../Morning Post
Posted April 15, 2011


On a rally: strongest 1st quarter for Canadian M&A deals by value since 2007 however "this is a different market" says PwC - 791 deals, worth nearly $51 billion and 81% higher than Q1 2010

TORONTO - The past 90 days in Canada have resulted in over $50 billion worth of deal announcements - 81% higher than the first quarter of 2010 and in line with the Q1 2007 high.

PwC's Canadian Deals Leader Kristian Knibutat says: "It has been a very active quarter and we've seen more diversity in deal making. For the first time since the credit crisis, the top twenty deals of the quarter showcased a variety of different industries. But our view is that the overall M&A environment in 2011 is dramatically different than 2007."

The PwC report suggests that 2011 will be very promising, but also points out some key differentiators between today's post-crisis Canadian M&A market and the pre-crisis "boom." Four trends are featured:

* A new kind of resource market. While Q1 saw activity from a variety of industries, Canada's deal markets remains the most concentrated on the globe (49% commodities). Within commodities, however emerging sub-sectors such as agriculture, alternative energy, junior mining, shale gas and unconventional extraction look to be the most promising deal opportunities. Knibutat also stressed that "Sector concentration in energy and resources is also a reminder that Canada's deal market is being supported by acute concerns about a variety of macro issues. This market is not being driven by 2007-like market exuberance."

* The return of leverage (but not leveraged deals). There was no shortage of leverage available in the first quarter of 2011. In fact there was a record quarterly volume of new issue leveraged loans in Q1, higher even than Q2 of 2007. However, most new issues were in support of repricing and recapitalization, not LBOs. Buyers remain hesitant to pursue leveraged buy outs that meet seller's value expectations. According to Knibutat: "This tension is evident in the relatively still-low LBO multiples. Buyers simply are not ready to march back into 2007 10x EBITDA + multiple territory."

* Private equity re-invented. In what is proving to be more of a market shift than a post-crisis anomaly, financial buyers continue to take a back seat to corporate buyers. This quarter, despite an uptick in available leverage and robust capital markets, private equity firms were only involved in 20% of Canadian deals (measured by value), down from 29% (Q4 2010) and 23% (Q3 2010). No Canadian private equity deal breached the $1 billion mark. In addition to digesting opportunistic deals completed in 2010, many private equity firms spent the quarter focusing on rebalancing private company portfolios and maximizing efficiencies within private company portfolios. According to Knibutat: "The shift away from the "lever-buy-sell" business model is not entirely due to lessons learned during the credit crisis. It is partially being driven by a shift in where the compelling buy-side deal opportunities are in today's market - a variety of resource/commodity sectors and emerging markets. In both cases, leverage is not the best way to boost returns."

* A new player - China. China's role at the upper end of the deal market in Canada is new to this cycle. An understanding of China's latest five-year plan, focused almost exclusively on domestic growth, sheds some light on what is behind this deal making: China is pursuing M&A in order to gain technology and know-how to leverage within China. Rather than focus on inbound investment from China, however, Canadians should consider the opportunities.

"China's five-year plan and its new 'emerging industry list' is a positive from a Canadian perspective. We see key opportunities in sectors such as clean energy, health care, consulting services, finance and bio/nano technologies," says Knibutat. Overall, there will be some good opportunities for Canadian businesses that are able to align their strategies with Beijing's larger policy goals," he says.

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