February 4, 2003

Is Canada's M&A Market Frigid or Thawing?

Depending on the media spin, Canadian M&A is either the hottest thing happening in North America, or has never been worse.

On Dec 21, Reuters ran two articles with headlines about Canada's M&A climate. They said that dealmakers there were "heating up" and that Canada is a "hot market" for M&A right now. Reuters quoted Phil Evershed, head of M&A for Canadian Imperial Bank of Commerce,[NYSE:BCM] as saying, "Just call us the Northe Tigers." Was that a misquote…

The heat is off in Canada, generally speaking. An Investment bank analyst in Toronto said that Canada's dollar volume hasn't been this bad since 1995. There were 210 transactions completed in the third quarter of 2002, a 17.3 percent decline relative to the second quarter and a retu to the record low levels experienced in 2001…

Cross-border M&A is likely to come from the private equity players in Canada looking to buy US firms. "Private equity firms will make some plays. They are definitely on the scene," said Mel Margolese, a partner at mid-market investment firm. "Canadian LBOs are likely to be the guys doing deals in the US." But US firms looking to buy Canadian ones are going to run up against a stumbling block known as "income trusts."

"The US private equity firms, in attempts to attract Canadian investments to their funds, have run up against income trusts and those income trusts have been the preferred investment vehicle here," said Bill Menear, a partner at Canec Inteational [www.canec.com ], a M&A advisory firm in Toronto. Menear agreed that cross-border transactions are likely to come from private equity firms. Some sources think income trusts may lose some of their luster this year, as many firms have tried to fit situations in the trusts that are better off in the hands of private equity teams with proven management in their portfolio companies and the funds to back them up financially. "I look for an increased presence of US private equity groups doing business in Canada," concluded Menear.

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Kenneth Rapoza
Senior Writer
The Mergers & Acquisitions Advisor
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