It is no secret that the Canadian dollar has been singing the blues of late. With the loonie declining more than 30% in the exchange rate against the United States (US) dollar, shopping trips and vacations to our friendly neighbour to the south are likely to become less frequent over the next little while. The Canadian M&A market, however, may stand to benefit from the lopsided exchange rate and it has left investors wondering whether Canadian targets can expect a line-up of interested foreign buyers.
A recent Financial Post article by John Shmuel, “Low loonie luring foreign buyers, but an M&A boom in Canada may prove elusive” (the Article), explores whether the down-and-out Canadian dollar may make for some healthy M&A activity in the first half of this year. The Article indicates that there certainly has been an increase in interest from foreign buyers, in particular from American strategic and mid-tier private equity firms. The object of their affections are reported as being primarily outside the resource space, with recent sizable deals announced in the home-improvement retail sector and the waste management sector.
The exchange rate isn’t the only enticing factor for foreign buyers: the Article points out that the Canadian stock market fell into bear territory last month and equity valuations are hovering near multi-year lows for many Canadian firms. The Article also indicates that it’s not only foreign buyers interested in capitalizing on the low dollar but that, according to a recent survey done by Ernst & Young, more Canadian firms are looking to sell non-core assets over the next two years than other companies around the world.
With interest evident on both sides, the question remains whether it will actually translate into deal activity here at home. The Article indicates that an offer for many of the attractive Canadian targets, with voting shares and being owner operated, would have to be sugary sweet for them to consider a buy-out. Additionally, there isn’t much interest humming around Canada’s struggling energy and mining sectors. The Article indicates that if deal activity doesn’t increase in those sectors, foreign private equity firms will likely only be sniffing around for assets of bankrupt companies.
The Canadian government may also play a role in stemming the flow of foreign acquisitions here as, according to the Article, many of the big named Canadian companies attractive to investors may be considered to be strategic assets for the government and not on the market. Further complicating the M&A landscape is that some economists expect that the Canadian dollar’s weakness is here to stay, meaning repatriated earnings from Canadian operations will be worth less for foreign buyers. With the convergence of these various factors, the M&A boom one might expect with a US dollar heavy-exchange rate may not materialize here in Canada just yet.
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