After Strong M&A Year, Canadian Firms' Deal Making Could Cool in 2018

Despite uncertainty around the North American Free Trade Agreement, mergers and acquisitions involving Canadian companies were strong in 2017, though deal activity could cool in 2018, bankers and companies say.

The fate of the free-trade agreement, likely to be decided in the first several months of the new year, is the biggest question overhanging the Canadian economy, according to Canadian bankers and executives.

The U.S. tax overhaul is also clouding the 2018 outlook, these people say.

In terms of trade, exports to the U.S. represent roughly a fifth of the country's gross domestic product, according to the U.S. embassy in Canada, and the country's manufacturing and technology sectors have expanded because international investors view Canada as an attractive gateway to the larger U.S. market.

But U.S. President Donald Trump has called Nafta the "worst trade deal ever made" and forced a renegotiation after his inauguration in January. Since then, Canadian and U.S. policy makers have become increasingly pessimistic about the future of an agreement that has underpinned Canada's economic relationship with its southern neighbor since 1994.

"I think that regulatory uncertainty in general, including Nafta, will create headwinds for M&A markets," said Jason Rowe, chief executive of Goldman Sachs Canada.

The CEO at Aurora, Ontario-based auto-parts maker Magna International Inc., one of the country's largest manufacturers, predicts large investments in Canada will either pause or flow south until the Nafta question is resolved.

"I think anybody that is contemplating any big investments over the long term is probably either waiting, or they're going to be biased to invest more in the U.S. until there's an outcome here," said Donald Walker, Magna's CEO, in a November call with analysts. "I think we're just waiting to see what's going to happen."

Canada's deal-making activity tends to be split between domestic deals for local targets, and those aimed at international companies.

Overall deal value for 2017 as of Dec. 26 totaled $216.3 billion, roughly 14% lower than the $251.88 billion in 2016. That would still make 2017 one of only five years since 1995 when deal value passed the $200 billion mark, according to Dealogic.

Much of the activity inside Canada in 2017 was fueled by divestitures and restructurings in the oil and gas sector. Looking outside the borders, Canadian pension funds such as Brookfield Asset Management Inc. and the Canada Pension Plan Investment Board added to their growing reputation as aggressive buyers of real estate and infrastructure.

Mr. Rowe's Goldman Sachs colleague, Luke Gordon, head of M&A for Canada, said mining and oil-and-gas companies could continue to be attractive targets for Asian and European companies, despite concerns about Nafta, while U.S. private-equity funds awash in capital may turn North as they search for investments.

Goldman advised Bolton, Ontario-based industrial equipment maker Husky Injection Molding Systems Ltd. in December, when private-equity firms Berkshire Partners LLC and OMERS Private Equity Inc. sold it to Platinum Equity Partners of Los Angeles for $3.9 billion.

"It's good to see a recovery in domestic M&A," said Grant Kernaghan, who is responsible for Citigroup's M&A business in Canada. Mr. Kernaghan expects more activity in the mining sector, which has been moribund for years as prices for metals dropped but are now seeing some recovery. He said Canada's burgeoning financial technology sector could be attractive for those looking to grow their technology capability, while Canada's big banks could remain on the hunt internationally.

Citi advised Banco Bilbao Vizcaya Argentaria SA on its $2.2 billion sale of its Chilean subsidiary to the Bank of Nova Scotia in November.

It is likely that a larger share of deal flow will start streaming out of Canada, as multinationals eye the impact of a U.S. tax overhaul that lowered corporate rates to 21%, lower than Canada's 26.5% rate. That could exaggerate a trend of growing Canadian companies looking outside the country as they seek to expand further, said Peter Buzzi, head of M&A in Canada for RBC Capital Markets.

The bank advised construction company SNC-Lavalin Group Inc. in its $2.7 billion purchase, excluding debt, of U.K.-based WS Atkins PLC in April.

"Canada is a small economy, and it's tough to be a Canada-only business, " Mr. Buzzi said.

While there has been a lot of talk of Canada's growing technology sector, the country is still a resources-heavy economy, and M&A will reflect those fundamentals, said Jeremy Fraiberg, head of M&A of Canadian law firm Osler, Hoskin & Harcourt LLP. If oil and metals prices rise, that will increase interest in Canadian targets, he said.

"As resources go, so does the Canadian deal-making economy," Mr. Fraiberg said.

Write to Vipal Monga at

(END) Dow Jones Newswires

January 01, 2018 07:14 ET (12:14 GMT)