Concordia, Finning Lead Canada Losers of U.K. Brexit Vote

  • Takeover potential of Concordia seen dimming, Canaccord Says
  • ‘The outlook for the Canadian financials has weakened’

Concordia Healthcare Corp., Finning International Inc. and WSP Global Inc. are among Canadian firms feeling the fallout from the U.K.’s decision to leave the European Union.

An index of 19 Canadian companies most exposed to Europe fell 3.6 percent in Toronto, more than double the 1.7 percent decline of the benchmark S&P/TSX Composite Index. Concordia lead the decline, dropping 11 percent as investors wagered the drop in the pound could cut revenue from a recent U.K. acquisition and dim the chances of a takeover of the company.

“Given the now elevated risks and uncertainties, we believe a private-equity bid is unlikely in the near-term," Neil Maruoka, an analyst at Canaccord Genuity, said Friday in a note.

Every 5 percent drop in the British pound could lead to a more than 1 percent drop in earnings before interest, taxes, depreciation and amortization for Concordia, Maruoka said. The economic shock of the U.K. leaving could also affect domestic funding from the National Health Service in England, he said. Those risks make a takeover in the near future unlikely after Blackstone Group LP and other unnamed bidders were said in April to be interested in a buyout of the Oakville, Ontario-based firm, he said.

No Impact

Concordia expects its international unit, the majority of which is in the U.K., to generate 60 percent of total revenue in 2016 after last year’s takeover of Amdipharm Mercury Ltd., according to a quarterly earnings call by the company.

Brexit has no impact on Concordia’s prospects as its product sales will continue as usual, Chief Executive Officer Mark Thompson said in an e-mail. Revenue in British pounds can be used to pay British debt, he said.

Finning International, a Caterpillar-equipment dealer that generated about 14 percent of its first-quarter revenue from the U.K., according to data compiled by Bloomberg, fell 6.5 percent to C$22.01. WSP, which announced a deal to buy Sweett Group Plc for 34 million pounds in May, fell 4.9 percent to C$39.25.

Finning will follow the progress of the discussions over the coming months and the company will maintain a competitive position in the U.K., Mauk Breukels, the company’s investor relations vice president, said by phone from Vancouver. 

"It’s clear due to the complexities involved in this process we believe it will take time," he said.

Isabelle Adjahi, a spokeswoman for WSP, a Montreal-based engineering firm which worked on the Shard Tower in London, said the deal for Sweett was expected to close at the beginning of July.

Flexible Workforce

"Combined strength with an agile, flexible workforce with transferable skills enables more resilience when dealing with economic swings," Mark Naysmith, WSP’s U.K. chief operating officer, who said in an e-mail. "I am confident that the underlying strength of the UK as a country, during this period of uncertainty, will lead to future prosperity.”

Great-West Lifeco Inc. and Royal Bank of Canada were among the biggest decliners of Canadian financial firms, dropping 4.6 percent and 3.1 percent respectively. Royal Bank, Canada’s largest lender by assets, and Great-West have the biggest exposure among the nation’s financial firms, according to analysts including John Aiken of Barclays Plc.

“As the implications of the vote likely have negative ramifications for U.K. and European economic growth, we believe the spillover impact will still be negative and that the outlook for the Canadian financials has weakened," Aiken said in a Friday note.

Highest Exposure

Great-West generated about 20 percent of its earnings from the U.K. and Isle of Mann in 2015 with its European operations contributing roughly 42 percent of total earnings last year, according to Aiken. Royal Bank gets roughly 11 percent of earnings from outside of Canada and the U.S., with the U.K. likely representing the largest proportion given its capital markets and wealth management operations in the region.

Great-West will continue to operate in the area and has undertaken an "in-depth analysis of the potential risks to our businesses," said Great-West’s CEO Paul Mahon in a statement.

Royal Bank also has the highest exposure as a percentage of assets among Canada’s big banks to the U.K. and Europe, with 2 percent of assets exposed to the U.K. and 5.5 percent of assets to Europe, according to BMO Capital Markets analyst Sohrab Movahedi in a note.

Near Term

"It’s still too early to comment on what our strategy would be in a changed environment, but the U.K. and Europe are strategically important to RBC and we are committed to the region," RBC Capital Markets spokeswoman Gillian McArdle said in an e-mailed.

Royal Bank’s capital-markets business is a key focus, with Europe accounting for 14 percent of total geographic revenue in that segment since the start of 2015, according to Scotia Capital analyst Sumit Malhotra. Though that represents about 3 percent of total bank revenue, Royal Bank faced “significant volatility" in its trading revenue in 2010-11 during the European debt crisis, he said.

Malhotra also points to Toronto-based brokerage Canaccord Genuity Group Inc. and Winnipeg, Manitoba-based insurer Great-West as among the most exposed in their industries to Europe. Great-West’s heavier exposure to Europe is “a near-term negative given our expectation of extreme volatility in key financial and economic factors," he said.

Presents Opportunities

Canaccord got 36 percent of its revenue from European operations across wealth management and capital markets businesses in its last fiscal year, Malhotra said. The wealth business is particularly important since it may represent a large portion of the market value of the company as a whole, he said.

"The only thing we can be sure of is that there will be short-term volatility," Canaccord Genuity CEO Dan Daviau said in an e-mail. "This presents challenges, but also opportunities: gold names for example are expected to gain strength, which will improve activity levels in a space where we have been historically dominant."

Daviau said the firm’s U.K. wealth business is "well positioned" to expand opportunistically if others falter, and a realignment of its capital markets business across regions provides resources across a global platform for its clients. He also said the firm’s strategy isn’t dependent on short-term fluctuations in currency.

Brookfield Asset Managment Inc., Canada’s largest alternative asset manager, has about 13 percent of its $240 billion in assets under management in the U.K. and Europe.

“As long term investors we remain committed to London and the U.K., and are confident that the U.K. will continue to attract international capital and be one of the leading business centres in the world,” Bruce Flatt, CEO of Brookfield, said in an e-mail.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE