Canada guides global M&A movement

Canada is leading the charge of global mergers and acquitisions, according to PwC’s latest quarterly roundup of the Canadian M&A market.

The dollar value of the Canadian deal market during the last three months was a staggering $95 billion, up 240% from the first quarter of 2010 and 168% from the second quarter.

Canadian activity also outpaced the global trend, where the aggregate value of third quarter deals declined by 10% from Q1 and gained 9% over Q2, the report says.

“This quarter was characterized by marquee mega-deals underscored by BHP’s $40 billion hostile bid for Canada’s Potash Corp, which accounted for 42% of announced value,” says Kristian Knibutat, national deals leader for PwC. “There were also thirteen $1 billion-plus deal announcements made during the quarter, the highest number of Canadian mega-deal announcements since the credit crisis.”

While deal values soared, the number of announced transactions pointed to a particularly sluggish M&A market, particularly among lower value deals. With 675 Canadian deals announcements during the quarter, the market was down 12% and 22% over Q2 and Q1, respectively. The third quarter in Canada was the slowest deal quarter since the 2008 credit crisis, when measured by number of transactions.

The drop in middle market deal announcements was the prime culprit for declining deal volumes, says Knibutat. Volumes in the $100 million to $1 billion segment were flat and transactions below $100 million declined by 12% compared to the last quarter.

In some deals select players have made the exception and decided to look past North America. These leading Canadian corporatioans extended their geographic reach and acquired companies in Latin America, the Middle East, Brazil, Australia and Africa. Middle market companies, however, continue to stay conservative and close to home.

Two large buyers, Canada Pension Plan (CPP) and Onex Corporation, are leading global private equity deal-making with announcements of multiple large acquisitions. .

“Achieving growth in new geographies, new markets and perhaps with controversial deal partners, will shape Canadian M&A in the months to come,” says Knibutat.

For the first time this year, however, private equity’s share of the Canadian M&A market declined during the third quarter, suggesting that strategic, not financial buyers, are calling the shots in today’s deal markets.

“The third quarter was dominated by a small number of noteworthy deals rather than a large number of typical ‘Canadian’ deals,” he says in the report. “The nature of M&A this quarter suggests the Canadian deal market is at a turning point, not in regard to deal volumes or values, but in regard to deal drivers.”

The report also says agricultural commodity deals have been an increasingly important component of the Canadian deal market over the last decade. The outcome of BHP’s controversial hostile bid for Potash Corp., will likely shape deal-making in the agriculture and all other commodity markets for the remainder of 2010 — possibly igniting a further flurry of commodity related M&A activity or, conversely, prompting a “chilling effect.”

(10/15/10)