Stikeman Elliott LLP Canada Corporate M&A Overview for Chambers Canada 2021
By J.R. Laffin and Warren Silversmith
Similar to jurisdictions across the globe, Canada’s M&A market is adjusting to the realities of the COVID-19 pandemic, which has significantly impacted the dealmaking landscape. Bidders and targets continue to have a desire to transact but the continued uncertainty from the pandemic, including the broader economic impact and anticipated recovery, have put a spotlight on the risk allocation and mitigation issues inherent in M&A. From due diligence (where virtual site visits and meetings have replaced in-person processes) through to satisfying conditions to closing (where the constantly shifting pandemic landscape puts additional pressure on interim operating covenants and MAC/MAE matters), virtually every aspect of the dealmaking process has been altered. The uncertainty has also led to a growing disparity in how buyers and sellers value prospective targets, particularly in the context of private M&A and private equity. In the 12 months prior to the onset of the pandemic, multiples across all sectors were generally very high. Sellers have continued to expect high multiples, whereas buyers have generally taken a more cautious approach in most sectors.
Prior to the pandemic, 2019 and the initial months of 2020 were characterised by generally robust M&A activity across a broad base of industries. Mining (in particular, precious metals) saw a wave of landscape shifting transactions (Barrick Gold’s merger with Rangold Resources; Newmont Mining’s acquisition of Goldcorp; and Barrick’s unsolicited approach to Newmont that resulted in a multibillion dollar joint venture in Nevada) which has been followed by increasing industry pressure for consolidation and rising gold prices, including all time high prices in July 2020. The result has been a flurry of transactions and ever-increasing gold producer valuations, including large domestic transactions such as Kirkland Lake Gold’s CAD4 billion purchase of Detour Gold, no/low premium mergers such as the CAD3 billion combination of SSR Mining and Alacer Gold, and inbound acquisitions of varying sizes, including the CAD1.5 billion acquisition of Continental Gold by China’s Zijin Mining Group.
High profile deal making in traditionally less active sectors also buoyed the pre-pandemic market, including in the transportation industry with transactions involving two Canadian airlines (WestJet Airlines’ CAD5 billion, including debt, sale to Onex; and Air Canada’s pending purchase of vacation destination airline Air Transat’s owner, Transat A.T.) and SNC-Lavalin’s CAD3 billion sale of its 10% interest in Ontario's 407 toll highway. Canada’s largest independent film and television company, Entertainment One, was also sold to U.S. play and entertainment company Hasbro in a CAD5 billion transaction.
The converse was seen in the Canadian oil and gas sector where issues related to pipeline construction and access, coupled with low commodity prices, resulted in reduced deal flow. These issues and the COVID-19 pandemic have also accelerated recapitalisation transactions in the oil patch. In addition the formerly high-flying cannabis sector, which leading up to, and following, Canada’s legalisation of recreational cannabis use in October 2018 enjoyed an extraordinary, frenzied period of mergers, acquisitions, initial public offerings, financings and joint ventures, has failed to maintain that pace, with significantly reduced valuations having become the norm. However, the cannabis industry has introduced novel dealmaking and transaction structures necessitated by Canada’s position as one of a handful of countries globally to legalise recreational cannabis on a national basis – Canada’s largest cannabis company, Canopy Growth, entered into a transaction with Acreage Holdings, a U.S. based cannabis operator, that allows Canopy to purchase all of the publicly-traded shares of Acreage at a future date contingent upon the occurrence of changes in U.S. federal law with respect to the legalisation of recreational cannabis.
Looking forward, in addition to matters stemming from the COVID-19 pandemic and its related economic impact, geopolitical factors loom large on Canada’s M&A market given Canada’s traditional inbound vs. outbound transactional mix, where inbound transaction volume is generally larger than its outbound deal flow. In particular Canada’s relationship with the United States, including its administration following the 2020 U.S. presidential election, can be expected to influence deal flow, as can Canada’s relationship with China. Historically, Canadian targets, particularly in the oil and gas, mining and real estate sectors, have had significant interest from Chinese buyers, however political tensions between the countries have introduced uncertainty to M&A discussions that was not previously present.
From a legislative perspective, it has been just under five years since Canada introduced a substantially revised take-over bid regime designed to rebalance (as between targets and bidders) a regime that had generally been characterised as “bidder friendly.” With the passage of time it has become relatively clear that the new regime, which, among other things, introduced a minimum 105-day period during which a bid without target support must remain outstanding and, effectively, a minimum 50% tender condition (excluding securities already held by the bidder), has played a role in reducing the number of unsolicited take-over bids. Only two unsolicited bids for Canadian targets were formally launched in 2019, and only one such bid was launched in the first half of 2020. Relatedly, activist and activist-like contested M&A has been used more frequently in recent times, including high profile mini-tender strategies employed by shareholder activists and rival bidders in connection with the take-private of Canada’s oldest company, Hudson’s Bay Company, and the pending acquisition by Air Canada of Transat A.T., respectively. In each case, the activist or bidder sought to use a mini-tender – a widely-disseminated offer to purchase a percentage of shares of a public company that would not constitute a formal take-over bid (offers to purchase securities that would take the bidder’s ownership to 20% or more generally trigger a formal bid) – to accumulate a substantial shareholding position with a view to voting against the announced friendly transactions. The desirability, and pursuit, of alternatives to traditional unsolicited take-over bids is likely to continue given general market reticence to launch bids under the new regime.
Additionally, as the “stakeholder” model of corporate governance (which looks more broadly to all a corporation’s stakeholders as compared to just its shareholders) continues to gain favour globally, including in light of issues stemming from the COVID-19 pandemic and social justice issues, a primary Canadian corporate law statute, the Canada Business Corporations Act (CBCA), was specifically amended in this regard. The CBCA now expressly provides that, in acting with a view to the best interests of the corporation, directors and officers may consider, but are not limited to, the interests of shareholders and certain other stakeholders (including, among others, employees, creditors, retirees and pensioners, government), as well as the environment and the long term interests of the corporation. The amendment is a generally a codification of the Supreme Court of Canada’s 2009 decision in BCE Inc. v 1976 Debentureholders, however, it remains to be seen whether the (now) express nature of the guidance leads to additional focus on such issues by directors and officers.