A recovery in the M&A market in B.C. remains relatively strong in 2010, although valuations are muted by the new realities of the economy, according to industry experts.
Ken Tarry, vice-president of transaction advisory services at Ernst and Young LLP in Vancouver, said, “Over the last few months, the major trend is that we are seeing increased deal flow. The uptick in mid-market deal flow really reflects a pent-up demand that’s been out there.”
Jim McGuigan, managing director of PricewaterhouseCoopers Corporate Finance noted, “B.C. is generally a 600- to 800-transactions-per-year province in terms of M&A activity. We’re probably going to see north of that this year, which represents a return to historically favourable levels.”
A PwC survey found that 34% of Canadian private companies are considering mergers and acquisitions as part of their growth plans, up from 28% in 2009.
The reasons for increased transactions are many, with a clearer picture about the direction of the economy underlying the increased clarity of future financial results that are key metrics for any deal.
“Sellers have a better view of their backlogs; there’s more clarity on cash flows. And buyers are buying into projections and sellers are forecasting growth again,” said Tarry.
“All of that lends itself to deals getting done.”
While the value gap between buyers and sellers has been relatively wide last year, sellers have slowly realized it’s unrealistic to expect sales based on the high valuations of 2006 and 2007. Buyers, on the other hand, are increasingly willing to boost the sale price to narrow the gap.
Tarry noted, “Back in 2007, a lot of transactions were being done simply on a last-12-months basis. That was the key data point, because it was advantageous for the seller, and the buyer had comfort tthat hose were the cash flows of the business,” said Tarry.
“Today, buyers are taking a longer-term perspective, ‘Maybe, I’ll take a longer-term average of the past few years, maybe we’re going to discount the boom and bust. Let’s look at what the pipeline looks like today, or how well we are meeting budget, or how well we can predict future cash flows.’”
Deal volume has also increased because strong companies flush with cash are more willing to make strategic deals. Tarry also noted that private equity firms have also returned to the market, eager to engage investor capital sitting uninvested.
The mining sector continues to be a strong area of M&A activity. Michael Cinnamond of PwC in Vancouver noted M&A activity on the TSX-Venture exchange was up 350% in the past year with many deals in the precious metals space.
“You’re seeing people coming in to spend the dollars to buy their way in.”
Big mining deals are also taking shape, illustrated by:
- the US$7.1 billion acquisition of Red Back Mining Inc. by Toronto’s Kinross Gold Corp., which closed in mid-September;
- Goldcorp Inc.’s $3.6 billion acquisition of Andean Resources Ltd. announced September 2;
- the $650 million acquisition of Vancouver’s Terrane Metals by Thomspon Creek Metals, which closed in late October; and
- Fronteer Gold’s $280.8 million acquisition of AuEx Ventures Inc., which closed November 2.
“We also saw Sojitz Corporation come in again, this time buying part of the Gibraltar Copper mine owned by Taseko Mines,” said Cinnamond. “It remains to be seen what happens going forward, but it doesn’t seem like interest is going away. If anything, it’s going to increase.”
New normal of deal values and terms
Despite the increase in activity, deal values remains off their peak, primarily because the level of debt financing remains more scarce than in 2007 and the first half of 2008. McGuigan suggested deal valuations are roughly 20% off the peaks in 2006 and 2007.
He noted one of the reasons for this is the lack of foreign lenders in the Canadian market.
“In ’06, ’07, you saw foreign lenders come in and they were very aggressive in Canada. You haven’t seen that aggressive lending style return and levels have returned to where Canadian banks are comfortably lending. But the level of debt financing is favourable overall. It’s returned to long-term historical norms.”
Despite the improvement in the M&A market, deals are still taking longer to close than in the past. Tarry suggested increased deal flow is tempered by the fact that there is increased due diligence, closing risks and post-closing conditions.
“If you’re trying to meet a particular value expectation, then often in today’s environment, you are tending to bridge it with some other non-cash consideration such as vendor notes, earn-outs and things of that nature.”
Despite the challenges, opportunities for good deals remain over the next few months and years with the pending wave of succession of small and medium-sized business owners looking to sell or pass on their business to a new generation of entrepreneurs. Some business owners had to wait out the past couple years to sell and retire, but some are already starting to explore a sale again.
Tarry noted an imbalance exists in the M&A market, where there are more buyers than sellers. “Growth by acquisition is back on the agenda for strategic acquirers and private equity has a lot of capital looking to be deployed. They’re all looking for good deals and this buyer-seller imbalance will correct itself at some point.”