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Stock prices fuel Cana­dian ac­qui­si­tions

Huge En­bridge deal used shares iti fi­nance deal

- Jim Middlemiss Business · Stocks & Markets · Investing · Financial Markets · Finance · Americas Stock Markets · Toronto · United States of America · Stuart · Vancouver · Kirkland Lake · Kirkland · Canada · New York City · Philadelphia Union · Canada Stock Markets · Enbridge · Spectra Energy · H. P. Lovecraft · Canadian Imperial Bank · Lawson · Endeavour Mining · Blake, Cassels & Graydon LLP

When En­bridge Inc. an­nounced in early Septem­ber that it was launch­ing a friendly of­fer to buy U. S.based Spec­tra En­ergy Corp., it could thank a buoy­ant Cana­dian stock mar­ket for en­abling the deal.

That’s be­cause rather than spend $37 bil­lion in cash, En­bridge used its shares as cur­rency in or­der to fi­nance the cre­ation of a North Amer­i­can en­ergy in­fra­struc­ture pow­er­house.

Un­der the deal, each share of Spec­tra is worth 0.984 of the com­bined com­pany, valu­ing Spec­tra shares at US$40.33, and pro­vid­ing its share­hold­ers with an 11.5-per­cent pre­mium. The com­bined com­pany’s en­ter­prise value is pegged at $165 bil­lion.

“I hope this is the start of Cana­dian ac­quir­ers look­ing south­bound and it opens the flood­gates,” said Pe­ter Hong, a merg­ers and ac­qui­si­tions lawyer at Davies Ward Phillips & Vineberg LLP in Toronto.

“We’ve got a per­fect storm here,” he says, re­fer­ring to a Cana­dian stock mar­ket that has per­formed well this year, with a year-to-date re­turn of more than 10 per cent, higher than both the S& P 500 and Dow Jones. “It makes it at­trac­tive for Cana­dian buy­ers look­ing south to use their stock, rather than cash, to buy their U. S. tar­gets,” Hong said.

An­other al­ter­na­tive is to use stock as part of the pay­ment, which is what CIBC did when it an­nounced in late June it was buy­ing U. S.- based Pri­vateBan­corp for $ 4.9 bil­lion. It fi­nanced about 40 per cent of the deal us­ing its shares.

“In a de­pressed mar­ket, shares aren’t as liq­uid,” ex­plained Stu­art Breen, a cor­po­rate lawyer at Law­son Lun­dell LLP in Van­cou­ver. The goal, he said, is to do a deal quickly be­fore the mar­ket turns. “In a hot mar­ket, re­ceiv­ing shares might be al­most as good as re­ceiv­ing cash.”

All- stock ac­qui­si­tions are be­ing used in more than just cross- bor­der deals. A num­ber of deals in the slowly re­bound­ing min­ing sec­tor have re­lied on share swaps. Ex­am­ples i nclude Oban Min­ing Corp.’s com­bi­na­tion with NioGold Min­ing Corp., En­deav­our Min­ing’s ac­qui­si­tion of True Gold Min­ing Inc., and Kirk­land Lake Gold Inc.’s pur­chase of St An­drew Gold­fields Ltd. How­ever, none of them had the lofty share- swap ra­tios of the Spec­tra deal.

Jef­frey Singer, an M& A lawyer at Stike­man El­liott LLP in Toronto, said Canada’s stock mar­ket re­cov­ery has been “dis­pro­por­tion­ate” to the U.S. and other parts of the world. “It is in­cre­men­tally help­ing get deals done that might not oth­er­wise have got­ten over the hur­dle.”

No one wants to do share deals when mar­kets are de­pressed. But when share price waters rise, all in­vestors’ boats float and it cre­ates op­ti­mism and pro­vides share­hold­ers with a com­fort level. Singer calls the En­bridge-Spec­tra deal one that “peo­ple want to bet on. They like that busi­ness and that sec­tor.”

Of course, there is al­ways the down­side to an all-stock deal. Ex­ist­ing share­hold­ers are di­luted and ne­go­tia­tors need to ar­rive at a share swap-ra­tio that sat­is­fies both par­ties, while keep­ing ac­tivists at bay. How­ever, that’s of­ten the same for cash deals if com­pa­nies is­sue stock to raise cap­i­tal for the pur­chase.

Hong said when it comes to cross-bor­der deals, hav­ing a cross list­ing on a U. S. mar­ket is crit­i­cal to be­ing able to wran­gle an all- stock deal, be­cause Cana­dian ac­quir­ers need to be able to is­sue stock in the U.S.

Nonethe­less, he said there is pent-up de­mand for deals. “The cur­rent cli­mate is such that both par­ties may be more mo­ti­vated to do a deal.”

Hong said he ex­pects to see more ma­ture and se­nior is­suers with cross-list­ings re­sort to all-stock deals.

Lawyers say all- s t ock deals are the ex­cep­tion and not the norm. Jamie Koumanakos, a se­cu­ri­ties lawyer at Blake, Cas­sels & Gray­don LLP in New York, said “the trend is that they are a mi­nor­ity of deals.”

The frothy Cana­dian stock mar­ket i s hav­ing an im­pact in other ways, he said. “Peo­ple have been will­ing to do trans­ac­tions over the last num­ber of months as some con­fi­dence has grown in the mar­ket.”

Singer agrees: “Cash is al­ways king.” As share prices re­cover and val­u­a­tions rise, the ris­ing mar­ket cre­ates bet­ter op­por­tu­ni­ties for com­pa­nies to raise that cash for M&A.

Look­ing ahead, the lower loonie is en­tic­ing U. S. com­pa­nies to look at Canada. A U. S. stock mar­ket surge could pro­vide the im­pe­tus for more in-bound Cana­dian deals, Hong said. “The U. S. mar­ket is much larger than the Cana­dian mar­ket in terms of po­ten­tial buy­ers. My ex­pe­ri­ence is that there is al­ways some level of in­ter­est from the U.S. in Canada.”

 ?? HAND­OUT / EN­BRIDGE. ?? Rather than spend $37 bil­lion in cash, En­bridge used it shares in ac­quir­ing U. S.-based Spec­tra En­ergy Corp.
HAND­OUT / EN­BRIDGE. Rather than spend $37 bil­lion in cash, En­bridge used it shares in ac­quir­ing U. S.-based Spec­tra En­ergy Corp.

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