Legal Trends 2016: Mergers & Acquisitions
March 4, 2016
An unusually strong third quarter bolstered Canadian M&A activity, making 2015 the most active year in Canadian deal making since the 2007 market bubble.
The value of Canadian deals announced to date in 2015 (all figures as of December 1, 2015) totalled approximately C$374.1-billion (US$293.5-billion), reflecting a 51 per cent increase over 2014 on an annualized basis. Deal volume also broke a 10-year record, reaching 2,749 announced transactions.
Here are some of the developments and trends we see impacting Canadian M&A in 2016.
ONE | POLITICAL CHANGE WILL CREATE INVESTMENT OPPORTUNITIES
Led by Prime Minister Justin Trudeau, the Liberal party secured a majority government in November. The Canadian business community is readying itself for Liberal policymaking, and some initial reactions have not been favourable.
A number of possible effects of the change in government on M&A include:
- Slow start to 2016: Many expect M&A activity to be slower out of the gate as, among other factors, the market adjusts to the regime change and possible tax implications
- Energy shift: The renewable-energy sector will receive a boost from the government’s stated commitment to phase out fossil fuel subsidies and implement new climate change regulation
- Infrastructure opportunities: With government spending on infrastructure poised to increase by C$5-billion annually, investors will look to capitalize on new Canadian projects
TWO | TAKE-OVER BIDS: JUST SAY “SLOW”
Available defences to hostile bids are expected to change in 2016 after the Canadian Securities Administrators published proposed amendments to Canada’s take-over bid regime in March 2015:
- All bids will be required to remain open for at least 120 days (an increase from the current 35 days), unless the target voluntarily shortens the period (to not less than 35 days)
- All bids must be subject to a minimum tender condition of at least 50 per cent of the outstanding securities of the class that are subject to the bid (not including those held by the bidder)
- Following the satisfaction of the minimum tender condition, all bids must be extended for an additional 10-day period
While no effective date has been announced, market participants expect the amendments will be implemented during the first half of 2016.
THREE | THE LOONIE: HOW LOW CAN IT GO?
After reaching a high of US$1.09 in 2007, the value of the Canadian dollar has undergone a precipitous decline in recent years. At the time of this publication, the loonie had fallen to US$0.72. With the Canadian dollar showing no immediate signs of a quick rebound in 2016, we expect foreign buyers to scoop up Canadian assets at bargain prices.
FOUR | DEPEND ON DE-SPACing
The special-purpose acquisition corporation (SPAC) market has been thriving in recent months. Since the first Canadian SPAC, Dundee Acquisition Ltd., went public in April 2015, seven additional SPACs have closed initial public offerings or filed preliminary prospectuses. We expect to see robust M&A activity by SPACs in 2016.
FIVE | CONTINUED TUMULT IN THE OIL PATCH
This year saw, for the first time in recent memory, the energy sector dethroned as the most active in M&A (in terms of deal value) by real estate and financial services. Nevertheless, market participants expect 2016 to be a robust year in energy M&A as both strategic and financial acquirers take advantage of undervalued Canadian assets. Of particular importance will be sales of assets and cash-flow streams by distressed companies trying to reduce debt levels or raise capital for maintenance or expansion of existing projects.
SIX | PRIVATE EQUITY IS SHOPPING
Canadian private equity (PE) deal volume and value were robust in 2015, with Q3 showing a dramatic increase over the prior period in 2014. Cross-border sponsor activity by U.S. funds is most prevalent, accounting for over half of all PE transactions in 2014 and will likely reach similar levels in 2015. We expect targeted PE activity, especially in the oil and gas services sector, to continue in 2016.
SEVEN | TPP MAY SPUR MORE ASIAN INVESTMENT IN CANADA
The Trans-Pacific Partnership (TPP), an accord that will reduce tariffs on many goods and provide duty-free trade on others among the 12 partner countries, will reduce Industry Canada’s oversight of foreign take-overs of Canadian companies by TPP signatories under the Investment Canada Act. The TPP is expected to come into force in 2017, if ratified by Parliament, once all approvals are granted.
EIGHT | INCREASED FOCUS ON FOREIGN CORRUPT PRACTICES DILIGENCE
Larger Canadian oil, gas and mineral development companies are now subject to the Extractive Sector Transparency Measures Act, which requires public reporting of payments made to foreign and domestic governments and government officials. Enforcement actions also received a boost from charges laid by the Royal Canadian Mounted Police against a large Canadian engineering firm. These factors will prompt potential purchasers to undertake more robust diligence efforts with respect to a target’s overseas activities.
For more details on these trends, click here.
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