M&A activity continues to heat up

(August 19, 2004) In what could be a positive sign for the markets, the second quarter of the year marked a three-year high for mergers and acquisitions (M&A) activity in Canada, according to a report from Crosbie & Company.

Not only did the number of deals made increase, but the total value of M&A activity surged as well, boosting the average value per deal. There were 250 transactions totaling $34.8 billion announced in the second quarter, compared to 203 transactions worth $23.5 billion in the first quarter. The average value per deal jumped from to $139 million from $102 million, an increase of 36%, while the total value of all deals increased by 48%.

“The broad-based strength of the Canadian M&A market in the second quarter was particularly positive given that global M&A activity declined in the second quarter following a strong recovery in the first quarter,” said Ian Macdonell, managing director at Crosbie & Company. “High commodity prices and continued strong demand for transactions from private equity groups bode well for activity levels for the balance of the year. However, concerns over the staying power of the US economic recovery could put a damper on transactions going forward.”

The high price of oil and gas fueled 68 mergers and takeovers in the energy sector during the first half of the year, worth over $15.1 billion. Only the industrial sector saw more activity, with 110 deals struck, but the total value was only $8.3 billion.

There was also a significant increase in cross-border M&A activity, with Canadians dominating the buy-side. Foreign companies bought a total of 58 Canadian firms, worth almost $13.3 billion, but this was dwarfed by both the number of deals and their value flowing in the opposite direction. Canadian firms bought 154 foreign companies at a total cost of over $27.7 billion.

In the second quarter alone, Canadian companies made 81 cross-border purchases worth $17.6 billion, compared to 31 acquisitions worth $9.6 billion, made by foreign firms of Canadian companies.

This boost in total value was aided by a pair of what Crosbie & Company call “mega-deals” worth over $1 billion. In April, Encana announced the $3.6 billion takeover of U.S. oilfield service company Tom Brown. Less than two weeks earlier, the second biggest deal had been announced, as drug store chain Jean Coutu Group struck a deal worth nearly 3.3 billion to buy Eckerd Drugstores from America’s J.C. Penney.

Rounding out the top five mega deals, were Hollinger’s $1.8 billion sale of the Telegraph Group to the Barclay brothers; Brascan’s $1.3 billion purchase of hydroelectric power assets from Reliant Energy; and Golden Star Resources’ takeover of Iamgold, worth $1.2 billion.

In all, there were 10 mega deals announced in the second quarter, making it the most active period for such transactions since the first quarter of 2000, in the heady days just before the tech bubble burst. The total value of Q2 mega deals was $16.7 billion.

The “core market”, made up of deals valued under $1 billion, also surged in the second quarter with 180 transactions valued at $18 billion, compared to 157 transactions totaling $11.9 billion in the first quarter.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com