Some of B.C.’s largest companies went on the corporate offensive last year, expanding further into the global marketplace.
By two key metrics, B.C. companies dominated this year’s list of the biggest mergers and acquisitions. Total value of deals involving B.C. acquirers rose to $13.6 billion compared with $7.6 billion in 2011. And the total number of deals involving a B.C. acquirer rose to 26 from 23.
“There was a diverse mix of transactions last year,” said Elise Rees, Ernst and Young’s B.C. transactions advisory leader. “We saw a lot of really solid activity from our entrepreneurs, and we felt the market was solid even though there was the European debt crisis creating all sorts of uncertainty.”
While the proportion of mining companies on this year’s biggest deals list fell to 23 from 30 in 2011, the number of big technology deals jumped to 11 from 3 in 2011.
Much of the M&A activity last year came from businesses making strategic acquisitions. But Rees noted that institutional investors and private equity funds continued to contribute to deal activity in the province. BC Investment Management Corp. (BCIMC) continued to drive deal activity involved in a number of significant deals last year. In addition to participating in last year’s largest deal on the list, BCIMC took full ownership of Vancouver’s Corix Utilities, buying out the stake owned by CAI Private Equity last fall for an undisclosed sum.
Portfolio companies of Vancouver-based private equity firm Tricor Pacific Capital also made two acquisitions last year, while Vancouver’s Fulcrum Capital Partners acquired Ontario-based Mobile Parts Inc. for an undisclosed sum.
“Private equity is still very active,” noted Rees. “They’re looking for the right deal and there’s lots of competition from private equity firms in the U.S.”
Mining sector continues to dominate
There is a large M&A market in B.C., but activity has declined last year and will continue to struggle. B.C.’s mining sector continues to contribute to the bulk of the largest deals in B.C. with the 23 largest deals last year contributing $12.2 billion to the overall value of the list. But the number and value of deals has been declining over the past few years (See chart).
Worldwide, last year was one of the worst years for M&A and financing for the mining sector. According to PwC’s global mining report, there were 1,803 mining deals in 2012, the lowest number since 2005 and 30% below the 2,605 deals in 2011.
Phillip Heywood, PwC’s Vancouver mining transactions leader said mega-deals in the mining space may still occur with some companies looking to shed non-core assets in an effort to boost profits and increase efficiency. That might be a boon for intermediate players based in B.C., many of whom have stronger balance sheets and are looking to expand production.
But avoiding cost overruns and improving efficiency of core assets will be a key focus for Canada’s largest mining companies.
“They will continue to see some pressure from shareholders. On the senior end of the market, these shareholders are more institutional investors, and generally, they are pushing for yield and cash flow, so dividends. They’re not necessarily looking for growth in resources,” said Heywood. “We’re not seeing a huge amount being put in greenfield development or acquisitions.”
For the junior mining space, however, Heywood expected more partnerships and outright mergers as exploration firms look to find alternative ways to finance further exploration. Junior mining companies have had a very difficult time obtaining financing from the capital markets over the past year.
According to data from the TMX Group, funds raised by mining companies on the TSX Venture Exchange fell 52.6% to $2.79 billion from $5.9 billion in 2011. The amount raised was less than the $2.8 billion raised in 2009 in the midst of the global financial crisis.
Heywood didn’t expect 2013 to be much better for junior companies. “I think they will continue to be plagued by the same market conditions that occurred in 2012,” he said. “That might start to ease if we see strong commodity prices and continued demand for commodities. One thing that’s driving the weakness is concern about how strong the level of demand will be from countries like China.”
Hostile M&A environment to persist
While most M&A deals will likely be friendly transactions this year, economic uncertainty and volatile stock markets are pushing more potential buyers to make a hostile run at a desired target business.
Over the past four months alone, a number of B.C. companies have instigated or been drawn into hostile takeover bids, including:
•First Quantum Minerals’ $5.1 billion bid for Toronto copper producer Inmet Mining;
•Huntingdon Capital’s bid for Toronto-based small-box retail property owner Key REIT.
•Alamos Gold’s attempted takeover of Vancouver’s Aurizon Mines Ltd.
•Brookfield Renewable Energy Partners’ bid for Vancouver’s Western Wind Energy Corp.;
Graeme Martindale, a Vancouver partner at Borden Ladner Gervais LLP. noted the valuation gap of a target company between potential buyers and management of a potential target is usually the key sticking point preventing a friendly transaction. In most cases, it just means a deal doesn’t get done. In other cases, it can lead to a potential buyer bypassing a target’s management and board of directors and taking their bid directly to shareholders.
“It is cyclical,” said Martindale. “If the market is up and down; there are a lot of issuers facing a low share price, and there’s this disconnect with valuations, then I think the environment is right for hostile takeovers [again].”
Expansion opportunities still abound for B.C. firms
Whether hostile or friendly, M&A activity in B.C. is likely to remain fairly active in 2013. In addition to First Quantum’s successful bid for Inmet and Brookfield’s successful takeover of Western Wind Energy, the past few months has seen a number of significant transactions, including:
•Coeur d’Alene Mine’s $383.7 million acquisition of Orko Silver Corp.;
•Angiotech’s $362 million sale of assets to Texas-based Argon Medical Devices;
•Vision Critical’s acquisition of DiscoverText in January
The tide of lost head offices in B.C. may not recede anytime soon as local companies will continue to get acquired by national and international companies eyeing opportunities in the Pacific Northwest. But if history is any indication, large B.C. companies will continue to invest and expand abroad at a significant pace. Over the past four years, B.C. companies have spent $50 billion in mergers and acquisitions, compared to $40 billion in B.C. acquisitions by international and other Canadian companies.
“I think right now, B.C. companies have a lot of opportunities they can take advantage of,” said Rees. “I think B.C. has some great companies and it’d be great for them to grow organically and strategically and not be taken out.”
