April 5, 2011 / 10:14 PM / in 6 years

Base metal deals to lead Canadian M&A

5 Min Read

TORONTO (Reuters) - Miners, especially of base metals, will drive Canadian merger and acquisition activity for the rest of 2011, although oil and gas and financial services will also be significant, bankers said on Tuesday.

In a panel discussion at the Reuters Global Mergers and Acquisitions Summit, investment bankers said deal volumes had a long way to grow, and the average size of larger deals would be around the $1 billion mark, or double last year's level.

Canada has seen a slew of multibillion dollar deals since the start of the year. Two Toronto-listed miners are facing unsolicited takeover bids.

"Clearly energy and mining, I think, are going to be the two key sectors in Canada over the next several years," said Peter Buzzi, co-head of mergers and acquisitions at the Royal Bank of Canada (RY.TO), Canada's largest bank.

Buzzi and chief investment bankers from the Bank of Montreal (BMO.TO), Bank of Nova Scotia (BNS.TO) and Canadian Imperial Bank of Commerce (CM.TO), said Canadian M&A activity would be healthy given strong corporate balance sheets and improved access to credit markets.

Room to Grow

"If you look at M&A volumes last year either globally or in Canada, they are still only at about half where we were at the peak, so there's still a fair bit to go," said Michael Boyd, head of mergers and acquisitions at CIBC.

Three major merger scenarios are unfolding in Canada: an unsolicited bid by base metals miner Equinox EQN.TO to buy Lundin Mining (LUN.TO) for $4.7 billion, another unsolicited bid by China's Minmetals Resources (1208.HK) to buy Equinox for C$6.3 billion, and a C$3 billion friendly bid from the London Stock Exchange to buy the TMX Group (X.TO), Canada's largest stock market operator.

Asked which Canadian sector would get the most attention, M&A bankers pointed unequivocally at mining, with a heavy emphasis on base metals, and the gold sector quick on its heels.

"The one other sector that we haven't really talked about which has been quite active and continues to be just for inbound and outbound M&As, is financial services frankly," said Andre Hidi, who leads mergers and acquisitions for BMO Capital Markets, the investment banking arm of Bank of Montreal.

"The exchange sector's going through a massive wave of consolidation right now of course, and frankly we think other areas of financial services will be the next most active sector after mining and energy," he said. "There may well be additional opportunities whether within Canada or abroad for the banks."

There were two major deals announced in December in the Canadian financial services industry: Bank of Montreal agreed to buy Marshall & Ilsley Corp MI.N for $4.1 billion, offering a 34 percent premium, and Toronto-Dominion Bank (TD.TO) agreed to buy Chrysler Financial for $6.3 billion, making it one of North America's biggest bank-owned auto lenders.

The Caveat

Bankers pointed to interest in Canadian commodity-based companies by Asian countries as another major and growing trend in dealmaking that is expected to expand further this year.

"It's imperative that investment firms have access and dialogue with Asian buyers," said John Tuer, head of mergers and acquisitions at Scotia Capital, the investment banking arm of Bank of Nova Scotia.

"Whether they ultimately become the buyer or not, they are going to always be in the mix, one way or another," he added, pointing to Minmetals' bid for Equinox.

Bankers see continued strength in the market for at least another year, and note deal flow came back much faster than expected after the global financial crisis.

So what keeps them up at night?

Rising interest rates, inflation, sovereign debt fears from Europe to the United States, and the potential for political risk in the Middle East were among the factors cited by Canadian bankers, though they are not overly concerned for the time being.

"I think whatever does bring down the current cycle is something that none of us that are here today are going to be able to predict," said Buzzi.

Reporting by Pav Jordan; Additional reporting by Solarina Ho, Alastair Sharp, Jeffrey Hodgson; Euan Rocha and S. John Tilak; Editing by Richard Chang

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