Canadian information mill wanting to make deals and international businesses are looking to buy in a low-loonie environment, but don’t expect that to result in a wave of acquisitions this year.
A decline in excess of 30 per cent in the exchange rate of the Canadian dollar from the greenback has made it less expensive for American firms to scoop up their northern counterparts, as Lowe’s Cos Inc. did now with Quebec-based Rona Inc. Those familiar with deal activity say there’s been an obvious uptick in American firms looking around for opportunities in Canada.
The interested buyers range from strategics to personal equity players, with most primarily thinking about companies outside the resource space.
“Recently we’ve seen a larger proportion of mid-tier U.S private equity investors within the Canadian marketplace, our sense is they’re looking for their traditional private targets,” said Doug Jenkinson, someone in Ernst & Young’s transaction advisory services practice in Canada.
This week already saw a high profile cope with the $3.2-billion acquisition of home-improvement retailer Rona U.S.-based Lowe’s. Other deals previously month include a merger between Canadian waste management company Progressive Waste Solutions and Texas company, Waste Connections.
There is buzz within the Canadian market that buyers are kicking the tires of companies as a low loonie makes the deals much more enticing, says Barry Schwartz, chief investment officer at Baskin Wealth Management.
“I can tell you which i have many clients which are telling me they are working on private deals of U.S. and foreign acquisitions,” he explained. “There’s lots of cash looking for a home. A forward-looking company, whether public use or private, is going to see there’s likely to be opportunities in Canada at this time. You need to assume that many publicly-traded companies in the U.S. and elsewhere are contemplating deals in Canada.”
The interest goes both ways. Jenkinson of Ernst & Young states that recent research by his firm, set to be officially released next week, shows that 56 per cent of Canadian firms surveyed are planning to sell non-core assets within the next two years, a notably higher number compared to 49 percent figure for global companies.
For foreign buyers, not only does the exchange rate make buying attractive, but equity valuations have fallen to multi-year lows for a lot of companies. Canadian stocks dripped right into a bear market recently (defined as a drop of 20 per cent or more from the recent high), using the the S&P/TSX Composite Index now trading at a 2016 forward price-to-earnings ratio of 15.4, compared with a lot more than 20.0 last year.
Finding an offer, however may prove more elusive. Interest doesn’t necessarily translate to a coming rise in mergers and acquisitions this season.
“The issue is there’s very few options because a large amount of our great Canadian names are voting shares, owner operated,” Schwartz said. “They’d need to obtain a spectacular offer to even contemplate being purchased, since you give up equity for cash, well now you have this cash, and you’ve got to pay for a bunch of capital gains unless they go for equity within the new company.”
Two of the most beaten down sectors, energy and mining, meanwhile, are unlikely to see much buyer interest. When they offer foreign firms some the steepest discounts, Jenkinson said that he’s seeing fewer prospective buyers looking around for energy deals.
Schwartz asserted if activity does get for the reason that space, he sees it coming from private equity finance players searching for the assets of bankrupt companies.
Other complications that could place a lid around the number of deals this year include the fact that a few of the more attractive names that foreign buyers may be thinking about – Telus Corp. and Canadian National Railway Co., for example, says Schwartz – are deemed to become strategic assets by the Canadian government and never on the market.
American firms may also be turned off when they agree with many economists that the loonie will stay weak against the U.S. dollar for an extended period of time. While an initial purchase might be cheaper for foreign buyers, repatriated earnings from Canadian operations may also be worth less as long as the loonie remains low.
“There’s always prospective buyers around the prowl, but I wouldn’t expect to see a big upswing in foreign takeovers this year,” said David Madani, senior Canadian economist at Capital Economics.
He added that, even though many companies are trading at low valuations, trying to determine the real worth of Canadian businesses in the current environment can be difficult, that might divide both sides.
“When we’re talking about energy companies for example, no-one can accurately predict what these companies count at this time, because no one can predict the need for oil three or five years down the road,” Madani said. “Yes, at the margin, the drop in the Canadian dollar vis–vis the U.S. dollar makes things more attractive from a foreign investment point of view, however, you need to look at other bits of the puzzle.”
Financial Post
