Low loonie luring foreign buyers, but an M&A boom in Canada may prove elusive

Canadian companies are wanting to make deals and international businesses are looking to purchase in a low-loonie environment, but don’t expect that to create a wave of acquisitions this season.

A decline in excess of 30 per cent in the exchange rate from the Canadian dollar from the greenback makes it less expensive for American firms to scoop up their northern counterparts, as Lowe’s Cos Inc. did now with Quebec-based Rona Inc. Those familiar with deal activity say there’s been a noticeable uptick in American firms shopping around for opportunities in Canada.

The interested buyers range from strategics to private equity players, with most primarily interested in companies away from resource space.

“Recently we’ve seen a larger proportion of mid-tier U.S private equity firms within the Canadian marketplace, our sense is they’re searching for their traditional private targets,” said Doug Jenkinson, someone in Ernst & Young’s transaction advisory services practice in Canada.

This week already saw a high profile cope with the $3.2-billion purchase of home-improvement retailer Rona  U.S.-based Lowe’s. Other deals previously month include a merger between Canadian waste management company Progressive Waste Solutions and Texas company, Waste Connections.

There is buzz within the Canadian market that buyers are kicking the tires of companies like a low loonie has made the deals much more enticing, says Barry Schwartz, chief investment officer at Baskin Wealth Management.

“I can tell you that I have numerous clients which are telling me they are focusing on private deals of U.S. and foreign acquisitions,” he explained. “There’s a lot of cash searching for a home. A forward-looking company, whether public use or private, will see there’s likely to be opportunities in Canada right now. You have to think that many publicly-traded companies within the U.S. and elsewhere are contemplating deals in Canada.”

The interest goes both ways. Jenkinson of Ernst & Young says that recent research by his firm, set to be officially released next week, shows that 56 per cent of Canadian firms surveyed are intending to sell non-core assets in the next 2 yrs, a notably higher number than the 49 per cent figure for global companies.

For foreign buyers, not only does the exchange rate make buying attractive, but equity valuations have fallen to multi-year lows for many companies. Canadian stocks dripped into a bear market recently (understood to be a drop of 20 percent or even more from the recent high), using the the S&P/TSX Composite Index now trading in a 2016 forward price-to-earnings ratio of 15.4, compared with more than 20.0 last year.

Finding an offer, however may prove more elusive. Interest doesn’t necessarily translate to a coming rise in mergers and acquisitions this year.

“The issue is there’s not too many options just because a lot of our great Canadian names are voting shares, owner operated,” Schwartz said. “They’d really have to get a spectacular offer to even contemplate being purchased, since you give up equity for money, now you got this cash, and you have to pay for a bunch of capital gains unless they go for equity within the new company.”

Two of the very most beaten down sectors, energy and mining, meanwhile, are unlikely to determine much buyer interest. When they offer foreign firms some the steepest discounts, Jenkinson asserted he is seeing fewer prospective buyers shopping around for energy deals. 

Schwartz asserted if activity does pick up in that space, he sees it coming from private equity finance players searching for the assets of bankrupt companies.

Other complications that may put a lid around the number of deals this year range from the fact that some of the more appealing names that foreign buyers might be thinking about – Telus Corp. and Canadian National Railway Co., for instance, says Schwartz – are deemed to be strategic assets through the Canadian government and not on the market.

American firms may also be switched off if they agree with many economists the loonie will remain weak from the U.S. dollar for an longer timeframe of your time. While a preliminary purchase may be cheaper for foreign buyers, repatriated earnings from Canadian operations will also be worth less as long as the loonie remains low.  

“There’s always prospective buyers on the prowl, however i wouldn’t expect to see a big upswing in foreign takeovers this season,” said David Madani, senior Canadian economist at Capital Economics.

He added that, even though many information mill trading at low valuations, trying to determine the true value of Canadian businesses in the present environment can be challenging, that might divide both sides.

“When we’re talking about energy companies for example, no one can accurately predict what these companies are worth at this time, because no one can predict the need for oil three or five years in the future,” Madani said. “Yes, at the margin, the drop in the Canadian dollar vis–vis the U.S. dollar makes things more attractive from the foreign investment point of view, but you need to look at other pieces of the puzzle.”

Financial Post