quarter
of 2013, to $54.8B from $38.9B, a 41%
jump in quarter-over-quarter deal value
and a modest 1% increase year-over-year.
The increase is the result of a handful of
mega-deals such as the $13B acquisition
of Shoppers Drug Mart by Loblaw that
opened the quarter and the $4.9B deal
between Brookfield Property Partners
and Brookfield Office Management that
closed it. Overall, while the quarter had
one less deal over $1B than Q2, the $36.4B
aggregate value of the nine that were
announced was the highest of any quarter
in our records, dating back to 2008.
200
10,000
100
—
­—
Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313
$0–$100
$100–$500
$500–$1,000
>$1,000
Volume
Number of >$1 billion Canadian deals announced
16
14
12
10
8
6
4
2
—
Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313
Sources: S&P Capital IQ, PwC Analysis
Both the Neiman and Saks deals point to the
anticipated recovery of consumption in the
US economy. Both targets are well placed
to benefit from an increase in discretionary
spending should our neighbours south of
the border be tempted to treat themselves
to a little luxury, following five years of
belt-tightening, as confidence in recovery
returns. Louisiana-Pacific Corp.’s $1.2B
purchase of BC-based Ainsworth Lumber
from private equity investors was also
helped on its way by returning confidence
in the US, and more directly by a rise in US
housing starts, up almost a fifth in August
2013 from the same period last year. As
Q3 unfolded, analysts became increasingly
confident in predicting a significant uptick in
the health and growth of the US economy.
But while the recovery in the US bodes
well for increased M&A activity here as
well as south of the border, the natural
resource sectors that allowed Canada
to outperform our peers through
the recession is now causing us to
underperform versus other markets.
Global stock market research firm Dealogic
reported global M&A surpassed $2 trillion
in the first nine months of 2013, up 13%
over the same period in 2012 (although,
as here, the number of acquisitions during
this period fell). While Canadian (as well
as Australian) performance lagged behind
the global indicators, US M&A activity was
at its highest since 2008, and predictions
of a new great wave of M&A deals started
creeping into analysts’ reports and
business headlines.
Then, Q4 opened with the shut-down of
the US government, and sentiment took
a U-turn. “As the world’s largest economy
struggles with its debt ceiling issues and
dysfunctionality on Capitol Hill, few other
economies escape unaffected,” says Nicolas
Marcoux, PwC’s National Deals Leader.
“The impact on Canadian M&A activity will
clearly be significant, since uncertainty is one
of the greatest obstacles to getting deals done.”
The near-term outlook, then, is unclear,
albeit with certain exceptions. For example,
we expect Canadian pension fund and
real estate players to continue to scour
the nation and the globe for product (see
Sector report, page 6). And the Canadian
middle market, which has been a consistent
source of deals throughout economic ups
and downs, is also poised to continue to fill
the domestic deal pipeline (see Hats off to
the mid-market, page 12). Economically
diverse Canadian regions that have
performed well during the slowdown in
the natural resources sector will continue
to be characterized by steady growth and
stability (see Spotlight on the Prairies,
page 10). And the effect of China’s appetite
for foreign targets, while temporarily
abated in the natural resources sector, is just
beginning in the all-important-to-Canada
area of agribusiness (see China’s appetite
for...food, page 13).
Prognosis: A return to consistently higher
growth by the Chinese economy would
drive increased M&A activity in Western
Canada’s natural resources sector and the
Canadian dollar would in turn strengthen.
If the US economy continues to improve
and Capitol Hill continues to fall into
line (however last-minute), Ontario’s
beleaguered manufacturing industry
would gain respite from a strengthening
US dollar and M&A activity could
increase in the East. Difficult to predict,
but Canada’s economic diversity should
serve to dampen any very rapid changes.
Top 10 transactions by value – Q3 2013 Total Transaction
Value (US$mm,
historical rate)
Announced Date
Target/Issuer
Buyer/Investor
07/15/2013
Shoppers Drug Mart Corp. (TSX:SC)
Loblaw Companies Limited (TSX:L)
09/09/2013
Neiman Marcus Group LTD Inc.
Ares Management LLC and Canada Pension Plan Investment Board
6,137
09/30/2013
Brookfield Office Properties Inc. (TSX:BPO)
Brookfield Property Partners L.P. (NYSE:BPY)
4,946
09/23/2013
BlackBerry Limited (TSX:BB)
Hamblin Watsa Investment Counsel Ltd.
4,175
07/29/2013
Saks Incorporated (NYSE:SKS)
Hudson’s Bay Company (TSX:HBC)
2,726
07/23/2013
Harland Financial Solutions, Inc.
Davis + Henderson Corporation (TSX:DH)
1,638
09/29/2013
Petrominerales Ltd (TSX:PMG)
Pacific Rubiales Energy Corp. (TSX:PRE)
1,506
09/04/2013
Ainsworth Lumber Co. Ltd. (TSX:ANS)
Louisiana-Pacific Corp. (NYSE:LPX)
1,224
08/26/2013
TMS International Corp. (NYSE:TMS)
Pritzker Organization
1,006
07/24/2013
Sobeys Inc, 68 Canada Safeway Properties
Crombie Real Estate Investment Trust (TSX:CRR.UN)
13,018
962
Sources: S&P Capital IQ, PwC Analysis
2
Capital Markets Flash: Q3 2013
Retail wars continue
Deal of the quarter: Loblaw
buys Shoppers Drug Mart
in $13B deal
The retail/grocery sector gave Canada its
largest deal in Q2, but has really excelled
in the current quarter, with five of Q3’s
largest deals coming from the retail and
consumer sector.
Jointly, the Shoppers, Neiman and Saks
deals illustrate several trends that have
defined each quarter of 2013 to date:
• the returning confidence in US
consumer spending;
• the global appetite of Canadian
pension funds; and
• the impact of US retailers’ strategies on
their Canadian counterparts.
According to Eric Lemay, a VP of PwC
Canada’s Corporate Finance practice,
“The acquisition of Neiman Marcus by Ares
and the CPPIB is a clear bet on the recovery
of the US economy.” While HBC is also
clearly confident of a return to spending at
the luxury end of the US market, its play
for Saks was motivated by that brand’s
potential in other global markets such as
Europe and Asia. Commenting on the deal,
HBC President, Bonnie Brooks said, “We’d
be the first to have a department store as a
global brand.”
But the most ambitious deal from the
sector in Q3 was the domestic megaplay by Loblaw for Shoppers Drug Mart.
“The Loblaw acquisition of the Shoppers
chain and its brands is an aggressive and
carefully thought-out, long-term strategic
play in the battle for Canadian consumers’
spending choices,” says Marcoux. While
3
Capital Markets Flash: Q3 2013
the timing of its announcement made the
deal look like a response to Sobeys’ C$5.8B
acquisition of Safeway’s Canadian assets,
its pace to closing suggests the deal was
already well under way before Sobeys’
deal was announced. For Marcoux, “The
strength of investor confidence in Loblaw’s
strategy and its management’s ability to
deliver on the estimated $300M of synergies
was the real story here. It’s not every
company that can announce that it’s paying
a 25% premium on a deal this size and have
its own shares go up by 5.4%.” Given that
the Canadian grocery market is mature and
highly competitive, the domestic megaplayers in the sector have been struggling
to find effective ways of competing not
just against each other, but against their
exponentially larger competitors from the
US: Wal-Mart and, more recently, Target.
Even the largest locals, such as Loblaw
and Sobeys, cannot compete with their
US counterparts on cost or volume. The
Loblaw deal illustrates the sector’s most
effective weapon in the cross-border food
wars: niche and brand differentiations.
“The domestic players must offer the consumer
what the cheaper competitors do not—unique
brands, better niche products—with a goal
to differentiate themselves in what they offer
and how they offer it. They cannot win on
price,” says Ilya Bahar, a Partner in PwC’s
Retail and Consumer practice. “Loblaw’s
acquisition of Shoppers illustrates this
strategy perfectly. It’s a massive deal, in terms
of footprint, delivering Loblaw 1,200 more
stores, mostly located in densely populated
urban areas that are not serviced by their
flagship Superstores. But what it really gives
Loblaw is a gallery of products and offerings
in the booming health, beauty and nutrition
sector. Expect Loblaw’s competitors to eye
similar deals, as the health and beauty brands
and products stocked by niche pharmacies are
a desired weapon in the ongoing retail war,”
says Bahar.
Another category that may be a target of
the mega-players in the next couple of
years is ethnic foods grocers. “The growth
in food consumption is coming almost
exclusively from ethnic foods,” adds Bahar.
The major players have taken note already.
In 2009, Loblaw bought T&T Supermarket
Inc., Canada’s largest Asian food retailer,
for C$225M. At the time of the purchase,
T&T had 17 stores in British Columbia,
Alberta and Ontario; it has since grown
to 22. Loblaw chairman Galen Weston
was emphatic about the reason for the
acquisition: “T&T’s talented management
team and colleagues have developed what we
believe are the best Asian stores in Canada,
which will be used to help Loblaw extend
its ethnic offering to better serve Canada’s
largest growing customer segment.”
In a similar play, in 2011, Quebec grocer
Metro bought a 55% interest in niche
ethnic food retailer Marché Adonis,
which at the time operated four stores
in the Montreal area. Adonis has since
added another store in Quebec and one in
Ontario. While most other ethnic grocers
remain independent and small, as they
grow, expand and perhaps combine, they
will become desirable targets for the
dominant domestic chains.
Prognosis: It may be a mature sector, but
Canada’s grocery sector may well be busy
for some time to come as competitors
adjust to the bold moves by Sobeys and
Loblaw. “There could be some more large
deals,” says Bahar. As well as lots of underthe-radar smaller mergers between niche
players—mini-pharmacies and ethnic
chains—in conscious or unconscious
preparation to be gobbled up by the
majors down the line.
DEAL TO WATCH
Fairfax’s offer to take
BlackBerry private
BlackBerry signs a Letter of Intent with Fairfax Financial
Holdings Limited for an all­‑cash take-private offer of $4.2B
In an agreement announced on September
23rd, financial holding company Fairfax,
already BlackBerry’s largest shareholder,
agreed to take the troubled company
private if a six-week due diligence dive into
BlackBerry’s books proves satisfactory and,
crucially, if they can raise the necessary
financing to fund the $4.2B offer. Fairfax has
until November 4th to confirm its bid.
While the agreement includes a go-shop
provision (see facing page) that leaves
BlackBerry free to pursue alternative
transactions or offers during this time (at
press, none have materialized), Fairfax
has negotiated a tight LOI that would see it
getting a breakup fee of $157M (increasing
to $262M once a definitive agreement
with Fairfax is signed) should BlackBerry
enter, announce or complete an alternative
transaction within six months of the end
of the due diligence period. Objectively,
these breakup terms are most unusual. The
presence of an asymmetric breakup fee at
LOI stage (Fairfax can walk away without
penalty for a wide variety of reasons,
including if it is not able to raise the cash
to complete the deal) is very rare. And the
amount ($157M represents some 3.3% of the
total value of the offer) is more in line with
breakup fees seen at the definitive agreement
stage in recent North American M&A.
4
Capital Markets Flash: Q3 2013
All this has been widely commented on in
the financial and popular press, the former
going to great lengths to try to determine
the end-game strategy of Fairfax as well as
its ability to finance a deal. Speculation as
to alternative suitors for BlackBerry is by no
means new either. Companies as varied as
Google, Samsung, Cisco, SAP and Lenovo
have all been rumoured to have interest
in looking at the company but all have
been non-committal. Lenovo’s CEO, Yang
Yuanqing, was recently quoted in French
business paper Les Echos as saying that a
deal with BlackBerry “could possibly make
sense, but first I need to analyse the market
and understand what exactly the importance
of this company is.” Some analysts were a
lot more encouraged by the emergence of
RIM co-founders Mike Lazaridis and Doug
Fregin as potential bidders. The two, who
control around 8% of the company, made a
regulatory filing on Oct 10th stating that they
are “considering all available options” with
respect to their 41.7 million shares in the
company including “a potential acquisition”
of the whole company.
Given the company’s iconic status, the
speculation is only to be expected. More
concerning for BlackBerry’s board (and, let’s
not forget, shareholders!) is that its shares
are still trading below Fairfax’s offer of $9.
“
We believe this transaction will open an exciting new
private chapter for BlackBerry, its customers, carriers
and employees. We can deliver immediate value to
shareholders, while we continue the execution of a longterm strategy in a private company with a focus on
delivering superior and secure enterprise solutions to
BlackBerry customers around the world.
Prem Watsa, Chairman and CEO of Fairfax
”
Go-shop provisions
“Go-shop” provisions allow the board of a target company to accept
an offer for the company subject to the absence of a better offer
arising from another party within an agreed-upon period of time.
In the strong bull markets prior to the
collapse of Lehman’s, public companies’
boards were faced with increasing numbers
of unsolicited take-over offers, in particular
from private equity buyers riding on a wave
of cheap and abundant debt financing. The
issue for the board of the target company
under offer is that their duty is to ensure
that they achieve the best deal reasonably
available for the shareholders of the target.
In the sellers’ market of the mid 2000’s,
this led to an increase in the use of so called
go-shop provisions (according to a 2008
ABA study, just 2% of announced deals in
2005 had such provisions, whereas in 2006
the proportion had risen to 29%). Go-shops
enabled targets’ boards to effectively put a
floor on the sale price of the company before
starting an auction process. By negotiating
a definitive deal on a one-to-one basis with
the party they believed to be the best suitor,
they would, through increased access to
information and management meetings,
for example, ensure that suitor was able to
put its best offer on the table. They would
include the safeguard of a go-shop provision,
that would allow them a specific period of
time in which they could not only negotiate
other unsolicited offers, but could actively
5
Capital Markets Flash: Q3 2013
engage in an auction process to try to
achieve a better result for their shareholders.
In effect, this led to target boards being
able to benefit from the advantages of
negotiating full details prior to accepting an
offer whilst avoiding any risk of missing out
on a higher “wild-card” bid that may present
a better deal to shareholders.
Breakup fees were introduced into these
go-shop provisions as compensation for
the buyer’s time and expense should such
an improved offer be accepted and the
monetary amount of the compensation
would generally reflect the relative
negotiating stance of buyer and seller.
The key to the effectiveness of a go-shop
is that the buyer should be legally bound
to complete the transaction if an improved
offer does not materialize.
The issue that the commentators have taken
with the Fairfax offer is that it is conditional
on financing and there is no penalty to
Fairfax if it fails to complete the transaction.
This has led some commentators to opine
that rather than putting a floor on an auction
of BlackBerry, the deal looks more like a free
purchase option granted to Fairfax at a strike
price of $9 a share.
“
The Special Committee is seeking the best available
outcome for the Company’s constituents, including for
shareholders. Importantly, the go-shop process provides an
opportunity to determine if there are alternatives superior
to the present proposal from the Fairfax consortium.
Barbara Stymiest, Chair, BlackBerry’s Board of Directors
”
Sector report
Fundamentals seen in key Canadian industry sectors in the first half
of 2013 continued unaltered through Q3. The pension fund and real
estate sectors filled the deal pipeline, while the natural resources sector
remained devoid of large deals and low on foreign investment.
The HOT: Pension
Funds and Real Estate
Canada’s pension funds and REITs
continued scouring the country and
globe for quality assets through Q3,
announcing more deals than any other
sector. Among the pension funds, the CPPIB
was the quarter’s most active buyer, with
transactions including the $6.1B acquisition
(in conjunction with Ares Management
LLC) of luxury Dallas retailer Neiman
Marcus Inc.—size-wise, the quarter’s second
largest deal. The CPPIB’s other acquisitions
in Q3 reflected the truly international
nature of its appetite to expand its real
estate assets and saw the fund paying:
• $480M for a 27.6% interest in Aliansce
Shopping Centers in Brazil;
• C$281.8M (£173.9M) for a 50%
interest in a portfolio of eight office
properties in London (UK); and
• C$118.6M for a 50% interest in
Samsung SRA Private Real Estate
Investment Trust, which owns a Grade
A office development property in
Seoul, South Korea.
The funds also continued to partner with
private equity players to make larger plays,
and private equity funds were only too
happy to help them deploy capital. Ares
Management was particularly active in this
sense, not only partnering with the CPPIB
to buy Neiman, but also joining forces with
Teachers to buy Pennsylvania buildingproducts maker CPG International Inc. (the
value of the transaction is undisclosed, but
estimated at $1.5B).
6
Capital Markets Flash: Q3 2013
As illustrated by CPPIB’s aforementioned
deals, pension funds were one of the key
contributors to the continued high level of
activity in real estate M&A. Another notable
pension fund/real estate deal came from
Caisse de dépôt et placement du Québec’s
real estate subsidiary, Ivanhoé Cambridge,
which moved to buy out fellow pension fund
AIMCo’s 50% share in landmark Montreal
property, Place Ville Marie in a deal valued
at more than C$400M.
“
We believe this transaction will consolidate our global office properties
under one platform and substantially increase Brookfield Property Partners’
public float which should help accelerate our growth strategy.
”
Ric Clark, Chief Executive Officer, Brookfield Property
But non-pension fund real estate investors
showed no signs of slowing down either, in
a market characterized by more buyers than
sellers. Brookfield Property Partners gave the
sector its largest deal of the quarter with its
$4.9B acquisition of Brookfield Office Properties.
The sector’s defining deals, however, continued
to be the more modest—but numerous—middlemarket acquisitions by REITs, with Calloway REIT,
H&R REIT, Granite REIT, Canadian Apartment
Properties REIT, and others all completing
acquisitions during Q3.
Real estate funding also left its imprint on other
industry sectors as well, with grocer Sobeys
moving to finance last quarter’s acquisition
of Safeway’s Canadian assets by selling 68
properties to its real estate REIT, Crombie,
in a $990M transaction.
The industry remains poised to continue active,
particularly in the middle market spectrum,
through the fourth quarter of 2013 and beyond.
Top targeted industries in Canadian M&A (by value)
Q1 2013
Industry
Q2 2013
Market share
Industry
Q3 2013
Market share
Industry
Market share
Real Estate
37%
Real Estate
21%
Food and Staples Retailing
23%
Energy
19%
Food and Staples Retailing
15%
Real Estate
20%
Industrials
14%
Paper and Forest Products
12%
Retailing
16%
10%
Energy
Metals and Mining
9%
Energy
Materials
3%
Industrials
8%
9%
Technology Hardware and Equipment
8%
Sources: S&P Capital IQ, PwC Analysis
Top targeted industries in Canadian M&A (by volume)
Q1 2013
Industry
Q2 2013
Market share
Industry
Q3 2013
Market share
Industry
Market share
Metals and Mining
23%
Metals and Mining
17%
Metals and Mining
21%
Real Estate
16%
Real Estate
13%
Real Estate
14%
Energy
12%
Industrials
12%
Industrials
13%
Industrials
10%
Energy
11%
Energy
11%
Software and Services
27%
Software and Services
11%
Software and Services
8%
Sources: S&P Capital IQ, PwC Analysis
7
Capital Markets Flash: Q3 2013
“
There clearly are more sellers than buyers of Canadian
energy assets at the moment... I am not advocating the
policy be changed in respect to the oil sands, but I do think
we need to continue to reassure foreign investors.
”
Jim Prentice, former industry minister, now senior executive vicepresident at CIBC
And NOT: Natural
Resources
Oil and gas
The oil patch endured another very quiet
M&A quarter. Speaking at the annual Oil
and Money Conference in London (UK)
on October 1st, 2013, Jim Prentice, former
industry minister, now senior executive
vice-president at CIBC, pegged foreign direct
investment into Canada’s energy sector at a
mere $2B for the first three quarters of 2013,
versus $27B for the same period in 2012—
a drop of terrifying magnitude, even when
allowing for the controversial $15B CNOOCNexen deal in the comparative numbers.
The chilling effect on M&A is similar: 135
transactions worth $8B for the first nine
months of 2013, versus 163 transactions
with a tag of $66B for the same time period
in 2012.
Against such a quiet M&A backdrop, the
$725M sale of ConocoPhillips’s interest in
the Clyden oil sands lease to Imperial Oil
and ExxonMobil Canada caused reasonable
excitement when announced and closed
in August 2013, as did the August 15th
announcement that Warren Buffett’s
Berkshire Hathaway had accumulated
17.8 million shares in Suncor Energy
at a cost of over $500M. Both welcome
signs of life—with the Buffett investment
potentially pointing to a reinvigoration of
investment in the cash-hungry oil sands.
But, between the controversy still dogging
the approval of both proposed to-port
pipelines, the continuing potential for major
price differential between domestic and
WTI crude, the increasing production in
the US, the continued caution of the Asian
economies that were high profile players
during the last wave of oil patch investment,
and doubts caused by the Canadian
government’s comments on approving the
CNOOC-Nexen deal, it is difficult to see an
M&A uptick in the sector in the near-term.
“There’s been a confidence crisis with big
mining companies because they haven’t
been able to deliver the levels of profitability
shareholders have grown used to in recent
years, even after the global finance crisis,”
says John Gravelle, PwC’s Global Mining
Leader. “The substantial write-offs we’ve seen
from many of the biggest producers around
the world have caused investors to leave the
market and move on to other things.”
Outside the oil patch, Pacific Rubiales
acquired its rival, Petrominerales, for $1.5B.
Really a Columbian deal but caught in our
statistics due to the former’s TSX listing.
For a more detailed analysis of the
global and Canadian mining sector,
see PwC’s Deals in the dumps:
Global Mining Deals Mid-Year Report,
September 2013
Mining
www.pwc.com/ca/deals
The sector that, through 2010, 2011
and 2012, swelled the Canadian M&A
statistics, accounting for a large slice
of deal value, continues moribund
in Q3, absent from the quarter’s topfive industries both by deal value and
volume. The $300M sale of three Western
Australia mines by Barrick Gold Corp.
to South Africa’s Gold Fields Ltd. is the
sector’s most prominent deal of the
quarter, and, coming on the heels of
Barrick’s $8.7B writedown and 75%
reduction in its dividend, is not a good
news story.
“
10
New Gold’s
contrarian
strategy
Randall Oliphant,
Executive Chairman and
Director, New Gold Inc.
14
Smart money mining
rock bottom valuations
Gareth Turner, Head of
Mining & Metals Private Equity,
Apollo Global Management
Deals in
the dumps
Global Mining Deals
Mid-Year Report
September 2013
www.pwc.com/ca/miningdeals
This may be a turning point, possibly. Mr. Buffett is
obviously recognized as a value investor, and the oil
sands sector represents significant value.
”
Peter Tertzakian, chief energy economist, Arc Financial Corp.
8
Capital Markets Flash: Q3 2013
Telecom: Still waiting for the shake up
as spectrum auction nears
With a focus on its $130B deal to buy the 45% of its US wireless business that it doesn’t
already own from the UK’s Vodafone, US giant Verizon is not buying Wind Mobile, and
there will not be a foreign player with deep pockets and clout at the January 14, 2014,
Canadian wireless 700 megahertz spectrum auction. But don’t look away yet: this story
is far from over.
The 15 participants who will be vying for a slice of the spectrum include the usual
suspects, with dominant incumbents Bell, Rogers and Telus on the list of registered
bidders. Quebecor subsidiary Videotron, Manitoba’s MTS Inc., and Atlantic
Canada’s Bragg Communications, operators of EastLink, are in too, as is Globalive
Communications, the parent company of still-unsold Wind Mobile. The only private
equity firms to feature, albeit indirectly, on the initial list are both local to Canada and
familiar with the sector: of these, Birch Hill, has subsequently withdrawn its registration
leaving only Catalyst Capital, which is also one of the largest bond holders of troubled
wireless junior, Mobilicity, remaining. As commentators have pointed out, since parties
registered to bid are forbidden by the auction rules from discussion with other registered
parties, withdrawal may indicate more a willingness to team with another registrant
rather than a complete exit from the process.
“What is clear at this stage is that the regulator’s desire to see a strong foreign carrier
enter the Canadian market to compete with the three major incumbents with the hopes of
driving a better wireless deal for Canadian consumers is not going to be realized via the
current auction process,” says PwC Deals Partner, Ken Goodwin.
“
Well before this summer’s public debate on wireless policy, our government has
introduced a number of measures to create more choice in Canada’s wireless market
and to defend consumers. …our government will continue to aggressively pursue
policies that ensure consumer interest are at the core of all government decisions.
James Moore, Industry Minister
9
Capital Markets Flash: Q3 2013
”
Spotlight on the Prairies
No booms, no busts—just steady and stable growth
Deals in Manitoba and Saskatchewan rarely
make the Canadian Top-10 or even Top20 lists. Indeed, in the past four years just
two deals over $1B have been announced;
namely BHP Billiton’s blocked $43.6B
bid for Potash Corp of Saskatchewan and
Glencore’s successful $7.6B takeover of
Viterra. In both deal value and volume,
Ontario tends to hog the spotlight, except
when natural resources M&A is booming,
in which case Alberta, Quebec and British
Columbia take a larger piece of the pie.
Manitoba and Saskatchewan? Off-the-radar,
out of the spotlight.
Here’s the boon though: the Prairies never
crater either. “The story of Manitoba in
particular is that we have no booms, but
also no busts,” says Jeffrey Johnson, PwC’s
Deals Leader for the region. That means
10
Capital Markets Flash: Q3 2013
the economy looks like it’s being left
behind when oil and gas booms or when
Bay Street goes red hot—but, when the
patch goes quiet and Ontario and Quebec’s
key industries are struggling, the Prairie
economy tends to just continue to perform,
as it has, steadily, since the global financial
crisis of 2008.
“Over the last several years, both Manitoba
and Saskatchewan have outperformed
most of their provincial peers in real GDP
growth and other key economic indicators,”
says Gurpreet Brar, Winnipeg-based Vice
President of PwC’s Corporate Finance
practice. “As a result, both provinces have
seen their profiles rise nationally and globally
from an investment and M&A perspective.”
What drives the Prairies’ growth—and
cushions descents—is the diversity and
scale of their base economies. No one
industry sector dominates. Agribusiness,
oil and gas, mining, manufacturing,
construction, and transportation each form
a piece of the pie; nimble and adaptive
mid-market private companies navigate
between the handful of public institutional
big names in financial services, insurance,
and real estate. Most of the mid-market
deals that happen here fly under the radar
of the financial press and of most investors,
Canadian or overseas. Currently, the Prairie
mid-market deal pipeline is filled with
succession-related transactions. And the
real estate sector, hot across the country
(see Sector report, page 6), is booming here
as well. Notably, the Winnipeg-outbound
Artis REIT was one of last quarter’s most
active deal makers, while Toronto-based
NorthWest Healthcare Properties Real
Estate Investment Trust has made several
Manitoba acquisitions in 2013.
A unique aspect of the Prairie real estate
story lies in the nature of the sellers: “There
are a lot of highly desirable privately-held
real estate portfolios here,” says Brar. “As the
REITs grow and as they compete with each
other for product, these private portfolios may
become more aggressively sought out targets.”
And succession issues are leading to
increased private equity interest in the
region. “Historically, the private equity
people would be flying over Manitoba to get to
Alberta,” says Johnson. “Now they actually
land and buy you lunch.”
Yet the more things
change—the more
they stay the same
But the M&A trend most likely to thrust
the provinces stereotyped as Canada’s
breadbasket into the global spotlight will
likely be the industry that traditionally
defined them: agriculture.
“We are seeing the growing global investment
interest in the agribusiness sector also play
out locally in the private company market,”
says Johnson. “From large Canadian-based
players, such as Richardson International,
through to global heavyweights such as
Japan’s ITOCHU Corporation, which
invested in the Manitoba pork processor
HyLife Ltd. earlier in the year, the Prairie
agribusiness sector is seeing a sharp jump
in both investment and profile. We expect
more M&A activity of this nature going
forward, particularly given China’s growing
appetite for food (see page 13). And there
will be continued consolidation following the
federal government’s 2011 decision to end the
Canadian Wheat Board’s monopoly.”
11
Capital Markets Flash: Q3 2013
Flagship Prairie Deals of 2013: While the
data show that deals were spread across
multiple sectors, the increasing importance
of oil and gas to the region’s M&A stats is
clear as all four deals over $100M in the
first nine months of 2013 were in this sector
and accounted for 72% of total disclosed
deal value. But, as people active in the local
market are well aware, the disclosed deals
tend to skew outsiders’ view of the market.
Johnson wraps the discussion up with his
take on the statistics: “Those of us who are
active in the local market, sourcing finance
and advising on acquisitions and divestitures,
know that the undisclosed market is a very
significant part of the overall M&A picture,
especially in terms of deal volume. And the
picture here on the ground is much more
sectorially diverse than the public M&A stats
paint it.”
Hats off to the mid-market
Middle-market quarterly Canadian deal trend ($100-$500M segment)
16,000
70
14,000
60
12,000
50
10,000
40
8,000
30
6,000
20
4,000
10
2,000
—
Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213
Deal value
31%
19%
Alberta
Quebec
4%
Saskatchewan
5%
4%
5%
British Columbia
10%
Deal volumes
Provincial middle-market activity (by value)
46%
62%
Ontario
Quebec
13%
2%
Saskatchewan
0%
13%
British Columbia
13%
0%
Q213
Q113
53%
51%
37%
18%
Alberta
33%
38%
Q313
—
Sources: S&P Capital IQ, PwC Analysis
Provincial middle-market activity (by volume)
Ontario
Prognosis: The steady performance of the
middle market will continue to define and
stabilize the Canadian deal pipeline, both
during times of headline-grabbing megadeals and when the mega-deals are absent.
VOLUME
“The mid-market’s sectorial diversity goes part
way to explaining its resilience to fluctuations
in M&A tastes,” explains PwC’s Canadian
head of Corporate Finance, Julian Brown.
“But there are clearly other key factors at play
as well.” Motivation for mid-market M&A
is often largely decoupled from those that
are affecting public market transactions.
“Private companies are, unfortunately, often
more likely to sell for the wrong reasons, such
as increased competitive pressures, financing
difficulties and suchlike. We are continually
trying to persuade owners that the time to
exit is when things are going well, not when
decline has already set in and they’re hoping
to find a buyer that won’t notice.” This factor
alone would tend to point to higher levels
of private company M&A activity when
things are tough, but there are others at
play too. “Another key determinant is age and
succession, and this clearly has a more random
effect on timing of M&A in the segment.” The
combined effect is that the mid-market tends
to be more constant than the public markets
where M&A is concerned.
VALUE (US$ MILLIONS)
Throughout the post-2008 downturn and
the ups-and-downs of the uneven recovery
of the following five years, the Canadian
middle market has continued to perform,
filling the deal pipeline steadily during
both high-performing and sub-performing
quarters. The drivers behind the middle
market’s steady performance nationwide are
very similar to the drivers behind the Prairie
region’s current stability (see Spotlight on
the Prairies, page 10).
4%
4%
32%
34%
13%
10%
11%
10%
17%
Q313
Q213
Q113
Sources: S&P Capital IQ, PwC Analysis
The increasing concentration of deals in Ontario and Alberta that we highlighted in our Q2 report
continued in Q3 with the added feature of a further shift east in both volume and value.
12
Capital Markets Flash: Q3 2013
GLOBAL TREND TO WATCH
China’s appetite for... food
China’s booming middle class and its government’s focus
on ensuring stability and heading off a food deficit will
have a significant impact on global agribusiness M&A
China’s voracious appetite for Canadian
natural resources, has been conspicuously
absent from the M&A scene throughout
2013. But it may be replaced by the world’s
fastest growing economy’s appetite for an
even more critical resource. Food.
The Chinese government has long pursued
a policy of near-100% food production selfsufficiency. Even the Chinese Communist
Party’s fiercest political and economic
critics must grant it this achievement: it
has fed its 1.35 billion population more
than adequately.
“They have managed to ensure the basic
food supply to everybody in the country,”
says Jennifer Fang, PwC’s Managing
Director, China Strategy. “In China, those
basic needs have been met, and continue
to be met, through a combination of many
economic and political policies.”
But China is now looking overseas for
food supply, investing in both resources
(agricultural land) and know-how
(agribusinesses). In late September 2013,
news broke that China was in negotiations
with Ukraine’s KSG Agro to enter into a
50-year lease on a whopping three million
hectares of arable land in the country. The
controversial deal—KSG Agro has been
quick to stress it is still negotiating with its
Chinese partners and that a “land sale” is not
on the table—is not China’s first foreign land
grab. It owns more than 200,000 hectares in
Argentina, 400,000 hectares in the Sudan,
110,000 hectares in Takjistan, and has
substantial holdings in Brazil.
13
Capital Markets Flash: Q3 2013
“
The challenge is clear: feeding China in the context of its
rapid economic growth and limited resource constraints is
a daunting task. China’s consumption growth will slightly
outpace its production growth. …While it would appear
that substantial room exists for productivity gains to sustain
domestic market advantage, constraints of land, water and
even rural farm labour appear to limit future supply.
OECD-FAO Agricultural Outlook, 2013­–2022
”
“
Making full use of international resources and
international markets has become very necessary. China’s
agricultural output has been rising, but demand has been
increasing even faster.
”
Chen Xiwen, Chinese agricultural official
Nearer home, in May 2013, China’s
Shuanghui International Holdings Ltd.
offered $7.1B for Smithfield Foods Inc., the
world’s largest hog and pork producer. The
deal was the biggest acquisition of a US
company by a Chinese enterprise and was
approved by US regulators last month.
China is not running out of food—yet. But
its population isn’t just growing: it’s growing
more demanding. “For the booming middle
class in China, the higher living standard
comes with higher expectations,” explains
Fang. “They don’t just want enough food—
they want higher quality food.” Tarred in
recent years by scandals about the quality
of its infant formula and growing concerns
from its consumers about the pollutants in
locally sourced food, Chinese agribusiness is
looking to foreign acquisitions to boost not
just its supply, but its reputation.
“Acquisitions of foreign food producers give
the Chinese companies access to foreign
brands, brands which give consumers in
China a higher level of assurance,” says Fang.
The foreign targets also give the Chinese
acquirers access to best industry practices
and, frequently, better technology. “Hog
production and processing in Canada and the
United States, for example, is actually a lower
cost enterprise than in China, as a result of
better practices and technologies leading to
much lower mortality rates of infant hogs.”
Fang explains.
What does this mean for Canadian
agribusiness? Potentially, plenty.
Although interested targets need to
consider that China is much more familiar
and comfortable with doing business in
the US market. “Canada is a very strong
player in the agribusiness sector,” says
Fang. “Across the country, but particularly
in the Prairie provinces, there are strong
players in the meat processing industry,
in the beverage industry, and in the dairy
industry. Companies with reputations
for quality processes are all potentially
attractive targets to Chinese companies.”
Research Resource: Access the full
OECD-FAO Agricultural Outlook, 20132022 at http://www.oecd.org/site/oecdfaoagriculturaloutlook/
14
Capital Markets Flash: Q3 2013
Deals
Achieving deal success—
from concept to close and beyond
The PwC Deals Team helps clients raise capital and
complete acquisitions, divestitures, or strategic
alliances. We add value across the entire deal
spectrum, from concept to close and beyond, by:
• developing your deal strategy;
• managing your go-to-market strategy;
• presenting your deal to the right targets,
partners and capital providers, across the globe;
• supporting your deal with due diligence,
including fraud and/or anti-bribery and
corruption assessments, valuation, integration
and tax advisory services; and
• implementing changes to deliver
deal synergies.
1
Our Canadian Deals team is part of the world’s
largest Transaction Advisory practice1.
Our approach helps clients to source and execute
deals faster and on more favourable terms, while
minimizing business disruption and risk.
We look forward to your call.
Nicolas Marcoux
Canadian Deals Leader
nicolas.marcoux@ca.pwc.com
514 205 5302
To provide feedback on this publication or to
sign up for similar publications, please email:
capital.markets.flash@ca.pwc.com
Source: Kennedy; “Business Advisory Services Marketplace 2012”; © BNA Subsidiaries, LLC. Reproduced under license.
A few of our recent global M&A publications
15
Automotive M&A Insights:
Mid-year 2013
Insurance 2020: A quiet
revolution – The future
of insurance M&A
Sharing deal insight:
European Financial
Services M&A – Data Card
www.pwc.com/auto
www.pwc.com/insurance
www.pwc.com/financialservices
Capital Markets Flash: Q3 2013
Contact us
Your PwC Deals Leadership Team
Nicolas Marcoux*
Canadian Deals Leader
nicolas.marcoux@ca.pwc.com
+1 514 205 5302
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Corporate Advisory and Restructuring
david.planques@ca.pwc.com
+1 416 815 5275
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Forensic Services­—Regulatory Compliance,
Risk and Controls
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GTA
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Corporate Finance—Americas
PricewaterhouseCoopers Corporate Finance Inc
julian.s.brown@ca.pwc.com
+1 416 687 8592
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Quebec
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+1 514 205 5286
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Forensic Services
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+1 416 941 8328
Jim McGuigan*
British Columbia
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+1 604 806 7594
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Infrastructure and Project Finance
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+1 514 205 5080
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Transaction Services
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Alberta
clinton.l.roberts@ca.pwc.com
+1 403 509 7307
Contributors
Eric Lemay
Dianna Paw
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Markets, Reuters Loan Connector, S&P LCD, Scotiabank, Seeking Alpha, Standard & Poors, Stikeman Elliot, TD Newcrest, TD Securities,
TMX Group, The TMX MiG Report, Toronto Dominion Bank, Torys LLP, United Nations, VC Circle, Wall Street Journal, The Washington Post,
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