In our M&A Outlook for 2012, we posed the question of whether the proverbial glass was half empty or half full. A year later, the future of Canadian M&A remains uncertain, as 2012 was another mixed year and the prognosis for 2013 seems equally murky. Nevertheless, Canada remains a very stable place to do business and we anticipate continued interest in Canadian M&A opportunities. As Mark Carney, the Governor of the Bank of Canada and soon-to-be Governor of the Bank of England recently said, "[i]n this uncertain world … Canada is rightly viewed as an attractive investment destination".
Reflecting back upon 2012, overall deal volumes were less than robust as a result of lingering global macro-economic and political issues, volatile commodity prices and other negative factors. However, some sectors performed relatively well and there were a number of high-value transactions that challenged the notion that market participants are reluctant to pursue large transactions in a risky environment.
Looking forward to 2013, we expect the cautious stance concerning M&A activity to continue. However, there is mounting tension between the protracted uncertainty overhanging the market and the abundance of capital available for M&A activity, and we expect some to yield to this liquidity pressure in 2013. Industry sectors we expect to be active include real estate and infrastructure, given the on-going desire for yield producing assets. We further expect to see continued activity in the energy and natural resource sector, although here the picture is a little more complex. We have little doubt that the interest in the sector will persist due to its global strategic importance, the on-going need for significant investment in Canada and the desire of many to tap into our surplus of natural gas as a less expensive source of supply or to benefit from the price differential between North America and Asia. Nevertheless, the picture will be complicated by our federal government’s recent policy pronouncements in the wake of the Investment Canada decisions in CNOOC/Nexen and Petronas/Progress Energy, debates surrounding pipelines and related matters, volatile commodity prices and other factors. In the short term, our new foreign investment framework is expected to curtail outright acquisitions of control of Canadian companies in the oil sands by stateowned entities (SOEs) and lead to more of the types of minority investments and joint-ventures that we’ve seen in the past. An open question will be the extent to which the new framework and lingering uncertainty tied to the rejection by the Ministry of Industry of BHP Billiton’s attempt to acquire Potash Corp. in 2010 will result in a broader “chilling effect”, or conversely whether the federal government’s policy stance will eventually soften as North America heads towards energy self-sufficiency and the need for oil sands and heavy oil perhaps doesn’t arise as quickly or profoundly as currently anticipated.
As always, we expect a good portion of M&A activity to be crossborder in nature as a result of the continuing appetite of foreign companies and private equity funds for Canadian assets and the on-going trend towards our banks and pension funds investing outside of Canada. However, in many ways, 2012 was a year where political, regulatory and legal issues dominated the M&A landscape. The unsettled state of play in our foreign investment, anti-trust and securities regulatory regimes, as well as the antitakeover developments we witnessed in Quebec, leads us to expect that foreign investors looking to Canada will be very sensitive to regulatory, political and other potential pitfalls, and will engage in very careful and thoughtful planning to address perceived execution risk.