M&A activity maintains momentum

(May 17, 2005) Mergers and acquisitions activity in the Canadian market maintained its momentum in the first quarter of 2005, according to investment bank Crosbie and Company.

While the number of transaction slipped from 203 in Q1 of last year to 200, the combined dollar value increased by $500 million, to $24 billion. Compared to the previous quarter, both the number of deals and their value have slipped, from 210 deals in Q4 2004 with a value of $32.1 billion.

One emerging trend is the increasing participation of private equity groups and pension funds, which were active in 20% of the M&A market in the quarter, up from 15% in the previous quarter. Pension funds in particular are finding it difficult to find suitable investments in the public markets and are increasingly buying out entire companies to supplement their revenue stream.

“Greater availability of inexpensive capital and lower investment return targets have made financial buyers formidable opponents when competing against strategic groups for transactions,” said Ian Macdonell, Managing Director at Crosbie.

The number of deals valued over $1 billion remained relatively high, with 6 of these so-called “mega-deals” announced. That matches the number of large deals in the previous quarter, but the total value has risen from $12.5 billion to $13.7 billion.

The largest single transaction was a trans-Atlantic deal in which Vodafone purchased the European wireless operations of Telesystem International Wireless for nearly $5.5 billion. Also in the media and communications sector was the sale of Bain Capital’s directory business to Yellow Pages for $2.6 billion.

High commodity prices sparked a flurry of M&A activity in the mining sector, with 15 deals worth a total of $3.8 billion, including Noranda’s $3.1 billion bid for the remainder of Falconbridge.

Canadian acquisitions of U.S. businesses continue to outpace the reverse on a two-to-one basis, thanks in part to the strength of the Canadian dollar in most of the first quarter of the year. The number of cross-border transactions fell from 100 in Q4 2004 to 86, but the combined value of such transactions increased from $13.8 billion to $17.7 billion, making up 74% of total deal value.

Aside from Bain’s sale to Yellow Pages, significant cross-border deals included Onex’s purchase of some of Boeing’s manufacturing facilities for $1,47 billion; Brascan’s $1.40 billion purchase of Canadian sawmills from Weyerhaeuser; and Eastman Kodak’s purchase of Creo for $1.22 billion.

While pensions and private equity funds are increasingly focused on takeovers, the venture capital industry has cooled its distributions, despite increased fundraising from retail and institutional investors, according to the latest research by Thomson Macdonald for Canada’s Venture Capital and Private Equity Association (CVCA).

First quarter investments this year totaled $326 million compared to $458 million in Q4 2004 and $417 million in Q1 2004. On the inflow-side, the industry has raised $1 billion, up from $589 million in Q1 2004.

“This influx of new capital into our industry is encouraging,” said Dr. Robin Louis, president of the CVCA. “However, this figure reflects fund raising for only one quarter. It is difficult to determine whether this pace of capital raising can be sustained for the balance of the year.”

The Canadian venture capital industry increasingly focuses on start-up funding, with early stage investments accounting for 65% of the industry total in Q1, up from about 50% where it has hovered for years.

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