REAL DEALS
THE LEGAL POST ROUNDTABLE ASSESSES THE CANADIAN M& A LANDSCAPE.
The biggest challenge in mergers and acquisitions used to be selling a proposed deal to a target’s board and shareholders. The rise of regulation has now added to deal risk. Discussing this and other hot topics in M&A with Legal Post editor Drew Hasselback were noted practitioners Vince Mercier of Davies Ward Phillips & Vineberg LLP; Jeff Lloyd of Blake, Cassels & Graydon LLP; Manny Pressman of Osler, Hoskin & Harcourt LLP; David Woollcombe of McCarthy Tétrault LLP; Brian Pukier of Stikeman Elliott LLP; and Sharon Geraghty of Torys LLP. This transcript has been edited.
Q What trends are you seeing? It seems to be a big year for deals — Enbridge- Spectra, Potash-Agrium, TransCanada-Columbia.
Vince Mercier You may be getting caught up in the hype of the big deals. If you look at the first half of the year, both deal volume and deal value are down from 2015, both globally and in Canada. The overall decline is not unexpected because 2015 was a banner year. Jeff Lloyd Senior issuers have found that capital markets are very receptive to financing some very large acquisitions. The TransCanada-Columbia deal, for example, was financed in part by a $4.4-billion bought deal. Manny Pressman We are seeing interesting structures that are designed to pre-empt regulatory risks. For example, the Couche-Tarde- CST transaction came with the back-end conditional deal to sell Canadian assets to Parkland Fuel Corp. And Bell acquired MTS, but agreed to sell one-third of the postpaid wireless subscribers to Telus. David Woollcombe I think the story with the big transactions that a number of strategic buyers have announced this year is the quest for growth. Canadian companies are operating domestically in a very low growth environment. They are frequently looking abroad for the revenue growth that they can’t get in Canada, and are often looking to diversify their revenue streams. Brian Pukier The trend of regulators stepping in and not being shy with respect to seeking remedies is actually quite important and has been ramping up over the years. Sharon Geraghty There’s a real concern with the impact of globalization on communities and big groups of people who are quite disillusioned that the wonders of globalization are not impacting them. What’s impacting them is economic uncertainty and in many cases dislocation.
Q That’s certainly an issue for politicians and regulators. But how much is that being thought about at the boardroom level?
SG I think a lot, and well beyond the M&A context. The mood of shareholders is still the primary factor for boards. But boards are also very aware of political uncertainty, how their regulators will look at deals, how that will impact growth and how that will impact things post-deal.
Q Must a board now sell a deal to a community in the same way it once had only to sell it to shareholders?
BP Absolutely. That’s a classic Investment Canada Act analysis that bidders go through. They do it not only outside the transaction agreement, but also within the four corners of the agreement. Increasingly, they are pre-agreeing with target companies which undertakings they will propose to obtain approval under the Investment Canada Act. MP One of the greatest challenges is prevailing upon clients the necessity and imperative of having a comprehensive govern- ment relations, public relations and stakeholder strategy before you announce. It’s missioncritical.
Q Companies have had to learn to deal with Investment Canada. Are they also learning to deal with regulators in destination jurisdictions?
SG If you talk to our pension funds, which are so dependent on outboard investment, they will tell you that their reputation in every jurisdiction is so important to them. JL They also have people on the ground in a lot of those jurisdictions in which they’re investing. DW Which makes sense, when the pension fund is looking at holding an asset for 25 or 30 years. It’s a very different approach than traditional private equity.
Q Will the changes proposed for CPP fatten the fund and lead to it making more acquisitions? Or are those changes so far ahead we won’t see a difference?
BP I couldn’t imagine CPP being more important than it currently is. They really are a formidable acquirer of assets all over the world. So I’m not sure anyone is waiting for them to become more powerful. SG More interesting is the formation of IMCO (Investment Management Corp. of Ontario), which is going to start at $50 billion.
Q When the Brexit vote happened, it seemed like it was the only story. Now we’ve gotten to the shrug stage. Is Brexit impacting deal flow?
JL I think the chill preceding the vote may have been more discernible because there was a specific date that people could point to and say, let’s not do anything until then. Now it’s not clear when something further will happen on Brexit, so people are saying, I’m not going to delay doing things indefinitely. BP In fact, the uncertainty has now shifted away from the U.K. to questions of whether there is another domino to fall, another country that might threaten to leave. If that occurs, then people are going to start to get quite exercised. MP At the risk of stating the obvious, it goes without saying that we’re not even approaching a global financial crisis, which was the doomsday scenario that everyone was concerned about. There’s no freezing-up of credit. VM Credit markets are better now than they were at the beginning of the year, but there’s no doubt Brexit has chilled M&A in the U.K. and Europe while companies evaluate its long term impact.
Q Are private placements the new poison pills?
SG No, private placements have been criticized as an M&A defensive tactic before. They have typically been undertaken by companies raising money to deal with immediate financial needs as well. JL And we don’t really need a new poison pill. What poison pills used to achieve, in terms of providing more time for target boards, is now enshrined in the new rules. VM Private placements sometimes work with small companies. They’re not going to work with well-funded, large-cap companies. MP Recent case law is of very limited relevance because it’s not hard for a small cap or a micro cap to demonstrate there’s a proper business purpose. You climb up the capitalization ladder, and good luck in demonstrating there’s a proper business purpose to a placement, especially in the face of a takeover bid. BP Yet they are the next poison pill in the sense that you can bet your bottom dollar that, whenever used by target companies, hostile bidders will be in front of securities commissions seeking that these private placements be reversed.
Q That’s where I’m going with that question. I thought the idea was to get securities commissions out of the litigation business as regards contested M&A.
VM No, they wanted to get out of the pill hearing business, and they’ve effectively done that with the new takeover-bid rules. They are still very much in the defensive tactics business. The OSC is reviewing every single case. If you run a non-robust special committee process, the OSC will be asking lots of questions. Now they have more time and resources to focus on what’s really going on in M&A transactions. JL And that’s a relatively new development. To be clear, this has nothing to do with defensive tactics. This is the commission re-allocating its resources to look very carefully at certain transactions.
Q A couple of SPAC — special purpose acquisition company — purchases are finally here.
MP It’s extraordinary that the SPACs were able to transact as quickly as they have given the incremental execution risk and competitive deal-making environment. The single greatest challenge facing SPACs is the same one facing private equity sponsors. More and more capital pools and capital providers are chasing the same deals. DW Plus, SPACs are up against the clock. The SPACs have to be more innovative. They have to come up with some new twist that differentiates them because the other side of the deal has to be comfortable with the deal incremental risk that comes from transacting with a SPAC.