Conducting due diligence a challenge during crisis
Silvercorp deal could be the beginning of ‘new normal’ for corporate acquisitions
When Vancouver-based Silvercorp Metals Inc. announced this week it would buy Toronto-based Guyana Goldfields Inc. for $105 million, it marked one of the first major corporate acquisitions in Canada in months.
In large part that’s due to the uncertainty brought upon by the COVID -19 crisis, rock-bottom oil prices and Canada’s weak economic outlook that has forced many companies to set aside any expansionary plans. Social distancing policies and grounded planes have also made it nearly impossible to travel overseas, severely limiting any prospective buyer’s ability to conduct due diligence.
And yet, Silvercorp, in what could be the “new normal” as one adviser put it, conducted its due diligence entirely online — potentially setting a new paradigm for how mergers can be consummated during a health pandemic.
“There were some leaps of faith that would usually be mollified by normal course due diligence,” said Pat Burke, president of Canadian capital markets at Canaccord Genuity, which advised Silvercorp on the transaction. “Oftentimes, it’s the boards that have a more difficult time, but they were able to do a virtual due diligence process that was unique.”
Typically, mine acquisitions involve site visits, and buyers like to talk to people on the ground, look at the mining licences, and inspect the geology of the mine.
Guyana Goldfields’ was engulfed in controversy last March after the company drastically revised its estimate of the proven and probable amount of gold at its Aurora mine from about 3.9 million ounces to 2.2 million ounces. It is one of several bumps that rocked the company, including management changes, a proxy battle with its former chairman and operational challenges at the mine that caused it to miss guidance and raised its costs.
In the past two years, the company has lost more than 80 per cent of its market capitalization as its stock dropped from above $5 to 65 cents on Wednesday.
Despite these challenges, Burke said his client met with management online over video conferencing software Zoom, interviewed miners and requested film of certain parts of the mine in order to make itself comfortable with the transaction.
“I’d say that the most important driver of M&A activity is confidence,” said Peter Buzzi, co-head of global mergers and acquisitions in Canada at RBC Capital Markets. “Obviously, we’re in a position where confidence is lacking.”
He said that’s contributed to a drastic reduction in mergers and acquisitions so far in 2020 compared to previous years. The precious metals sector, which is considered countercyclical to the rest of the market, has been one of the few bright spots, he noted.
According to Financial Post data, there have been 346 corporate transactions in Canada across all sectors, worth an estimated $30.5 billion across 349 deals in the first four months of the year. That belies the fact that 97 per cent of the deals, as measured by dollar value, were announced in the first quarter and before the coronavirus reached North America.
By comparison, in 2019, there were 603 deals announced at this time, worth an estimated $73.5 billion, according to FP data.
Looking deeper, there were only 28 deals valued over $100 million or above during the first four months of 2020, realizing a combined $26.4 billion in value — compared to 83 deals (a 66-per-cent drop), generating $65.5 billion in value in the same period last year.
“There hasn’t been a lot of activity since we went on this COVID crisis,” said Mike Boyd, managing director and head of global mergers and acquisitions at CIBC World Markets.
Even financings have been affected by the crisis. In March, National Bank Financial invoked the disaster clause to back out of a planned $75-million bought deal financing, in which it would offer 9.1 million shares of Silvercrest Metals Inc. to the market. It cited the uncertainty caused by the coronavirus as its reason to pull out of the deal.
Investors are also watching for two high-profile deals in Canada. U.K.’S Cineworld Inc. is hoping to wrap up its proposed acquisition of Toronto-based Cineplex Inc, for US$2.3 billion by the first half of 2020. Meanwhile, Air Canada Inc.’s $720-million proposed acquisition of rival Transat A.T. Inc. is also under scrutiny by the federal Minister of Transport.
Both deals were announced last year and have drawn scrutiny from investors as social-distancing and restrictions on movement decimate both the cinema and travel industry in the short term.
The Cineplex deal is being reviewed under the Investment Canada Act. Earlier in April, Cineworld stock tumbled after a report suggested its lenders were exploring legal challenge to block the takeover Cineplex. Bluebell Capital Partners Ltd, an activist investor, also urged Department of Canadian Heritage to scrap the deal.
And before the pandemic decimated the air travel industry, Air Canada was planning to buy holiday travel operator Transat A.T. for $18 per share. Air Transat’s stock price has since plummeted to about $10.15 per share, leaving analysts questioning whether the deal will go through.
They were able to do a virtual due diligence process that was unique.