Overall merger and acquisition deal value involving Canadian companies totalled $216.3 billion in 2017, which was approximately 14% lower than the $251.88 billion seen in 2016, which was a decade-high level. The fall in overall value was primarily caused by a 25% decline in energy deals, according to a report in Bloomberg, which resulted in the first year-over-year decline in total deal value since 2012-2013. Despite this decline, 2017 stands as one only five years since 1995 when deal value exceeded $200 billion, according to a report in the Wall Street Journal.
Outward bound M&A activity was down slightly in 2017, from a record of $176 billion to approximately $122.3 billion, which still remained well above the $72 billion average from the previous five years. Domestic M&A reached its highest level in more than a decade with Canadian firms buying $69.9 billion worth of local companies and assets. The domestic M&A market was mostly driven by the Canadian energy firms purchasing assets as foreign players exited the market – specifically driven by divestitures and restructurings in the oil and gas sector.
While the steady economy, availability of financing, and low interest rates should contribute to a strong environment for M&A activity in 2018, the outcome of any renegotiation of the North American Free Trade Agreement (NAFTA), or even potential U.S. withdrawal from the trade pact, combined with new lower U.S. corporate taxes are expected to impact deal numbers and have left analysts uncertain in their outlook for the coming year. As evidenced by foreign players’ exit from the market in 2017, there is a declining foreign interest in Canadian resources. This decline is caused by the perception in the market that Canada presents environmental regulatory concerns around buying oil-sands assets, has higher-cost bases to produce, and does not have adequate transportation options available for export.
That being said, the continuation of recent rises in in oil and metal prices may increase interest in Canadian targets. According to the Wall Street Journal report, mining and oil-and-gas companies may also continue to be attractive targets for Asian and European companies despite the concerns associated with NAFTA, and that U.S.-based private equity firms may see buying opportunities in Canada. In 2018, deals are expected to consist of consolidations among Canadian mid-sized oil and gas companies or purchase by mid-sized mining companies of smaller precious and base metal companies.
Despite the slight downward trend from 2016 to 2017, Canadian M&A activity in 2018 is expected to be at or above 2017 levels, supported by an optimistic outlook that activity in the mining sector will return to its historical standards.
The author would like to thank Shreya Tekriwal, Articling Student, for her assistance in preparing this legal update.
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