The $12.8-billion (U.S.) acquisition of Catamaran Corp. announced Monday could signal the start of a wave of foreign takeovers of Canadian-listed companies, as the lower loonie effectively puts many companies up for sale.JONATHAN HAYWARD/The Canadian Press
The $12.8-billion (U.S.) acquisition of Catamaran Corp. announced Monday could signal the start of a wave of foreign takeovers of Canadian-listed companies, as the lower loonie effectively puts many companies up for sale.
With the Canadian dollar trading below 79 cents, crude oil prices slumping and the outlook for the economy uncertain, foreign firms are expected to have their sights set on Canadian companies, particularly those with a high share of international sales. American firms will likely be eager suitors, as financing costs south of the border stay low and corporate balance sheets remain relatively strong.
"While we have not seen major foreign takeover action in the Canadian HITS [health care, industrials, and technology sectors] yet, we suspect it is only a matter of time before some of Canada's smaller and most innovative firms are scooped up by investors with greenbacks or currencies pegged closely to the U.S. dollar," Ted Dixon, CEO of INK Research, said in a recent report.
"Although Canadian nationalists will view that as a sad development, shareholders in those firms will likely be quite pleased," Mr. Dixon said.
Catamaran is being snapped up by UnitedHealth Group Inc., the largest health insurer in the United States, in a deal that will bolster UnitedHealth's benefits management business. Catamaran's shares trade on the TSX, although the company's headquarters is in the United States and most of its revenue is generated there as well.
Mr. Dixon highlighted Canadian industrials, which have seen robust insider buying recently, as attractive takeout targets that have been posting growth on the top and bottom lines.
"We are a small country, and at risk or having our innovative base shrink even further as the Canadian dollar falls," he cautioned. "From the political perspective, it's an issue, but for investors, it's an opportunity."
The value of all merger and acquisition transactions involving a Canadian company totalled $157-billion (Canadian) in 2014, according to advisory firm KPMG, which is forecasting a further increase in 2015.
"One thing that's a characteristic of Canadian [M&A], once you reach a certain size, as a company, the logical purchasers are often not in Canada and attract more interest from foreign buyers," said Peter Hatges, a KPMG partner in Toronto.
While the decline in the currency could serve as an impetus for foreign firms to set their sights on Canadian companies, it's not the only factor.
"Canada has a strong and capable work force, and I think that counts for a lot as you move to modern advanced manufacturing," Mr. Hatges said.
Canada's oil patch could be among the first targets for foreign buyers. So far, there has been little in the way of consolidation among energy companies, but that could change if the price of West Texas intermediate crude continues to linger below $50 a barrel (U.S.) and puts increasing stress on the ability of smaller firms to meet their debt obligations. Canadian energy companies are currently priced for an imminent rebound in oil prices or takeout offers; the S&P/TSX Energy sector is trading at more than 60 times estimated 2015 earnings.
The bottom for this group came on Dec. 15, just before Spain's Repsol SA announced its intention to purchase Talisman Energy Inc. The following morning, Canadian energy stocks surged, despite continued weakness in the price of oil.
Brian Belski, chief investment strategist at BMO Nesbitt Burns, said that the pullback in equity prices makes certain companies more attractive to the behemoths in the space, and might leave junior producers in a position where they would be more willing to entertain offers.
"You will see more M&A," he said, suggesting that large Canadian energy firms or their U.S. counterparts would be the most likely buyers. "Companies can't grow into these earnings, and smaller companies may be more approachable."
Chinese energy companies might not be as keen on Canadian assets in light of some recent experiences. China's CNOOC Ltd. recently took an $842-million writedown partly tied to assets it acquired in its purchase of Calgary-based Nexen Inc. PetroChina Co., for its part, is attempting to rid itself of its North American properties through an asset swap. The company's appetite for oil sands assets has no doubt been soured by its acquisition of the Dover project from Athabasca Oil Corp., which took months to close after management became upset that it had agreed to buy a lemon.
"[Chinese companies] are probably looking a little more inwardly to their own operations at a time in which their own economy is undergoing a transition," KPMG's Mr. Hatges said.