Energy Powers Canadian M&A 30% Past 2013 on Cheap Funds

Canadian mergers and acquisitions are set to keep rolling amid cheap financing and rising economic confidence after record energy activity drove the value of deals up 30 percent in the first half of 2014 over a year ago.

Appetite for more deals appears strong, particularly in energy, infrastructure, and other diversified industries as access to capital remains easy and economic growth is forecast to pick up, investment bankers say.

“We continue to have a pretty robust pipeline,” said Daniel Barclay, head of Canadian mergers and acquisitions group at Bank of Montreal’s BMO Capital Markets unit.

Canadian companies announced $85.6 billion of deals in the first six months of the year, up from $65.9 billion a year earlier, data compiled by Bloomberg show. Those gains were helped by $30.6 billion worth of deals in the energy business, up 209 percent from a year ago, and the strongest start for Canadian companies in the industry since Bloomberg started collecting data more than a decade ago.

“Canada’s back in favor,” said Patrick Meneley, vice chairman of investment banking at TD Securities, a unit of Toronto-Dominion Bank. “Calgary’s back in favor.”

Barclays Capital Inc., a unit of Barclays Plc, led the rankings of advisers of mergers and acquisitions in the first half, followed by Goldman Sachs Group Inc. and Royal Bank of Canada’s RBC Capital Markets, according to the data.

Barclays offices in Toronto and Calgary are “as busy as I’ve seen them,” said Tim Kitchen, head of Canadian investment banking at the bank.

Investment Plans

Credit conditions eased in the second quarter and business-investment plans rose for a third quarter, the Bank of Canada’s second-quarter Business Outlook Survey showed yesterday. The Standard & Poor’s/TSX Energy Index gained 18 percent this year through yesterday compared with an 11 percent rise for the main S&P/TSX Composite index, with energy firms on pace for the best profit growth since 2005.

The S&P/TSX Composite Energy Sector Index fell 1 percent at as of 10:30 a.m. in Toronto.

The pace of Canadian economic growth is forecast to double to 2.4 percent by the end of the year compared with 1.2 percent in the first quarter, according to the median estimate of economists surveyed by Bloomberg.

“A period of significant economic uncertainty has given way to expectations of positive economic growth, bringing companies sustainable cash flow and the confidence to invest,” Moody’s Investors Service Inc. said in a June report. “Positive growth should boost M&A activity, making deals companies had considered but not consummated amid post-recession uncertainties.”

Private Equity

The energy sector is attracting a lot of attention both domestically and abroad this year, including from large U.S. private equity investors, Kitchen said.

KKR & Co. opened an office in Calgary earlier this year, and Blackstone Group LP has hired an adviser in Toronto too. Apollo Global Management LLC’s purchase of Encana Corp.’s Bighorn assets for about $1.8 billion through its Jupiter Resources Inc. unit, provides a template for other private equity firms, Kitchen said. Jupiter was advised by Barclays.

Private-equity firms that traditionally sought to sell their energy investments to state-owned companies are now more inclined to view initial public offerings as an exit strategy, Kitchen said. The successful spin off and C$1.67 billion ($1.57 billion) IPO of PrairieSky Royalty Ltd. completed last month, the largest since 2000, is fanning the flames, he added.

Hunting Abroad

Apollo would likely take Jupiter, an investment in Apollo’s private energy portfolio, public at some point, Kitchen said.

“Eventually, they will go public,” he said. “That’s the typical exit for a number of the private-equity firms.”

Simon Bregazzi, Jupiter’s chief executive officer, declined to comment yesterday on a potential IPO of the company.

Canadian companies have also been active scouting abroad as they look to shed non-core assets and “core up” in other geographies, like Encana did in purchasing Freeport-McMoRan Copper & Gold Inc.’s Eagle Ford shale asset in May, Adam Waterous, co-head of global equity and advisory at Bank of Nova Scotia, said by phone from Calgary.

“We’re supposed to be the hunted,” he said. “We’re the hunters right now.” The capital markets are even more supportive today than they were six months ago, he said.

The yield on Canada’s benchmark 10-year bond declined to 2.3 percent yesterday from 2.8 percent at the start of the year. Standard & Poor’s/TSX Composite rose 11 percent from the start of the year through June 30.

Mining Pickup

“We think companies will want to sign M&A deals now while financing is readily available,” Moody’s said in the report.

Scotiabank advised on the three largest energy deals so far this year involving Canadian companies, and several of the largest energy transactions globally in the first half of the year, including Marathon Oil Corp.’s $2.7 billion sale of its Norwegian unit to Det Norske Oljeselskap ASA in June.

Moody’s cautioned in its June report that while financing conditions are currently favorable that could change as the U.S. withraws its monetary stimulus.

With a strong deal flow expected to continue into the second half of the year, the lingering question is whether the mining sector will gather momentum after a lot “tire kicking,” particularly in gold and copper, in recent months, said Tina Woodside, a partner at Gowlings Lafleur Henderson LLP in Toronto.

The industry continues to wait for an upswing in mid-cap gold deals as a sign the sector is heating up again, Woodside said.

Gold Price

Prospector Continental Gold Ltd. said yesterday it’s receiving interest from potential buyers but is rebuffing bids until it gets a modified environmental license on its Buritica project in Colombia.

The value of mining deals remained essentially flat year-over-year at $5.9 billion after hitting a nine-year low in 2013 at $8.2 billion.

Gold deals are still the gold standard in terms of M&A in the sector, said Mike Boyd, head of mergers and acquisitions at Canadian Imperial Bank of Commerce’s CIBC World Markets.

Gold futures for August delivery fell 0.3 percent to settle at $1,317 an ounce at 1:42 p.m. on the Comex in New York, and have gained 9.5 percent this year. Gold remains about 30 percent below its 2011 peak.

“Gold prices aren’t where people would like it to be but at least it’s stabilized,” he said by phone from Toronto. “When you have no idea where the commodity prices are going it’s pretty tough to pull the trigger on an M&A deal. But I think the fact that it has stabilized and is moving up is positive for deal activity.”

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