M&As sluggish in 2013, resource sector to blame

Retail, real estate, utilities and pension fund activity were not enough to fill the gap left by a dearth of deals from Canada’s oil patch and mining companies, says PwC.

Even life sciences chipped in with large deals in Q4, but it wasn’t enough to prevent 2013 being the slowest year since 2009, shows PwC’s Capital Markets Flash. Overall in 2013, 2,500 deals worth US$162 billion were announced.

“We started 2013 with optimism since equity and debt were both available and the economic backdrop was improving,” notes Nicolas Marcoux, Canadian deals leader, PwC. At the start of 2014, he’s optimistic again. He says this year appears to have the key mergers and acquisitions ingredients that were lacking in 2013—higher valuations in the public markets and strong positive market sentiment.

“This sentiment should help investors bridge the valuation gap with sellers as they start to feel more confident about the future,” he says.

Read: Washington beats Wall Street

In Q4 2013, the 716 deals with an aggregate value 26% below Q4 2012 was not a great finish, but the US$44 billion total was not out of line with post-crisis performance. The sector breakdown for the quarter showed utilities, energy and real estate best-performing sectors. The life sciences sector was also strong, with two deals over US$1 billion.

“The US biotech industry has been very healthy—putting American companies in a position to pursue Canadian targets,” says Nitin Kaushal, managing director, corporate finance, PwC. “There’s a scarcity of good, revenue-producing companies in this sector, and the leading Canadian companies are attractive targets. Expect to see a surge of financing in the life sciences sector this year as investors cycle cash back into earlier-stage ventures.”

Read: Positive returns to continue this year

M&A outlook

• Equity remains available and is looking for a return. Similar to a year ago, corporates and private equity funds have significant resources available and part of that will translate into mergers and acquisitions. The question is whether they would like to re-enter the market—almost a certainty for the private equity funds, but corporates can always return the excess to shareholders as they did in 2013.
• Debt is (still) available and cheap. Canadian interest rates look to remain low for some time. The difference from 12 months ago is that pundits now consider rates may rise in the US before they do here.
• Exchange rates. Most are pointing to a gradual, but steady, decline in the Canadian dollar throughout 2014. This bodes well for export sectors.
• Pension funds. Canada’s direct-investing pension funds are expected to continue to perform well. Expect them to continue to invest in real estate and infrastructure, but also continue partnering with private equity players further up the risk-reward ladder.
• Household debt. Record levels of household indebtedness will likely lead to problems for retailers, but the resulting margin squeeze may continue to drive merger and acquisition activity as scale becomes ever more important.

“With the US economic recovery and public company valuations far ahead of where they were a year ago, we expect the biggest push toward increased M&As in 2014 will come from sellers finally getting what they regard as a reasonable price from more confident buyers,” adds Marcoux.

Read: UPDATED: More MGA acquisitions to come

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.