An overview of global M&A activity in May 2015

In the month of May 2015, global mergers and acquisition activity was calm as deal value totalled US$348.1bn, which represents an increase of 14% since April 2015 and an increase of 27% over May 2014. However, total deal volume fell 8.5% since April and 30.9% compared to May of the previous year, with a total of 984 deals. Technology, Media and Telecommunications was the most active sector in terms of value and volume of transactions, accounting for 58.5% of the month’s top 10 in terms of overall value. Much of this activity was concentrated in the US, where 8 of the top 10 deals took place.

The North American market was exceptionally active, seeing the highest deal value in Mergermarket history with a total of US$236.6bn for 287 deals. This represents a 46.6% rise over May 2014 and a staggering 304.8% increase since April. Technology, Media and Telecommunications drove much of this growth, accounting for 58.4% of the market share and 3 of the top 10 deals. 264 of the deals took place in the US, while Canada accounted for the remaining 23. However, private equity trended downward, as buyouts decreased by 49.4% over the previous year and by 53% since April.

The European market was also active, experiencing its strongest five month start to a year since 2008, with transaction value topping US$386.6bn. Strong performances in the UK and German markets helped offset sluggish French performance, where deals plummeted by 84.5% from the previous month. This activity was evenly spread out across several sectors, as the top 5 all assumed between 9.3% – 16.2%, led by the Consumer sector.

By comparison, Central & South America and the Middle East & Africa both witnessed poor performance. The former region had only 25 deals for a total of US$5.2bn, while the latter region saw its lowest monthly value since August 2014 with only 20 deals worth US$1.5bn. This amounted to a 29.7% and 78.8% drop compared to the previous May, respectively.

While Japan’s performance over the year so far has lagged behind last year’s over the same time period by 11.1%, May brought a boom in deal volume with 32 transactions for US$6.3bn. Much of this value was concentrated in the Real Estate sector, which accounted for 72.3% of the total despite only 2 deals, while Industrial & Chemicals saw the highest activity with 9 deals, representing 28.1% of the total.

Based on the high valuation of its technology companies on its domestic stock market, China drove growth in the rest of the Asia-Pacific region, with 50.3% of 265 total deals and 54.7% of the total value of US$60.6bn, The Technology sector was the region’s most active, with 49 deals totalling US$9bn. However, the region did see a drop of 38.9% by value compared to the previous May.

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Behind the perfection certificate (Part II): the asset purchase transaction certification

In our previous post on March 31, 2015, we considered perfection certificates in the context of a share purchase transaction/ amalgamation/ name change certification. In this post, we continue to explore perfection certifications but in the context of a post-M&A or leveraged finance acquisition debtor.

Perfection certification: the debtor has acquired all its assets in the ordinary course of business.

Under the Personal Property Security Act (Ontario) (the OPPSA), and the personal property security acts of most other jurisdictions in Canada, a creditor can maintain priority over an asset if title to the asset is transferred and the secured party registers a financing change statement within the prescribed period of time. Section 48(1) and (2) of the OPPSA provides for the situation where collateral is transferred both with and without the prior consent or knowledge of the secured party.

The asset purchase certification would, among other things, identify to an incoming creditor any assets which were acquired by the debtor outside the ordinary course of business. As most companies are not in the business of purchasing all or substantially all of the assets of another company, disclosure of asset purchase transactions within the specified period of time would be disclosed under this certification.

To further understand the value of this type of certification, consider the following hypotheticals where you represent a lender, Creditor A, against the borrower, the Purchaser; the Seller is the seller of the particular asset in question, and Creditor B is a lender to the Seller.

Consider firstly the scenario where Creditor A and the Purchaser are about to enter a secured lending facility. As part of the collateral securing the facility, Creditor A requires a first priority security interest in the Purchaser’s very large and expensive piece of mining equipment (the Asset). In the Purchaser’s Perfection Certificate to Creditor A, the Purchaser discloses that the Asset was acquired 2 years ago from the Seller. As a result of this disclosure, given the importance of the Asset to Creditor A’s collateral package, searches should be done against the Seller’s name (and any predecessor names of the Seller within the prescribed period (see Part I of this post)). The results of those searches and how to deal with them are discussed below.

In the second scenario, Creditor A is providing financing to the Purchaser for the proposed purchase of all or substantially all of the assets (the Purchased Assets) of the Seller. The Purchased Assets will again form part of the collateral package securing the Purchaser’s loan from Creditor A.  Creditor A should conduct due diligence against the Seller to ensure the Purchaser is obtaining the Purchased Assets free and clear of all liens. Therefore similar to the first scenario, Creditor A will request searches be conducted against the Seller’s name and any predecessor names of the Seller within the prescribed period.

If the searches conducted in either of the above scenarios reveal a secured party filing by Creditor B that encumbers the relevant assets, this filing will need to be dealt with in advance of or at closing of Creditor A’s financing:

  • If Creditor B is a current creditor of the Seller, Creditor B will likely not be willing to discharge the registration covering the Asset/ Purchased Assets. For instance, Creditor B may have an all-PAAP filing against the Seller which underlying financing continues to be outstanding.
    • In the first scenario where the Purchaser now owns the Asset, Creditor A will want assurance that their security interest will not be primed by the all-PAAP filing of Creditor B against the Seller, the Asset’s previous owner. In this situation, Creditor A can request a no interest letter which would be addressed to both the Purchaser and Creditor A from Creditor B, acknowledging that, (i) the Asset has been sold to the Purchaser free and clear of its lien, and (ii) Creditor B’s registration against the Seller does not extend to the Asset.
    • In the second scenario where the Purchaser will own the Purchased Assets on closing, unless the Seller is continuing operations in some other capacity and Creditor B has agreed to continue financing the Seller, Creditor A will likely need to negotiate a payoff and discharge of Creditor B’s security interest.

In either scenario, if the Assets/ Purchased Assets are transferred without the prior consent or knowledge of Creditor B, Creditor B has 30 days from the day it learns the asset has been transferred to the Purchaser to register a financing change statement and prime Creditor A’s security interest in the same collateral.  By conducting searches against the names of prior owners of assets, Creditor A can avoid prior ranking creditors coming out of the woodwork after financing has been provided.

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Canadian mining M&A in Q1 2015

The M&A results and in and they are decidedly mixed in respect of the Canadian mining industry for Q1 2015. Although total M&A transactions and financing was down worldwide, Canadian companies were the dominant players in those M&A transactions which did take place during the quarter, and Canadian companies also had a dominant position in the raising of capital during Q1.

  • During the first quarter of 2015, the global mining industry recorded its lowest number of M&A transactions in many years, only 14. This represented a drop of 46% compared to the number of transactions last quarter and a drop in deal value of 58% as compared to last quarter. On the plus side, however, Canada was by far the dominant player in Q1, representing both the major acquirer and the major target by a wide margin, and factoring into five of the eight top global transactions.
  • The TSX/S&P Global Gold Index rose for the first time in three quarters. In total, Canadian companies were involved in nine transactions valued at over US$50 million, with a Canadian company functioning as the acquiror in seven of those transaction. 60% of worldwide deal value, including the largest single deal, was in the gold industry. This largest gold transaction, valued at nearly US$1.4 billion, was an all-Canadian affair, as were the next two largest global gold deals.
  • The top ten transactions in Q1 2015 featured one transaction from the copper, coal, potash and uranium industries, respectively, with the latter being an all-Canadian affair.

Based on the above statistics, it cannot be said that the outlook for the industry in Canada is entirely gloomy. Nonetheless, mining financing in the first quarter of the year still fell behind the capital raised in 2014 and 2013, not to mention the boom years of 2007 to 2009. Overall, more than a third of the capital raised worldwide during the quarter was for Canadian projects, followed by Latin American projects at 26%, and projects in Asia/Middle East at 13%. This represents a significant change over the previous nine quarters taken as a whole, during which time Canadian mining companies raised the most capital at US$22.16 billion, but invested less than a third of it in Canadian based projects.

In terms of the rate of domestic spending by Canadian mining companies, it is noteworthy that there was an increase from 19% in 2013 to 35% in 2014, and this trend appears to be continuing. Canadian mining companies remain among the world’s leaders for financing in gold, potash and diamonds. The Canadian Mining Eye Index fell 1% in the first quarter of 2015, which compared favourably to the 12% decline from the Q4 2014. However, the index underperformed the S&P/TSX Composite index, which was up 2%.

Finally, in Q1 2015 mining sector employers reported the weakest – and the first negative – hiring intentions since the sector analysis was first carried out in the first quarter of 2004. With numerous large offerings planned, however, it is still possible for results in the mining sector to turn around and for 2015 to be a more robust year than the Q1 results suggest.

The author would like to thank Graeme Rotrand, summer student, for his assistance in preparing this legal update. 

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Significant M&A activity reported in the aviation sector in Q1 2015

jet-680x220ICF International has released its seventh edition of Aviation and Aerospace M&A Quarterly – a publication highlighting merger and acquisition deals and trends in the aircraft, airlines, and aerospace sectors. This most recent publication focuses on the first quarter of 2015, reporting strong activity through significant investments in these sectors across the world in North America, Europe, and Asia-Pacific. Throughout these regions, most investments were seen by Asia-Pacific buyers investing in North America or Europe, however there was still some deals seen by North American buyers completing transactions in Europe.

The publication reports the aircraft sector was booming with various notably large transactions, continued explorations into niche market leasing, and acquisitions in the rotorcraft sector. Further, in the airline sector, aviation technology deals have begun to consolidate the marketplace through a range of mergers and acquisitions including activity in the online travel agency stake sales and in-flight entertainment companies. Aviation technology has begun to reflect consumer’s demand for in-flight connectivity. The publication also looked at activity in aerospace sectors, particularly related to metals. Transactions in this first quarter have continued the consolidation of the metals market with significant acquisitions. Finally, in the airports sector, it was reported that the Asian market remains active with buyer movement in other international areas. Further, European airports have continued the 2014 trend of partial airport privatizations.

Significant activity in the aircraft, airlines, and aerospace sectors seen in the first quarter of 2015 have led to an increase in market consolidations. There were a variety of both large and unique transactions, which continue to be expected as we make our way through the second quarter.

The author would like to thank Nicole Buchanan, summer student, for her assistance in preparing this legal update.

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WARNING! This investment is risky

red-light-680x220Generally, unless there is an applicable exemption, securities of a company cannot be distributed in Canada unless a prospectus has been filed. One common exemption relied upon by private companies is known as the “private issuer” exemption; however, this exemption is only available to issuers that meet certain criteria, including having less than 50 shareholders (not including employees and former employees) and having constating documents (e.g., articles of incorporation) which restrict the transfer of the company’s shares.

If the criteria of the “private issuer” exemption cannot be met, another commonly used prospectus exemption is the “accredited investor” exemption. On May 5, 2015 previously announced amendments to the accredited investor exemption took effect. Private, as well as public issuers, should take note of these amendments.

According to the Canadian Securities Administrators (a group consisting of securities regulators from each of the 10 provinces and 3 territories in Canada), the recent amendments to the accredited investor exemption are intended to address the concern that some individual investors may not understand the risks of investing under the accredited investor exemption or may not in fact qualify as accredited investors. Therefore, one of the most significant amendments is the requirement that individuals relying on the accredited investor exemption (other than an individual who has financial net assets in excess of $5 million) sign and complete a ‘Risk Acknowledgement Form for Individual Accredited Investors’. In addition to providing a list of eligible accredited investor categories, the form provides the individual with prominent disclaimers regarding the risks involved in the investment, including a prominent disclaimer stating “WARNING! This investment is risky. Don’t invest unless you can afford to lose all the money you pay for this investment.

Other amendments include: (i) an amendment to the definition of accredited investor in Ontario to allow fully managed accounts to purchase investment fund securities in Ontario; and (ii) a change in the definition of accredited investor to include a family trust established by an accredited investor for his or her family, provided the majority of trustees of the family trust are accredited investors. As well, greater guidance is now provided on the practices of an issuer for verifying accredited investor status and the conditions of certain other exemptions.

Companies issuing securities to investors relying on the accredited investor exemption should review the amendments and seek further guidance from legal counsel to ensure adherence to the new rules.

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Tax considerations in M&A for purchasers dealing with non-resident vendors

If a non-resident vendor sells property, one consideration that a purchaser must be cognizant of is whether that property constitutes “taxable Canadian property” under the Income Tax Act (Canada). If the property is taxable Canadian property and the vendor does not obtain a certificate of compliance (discussed below), generally the purchaser must withhold 25% of the purchase price and remit it to the Receiver General of Canada.

It should be noted that even a non-resident purchaser is required to make this withholding and remittance. The purpose of these rules is to allow the Government of Canada to secure its tax revenue from dispositions by non-resident vendors (since it may be difficult to collect these taxes from persons that live in other jurisdictions).

What is taxable Canadian property?

According to the Income Tax Act (Canada), taxable Canadian property includes:

  1. real or immovable property situated in Canada;
  2. property used in a business carried on in Canada;
  3. shares of a corporation that is not listed on a stock exchange if more than 50% of the value of those shares is derived from certain property (e.g., real or immovable property situated in Canada or Canadian resource property); and
  4. shares of a corporation that are listed on certain stock exchanges if more than 50% of the value of the shares is derived from certain property and certain ownership criteria are met.

Options and other interests in the properties discussed may also be considered taxable Canadian property.

It is noteworthy that the tax, if remitted by the purchaser, is not a final tax on the non-resident seller. Rather, it is a proxy for the capital gains tax that could be payable on the disposition of taxable Canadian property. If an amount is remitted but no (or less) tax is actually owing, the non-resident can apply to the Canada Revenue Agency for a refund by filing an income tax return.

Obtaining a certificate of compliance

To obtain a certificate of compliance, a non-resident vendor may send a notice to the Minister of National Revenue that sets out the name and address of the purchaser, a description of the property and the estimated proceeds of disposition and the adjusted cost base of the property to the vendor. In addition to the notice, a vendor should remit 25% of the amount that the estimated proceeds of disposition exceed the estimated adjusted cost base to the Receiver General (alternatively, security can be posted with the Minister). Once the notice and payment have been received, the Minister will issue a certificate of compliance to the vendor. This certificate provides evidence that the appropriate tax has been paid on the sale so that the purchaser does not have to withhold amounts from the purchase price, subject to the amounts outlined in the certificate.

Exceptions: treaty protected property

An exception to the withholding applies if the property under consideration is “treaty-protected property”. In that case the purchaser is not required to remit the tax to the Receiver General of Canada. For this exception to apply, the purchaser would need to conclude after reasonable inquiry that the non-resident person is resident in a country that has a tax treaty with Canada. Further, the property in question needs to be “treaty-protected property” of the non-resident assuming that non-resident were a resident in that particular country (generally, this means that a tax treaty would exempt such a gain on the disposition of the property from taxation in Canada). The purchaser must also file a notice with certain information to the Minister of National Revenue for this exception to apply.

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Market forecasters weigh in on possibility of M&A market top

In recent months, there has been a sizable resurgence of activity in terms of large-scale mergers, most pronouncedly in the US market. In fact, during May of this year, the US record for total volume of mergers and acquisitions in a given month was broken, led by multi-billion dollar tech deals. However, this news is not well received by many investors and market analysts, who will point out that the previous record had been set in the summer of 2007, in the lead-up to the global financial crisis. The optimism and euphoria that surrounded the rally of M&A deals 8 years ago is far less present today, with investors fearing a seemingly recurring set of circumstances that were present leading up to the last six major “market tops”, including the height of the dot-com tech bubble and the months before beginning of the financial crisis. These periods, according to Harvard Business School Professor Matthew Rhodes-Kropf in an interview with Market Watch, are marked by waves of M&A and end in “precipitous declines in equity prices”. In addition, many analysts are spooked by what they believe to be unsustainably low lending rates and the abnormally long period since the last market correction (which at 916 days, is well above the average).

However, others have cast doubt on these predictions, equating them essentially to fear-mongering. An article on Think Advisor goes so far as to suggest that these headlines have simply arisen because bad news sells better than good news. Another article on Ciovaccocapital lists close to a dozen articles published in the past 3 years prophesizing an impending market top and crash in deal activity. It is worth noting that half of these articles predicted such an event would occur in 2014, and yet the warnings turned out to be unfounded. These articles argue that the lack of optimism and euphoria towards this recent spate of deals actually may be one of the key aspects separating previous market top events from the M&A landscape of today. One of the issues plaguing the former was overvaluation and over-leveraging, with companies paying inordinate sums to acquire highly questionable businesses. So far however, the major deals in 2015 have generally avoided this trend, as Thomson Miller Investment portfolio manager James Penn reported in a recent article. While today’s companies do admittedly have large cash reserves due to historically low borrowing rates, Penn believes that most of the major 2015 deals have been sensible purchases aimed at consolidating markets, as opposed to the reckless “spending for the sake of spending”, characteristic of previous market top periods. Unlike 2007/2008, business leaders are not acting as if under the impression that equity prices will continuously rise and are less inclined to shell out several billion on “empire building” acquisitions.

Taking the middle ground, a recent Financial Times article is skeptical that the signs indicated a market top, or that such a prediction is even possible to make accurately, while submitting that there are a few worrisome trends developing in the market. The article suggests that we are perhaps headed for an M&A Peak, and that the resulting fall may indeed be precipitous, but that the timeline on such an event can be extensive and drawn-out. In both 1998 and 2007, market events in the United States caused a cut in interest rates, leading to widespread concern that a market top had been hit. However, the actually fall in the markets did not occur for over a year in both cases, making timing the event extremely difficult.

The author would like to thank Peter Charbonneau, summer student, for his assistance in preparing this legal update. 

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US breaks all-time monthly M&A record in May 2015; Canada keeps pace with 2014 numbers

US mergers and acquisitions activity broke an all-time monthly record in May, according to Dealogic data in the Financial Times. The overall value of deals in US-bound M&A activity was $253 billion in May of 2015. This compares to $226 billion during May 2007 and $213 billion in January of 2000, which were previously the busiest and second-busiest in US history.

The Times notes that many bankers and lawyers are expecting 2015 to be a record year, with chief executives under pressure to expand their businesses and deals often being the fastest and easiest way to do so. They also expect that M&A activity will continue to be strong in the near term, given pent-up demand for fixed-income investments.

Much of the acquisition spree has been spurred on by a borrowing boom among US companies, benefitting from advantageous credit terms before an expected tightening of monetary policy in September. Average company bond yields have halved since 2007 to about 3 per cent in the US, and there has been more than $100 billion of corporate bond issuance every month for the past four months-the longest ever streak of issuance above that mark.

In Canada, according to Lexpert’s DealsWire, May of this year saw $8.1 billion of M&A transactions worth over $50 million. This contrasts with $8.2 billion worth of transactions in 2014.

The author would like to thank Joe Bricker, summer student, for his assistance in preparing this legal update.

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Oil & gas M&A activity in Q1 2015: review and outlook

According to PWC’s First-quarter 2015 oil & gas industry mergers and acquisitions analysis report, mergers and acquisitions activity in the oil and gas industry stalled in the first quarter of 2015. The large swing in oil prices over the past 10 months has been a major factor in continued low deal volumes with 39 oil and gas deals (valued at over $50 million) representing a total value of $34.5 billion in Q1 2015 as compared to 70 deals with a total value of $103.5 billion for the same period a year earlier. While the number and value of deals in the upstream, oilfield services and downstream segments during the first three months of 2015 either decreased or remained the same as the respective levels in the corresponding period in 2014, midstream deals increased in volume and value by 47% and 398%, respectively.

From a macro perspective, oil and gas M&A transaction activity is typically muted during times of falling oil prices due to a widening bid / ask spread between buyers and sellers. Historical experience supports a pattern of limited M&A activity during a fall in oil prices, but once prices stabilize and the industry adopts the new pricing environment, M&A activity will typically increase to normalized levels. So, despite the slump in M&A activity in the oil and gas industry in the first quarter, the level of activity may rise over the next several months in light of the following:

  • Industry players have begun to adopt the new pricing environment as oil prices have remained relatively stable over the past few months, which provides more certainty to buyers and sellers in negotiating and pricing deals. In fact this has already begun to occur as transaction activity has picked up materially in Q2 2015 highlighted by a couple major transactions (most notably Shell’s $82 billion acquisition of BG).
  • There is a large backlog of transactions that stalled when oil prices started to fall in September 2014, which may be revived, although with different pricing expectations.
  • High domestic and international interest for North American shale opportunities drove the substantial M&A activity seen in 2014 (as noted in a PWC press release) and this interest persists with activity expected to return as prices stabilize.
  • If oil prices remain at current levels for extended periods and as hedges roll off, some companies will face increasing balance sheet issues and distressed company sales are a potential outcome.
  • The private equity sector has a significant amount of capital to deploy in the oil and gas industry. According to a recent Financial Times article, more than $40 billion of private equity funds are earmarked for exploration and production deals. Private equity firms will seek opportunities to acquire assets at reduced prices as distressed sales may begin to increase and as some oil and gas companies attempt to sell off assets in an effort to raise capital and cut costs amidst the pressure of lower oil prices.

It is important to note, however, that any increase in M&A activity is underpinned by a stable or increasing oil price and any drastic fall would likely extend the period of slow oil and gas M&A activity.

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OPEC’s decision to maintain oil production and its impact on M&A activities

As was expected, the Organization of Petroleum Exporting Countries (OPEC) announced on June 5 that it will maintain its crude oil production at 30 million barrels per day. This is the second time in six months that OPEC has decided to maintain it crude oil production. This decision was made in light of declining oil prices that many people are attributing to an oversupply of oil. The drop in oil prices puts pressure on producers that use higher cost production methods, including many US and Canadian based producers. Commenters have suggested that the decision by OPEC to maintain its production means that we will likely continue to see low oil prices and financial pressure on US and Canadian based producers.

A recent article from the March edition of the Lexpert Magazine titled “Oil Crash Dealmaking: The best time to pursue energy M&A may be now” highlighted how M&A activity can be used by producers to help manage uncertainty in a time of unstable oil prices. According to the article, in a number of the recent oil price slumps, large players in the industry have merged in an effort to consolidate their businesses. This provided cost savings, generated revenue synergies, eliminated key competitors and improved negotiating power. The article suggests that while the oil markets will eventually balance themselves out, in the meantime we should expect to see considerable M&A opportunities that may be capitalized upon.

This sentiment is echoed by many other commenters who have suggested that depressed oil prices afford greater opportunities for investment, including encouraging businesses that invest in distressed companies to become active in the oil sector.

OPEC’s announcement to maintain its oil production likely means continued depressed oil prices and possible instability within the sector, leading to an increase in M&A opportunities for companies that are well capitalized and willing to assume the risk.

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