Canadian Q2 M&A activity outpaces the global trend - volumes up 15% over the prior quarter, with energy and materials deals leading the way: PwC

Not a ‘V’ shaped recovery as consecutive quarterly pace has slowed by 12%

July 14, 2010 — PricewaterhouseCoopers (PwC), in its second quarter roundup of the Canadian M&A market, is reporting a 15% increase in the number of announced Canadian deals and a 26% increase in the aggregate value of announced deals. These results are in contrast to the U.S. market, where deal volumes in 2010 are at a decade low.

While this quarter’s growth is noteworthy, the consecutive quarterly pace of deal volume growth has slowed by 12%. “As the second quarter ended, we noted a shift in mood from cautious optimism to just plain caution,” notes Kristian Knibutat, national Deals leader for PwC. “While we do not anticipate a retrenchment in activity for Q3, we believe that the M&A recovery will be shallow and slow, dominated by well-capitalized corporations and large pension funds.”

PwC has identified four key deal trends based on the latest Q2 figures:

• Improved access to leverage resulted in heightened “mega deal” and financial buyer activity. The leveraged lending rally of the first quarter continued through the second quarter. This improved access to deal capital enticed large financial players into the deal market: Measured by value, Private Equity’s share of the Q2 deal market rose to 25%, its highest proportion since 2007. Access to deal capital also permitted a subdued comeback in “mega deals:” the number of deals valued at >$500 million involving a Canadian entity doubled over Q2 2009.
• M&A is being utilized by corporates to get “back to basics.” In an economy that remains volatile and uncertain, many Canadian corporates are engaging in M&A to tighten operational focus or to achieve economies of scale. This trend is in stark contrast to the 2005 to 2008 period when a more common strategic rationale for corporate deals was to diversify operations.
• Foreign buyers continue to actively acquire Canadian assets. Few Canadians are looking past the U.S. border. Meanwhile, foreigners continue to scour the Canadian market. In particular, the Asian buying spree of Canadian assets that started in 2007 intensified this quarter, with the oil patch attracting considerable attention. For example, in the largest Chinese investment ever completed in Canada and the second largest Chinese investment ever made in North America, state-owned oil company, Sinopec acquired a 9.03% stake in oil sands leader ConocoPhillips for $4.65 billion.
• The energy and resource sectors are differentiating the Canadian deal experience. Canada’s dominance in the materials deal space is a “natural hedge” for our domestic deal market. These industries are being viewed by global investors as “safe havens” in an uncertain environment. Energy and materials deals represented 46% of all Canadian M&A activity this quarter with metals and mining take the lion’s share of volume at 29%.

PwC deal data includes announced M&A translations involving at least one Canadian entity and the source of all of our data is Capital IQ and S&P LCD. The full six-page report including graphs and detailed analysis is available at www.pwc.com/ca/QuarterlyDeals. To subscribe to or download our bi-weekly Capital Markets Flash, visit http://www.pwc.com/ca/cmf.

About PricewaterhouseCoopers’ Deal Team

PricewaterhouseCoopers’ Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success – from concept to close and beyond. As part of the world’s largest Transaction Advisory practice¹, and with our Global Corporate Finance group being 2010 Upper Mid Market M&A Advisor of the Year², the PwC Canada Deals Team is your gateway to an exciting new world of emerging M&A opportunities.

¹ Source: Kennedy; “Business Advisory Services Marketplace 2009-2011”; © BNA Subsidiaries, LLC. Reproduced under license.

² Source: Acquisitions Monthly Awards 2010