Strong Canadian stock prices are fuelling mergers and acquisitions
JIM MIDDLEMISS
FINANCIAL POST
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 include 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 got 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 crossborder 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 matureandseniorissuerswithcrosslistings resort to all-stock deals.
Lawyers say all-stock 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 is 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 inbound 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.”