Canadian companies are daring to go where others are pulling back -- Europe.
Corporations and pension funds from the fastest-growing nation in the Group of Seven are on a European buying spree, boosting spending on deals in the region by 58 percent in the year’s first half, even as U.S. and Chinese buyers slash spending on takeovers there. Europe’s low valuations, the robust Canadian dollar and cheap capital are luring Canadian companies such as Brookfield Asset Management Inc. (BAM/A) and Alimentation Couche-Tard Inc. (ATD/B)
“Canadian companies are basically punching above their weight in the European market,” said Julian Brown, head of corporate finance for Canada at PricewaterhouseCoopers Ltd. in Toronto. The advisory firm is working with at least five Canadian companies on planned acquisitions in Europe, he said.
The newfound trans-Atlantic emphasis underscores a shift in Canada’s outward focus from the U.S. to other foreign markets. America’s economic recovery has made its assets more expensive, and cash-rich Canadian buyers are looking for new places to deploy resources. Trade is at stake too, as Prime Minister Stephen Harper negotiates a free-trade pact with the European Union that could be more extensive than the North American Free Trade Agreement among Canada, the U.S. and Mexico.
Valuations and Currency
In Europe, “there will be opportunities that will come along that will be similar to those in the U.S.” during the recent recession, said Bruce Flatt, chief executive officer of Brookfield Asset Management, a Toronto-based manager of about $150 billion in assets including real-estate and infrastructure. “Part of it is valuations that are more interesting, and part of it is the currency.”
In June, Brookfield’s office property arm made its first U.K. deal in two years, spending 518 million pounds ($811 million) on a group of buildings in London’s City financial district. More deals are likely, said Flatt, as the company looks for targets in the infrastructure sector in continental Europe while building its presence in London real estate.
With $15.1 billion in deals in the first half, Canada was the second-biggest acquirer in Europe after the U.S., whose deal volume there fell by more than 50 percent to $54 billion. Canada’s economy is about one-tenth the size of its southern neighbor’s.
Chinese companies cut European takeovers by a third in the same period, to $4.5 billion. Overall European acquisitions by foreign buyers fell 38 percent as Greece, Italy and Spain dragged down the continent’s economy.
Gamut of Industries
Canada’s European acquisitions this year have run the gamut of industries -- from Couche-Tard’s $3.5 billion deal for service stations operated by Norway’s Statoil ASA (STL) to CGI Group Inc (GIB/A)’s $3.1 billion acquisition of U.K. computer-services provider Logica Plc.
Couche-Tard may next bid for German gas stations being sold by Exxon-Mobil Corp., analysts at firms including Barclays Capital and CIBC World Markets have said. Couche-Tard, a Laval, Quebec-based operator of convenience stores, wants to “take a good shot at growth opportunities” in Europe, Chief Executive Officer Alain Bouchard said last month.
Canada’s big pension funds, which typically manage most of their assets in-house and participate directly in buyouts, will also be key players. The funds are likely to be among bidders for Total SA (FP)’s TIGF gas-transport network, which the French oil company is seeking to sell for about 2.5 billion euros, according to people familiar with the situation.
Ontario Teachers’ Pension Plan, which manages about $117 billion, is expanding its seven-person London team and seeking European deals, recently agreeing to buy Norwegian apparel group Helly Hansen from private-equity owners for an undisclosed price. Last month the fund, Canada’s third-largest, announced a 73 million pound bid for Goals Soccer Centres, which runs U.K. sports fields.
Economic troubles mean opportunities to buy companies that “can’t access other pools of capital today because of what’s taking place in Europe,” said Jane Rowe, the head of Teachers’ private-equity arm.
Canada’s economy has grown at an annual rate of 0.9 percent since 2008, buoyed by robust prices for commodities like oil and potash. In the same period, the 17-country Eurozone economy has shrunk by 0.2 percent annually.
Canadian companies are meanwhile getting more bang for their buck after the Canadian dollar in July touched its strongest level versus the euro since the common currency’s establishment in 1999, reaching about C$1.23.
They also have access to relatively cheap and abundant financing. Canadian corporations with investment-grade ratings saw their borrowing costs fall last month to just under 3 percent, the lowest since at least 1992 and less than the 3.06 percent for their U.S. counterparts. The country’s banks, which avoided the riskiest lending and didn’t require major bail-outs during the global financial crisis, are rated the world’s safest by the World Economic Forum.
Reflecting the easier money, the average Canadian deal in Europe this year was worth more than $460 million, up from $318 million in the same period in 2011. Five have been larger than $1 billion, compared with two last year.
“We’ve never seen a more global focus by Canadian companies,” said Steve Mayer, a Toronto-based managing director at Goldman Sachs Group Inc. “For a company that wants to transform itself to be a global player, they need to have a presence in Europe.”
Beyond the U.S.
Canada has taken advantage of its relative strength before. Its companies bought aggressively in the U.S. following the 2008 collapse of Lehman Brothers and subsequent recession, spending more than $58 billion in 2010 on American acquisitions, the most since at least 2000 except for 2007, according to data compiled by Bloomberg.
Yet Canada is increasingly looking beyond the U.S. market, which receives about three-quarters of Canadian exports. The free-trade deal with the European Union, planned for completion this year, would eliminate tariffs, harmonize regulations and open up public-sector contracting.
Harper has also designated as a national priority stronger Asian links for Canada’s oil and gas industry, including a new export pipeline to the Pacific coast. Last month’s $15.1 billion takeover offer for Calgary-based energy producer Nexen Inc. (NXY:US) by China’s state-backed Cnooc Ltd. (883) was the most dramatic example yet of closer ties.
Deals Flow Eastward
Canadian companies are finding themselves prey to some European buyers looking to expand, too. In March, Glencore International Plc (GLEN), the world’s largest commodities trader, agreed to buy Viterra Inc. (VT), Canada’s biggest grain handler, for $6.1 billion, giving the Swiss company its first major foothold in the North American grain market.
The flow of deals, however, is largely eastwards. European acquirers’ deals in Canada in the first half of the year totaled $12 billion, about 20 percent less than those in the other direction. Canada’s economy is less than 10 percent the size of Europe’s.
“I wouldn’t be surprised to see more deals in Europe” as well-endowed pension funds and strong Canadian banks encourage acquisitions, said Paul Simpson, global head of business services at Rothschild, who advised British engineering firm WSP Group on its takeover by Montreal’s Genivar Inc. (GNV) in June. “Canada Inc. is supporting the expansion.”
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