HBC, Saks deal latest as Canada’s M&A activity heats up

If it weren’t for blockbuster deals in the retail sector this summer, corporate Canada wouldn’t have much to talk about.

A new report shows merger and acquisition (M&A) activity for the first half of 2013 was at its slowest pace for a January-June period in eight years.

M&A activity fell 40 per cent in the first six months of the year to 245 deals valued at $31.7 billion, according to a report from The Mergermarket Group. (Coincidentally, Mergermarket, a division of the Financial Times Group, has itself been put up for sale its parent Pearson Group said on Friday)

Mergermarket said Canadian M&A activity dropped off in the second quarter. While some of that slowdown is the result of volatile markets that have created financing challenges, others believe it's due in part to new foreign takeover rules introduced by the Harper government late last year.

The government approved takeovers of Nexen Inc. and Progress Energy Resources Corp. by foreign state-owned enterprises (SOEs) but then vowed all future takeovers by SOEs in the oil patch would be approved only on an “exceptional basis.” That has created some confusion in the M&A world around what "exceptional" means, and what would happen in other industries.

There have also been calls for further clarification and discussion around the power of proposed Bill C-60 that looks at changes to the Investment Canada Act. Foreign takeovers in Canada have been a hot topic since the federal government blocked bids for Potash Corp. of Saskatchewan Inc. in 2010 and MacDonald Dettwiler and Associates Ltd. in 2008.

For the first six months of 2013, the Mergermarket report says values of outbound M&A have been higher than inbound, where the target company is Canada, for the last three quarters.

Canada’s M&A activity levels would have be worse if it weren’t for the Sobeys Inc.’s $5.8 billion purchase of Safeway's Canadian assets announced in the final weeks of June. That was the largest deal for the first half of the year, followed by H&R Real Estate Investment Trust’s $4.6-billion offer for Primaris REIT announced back in January.

Second quarter M&A picking up

The second half 2013 started off a bit more exciting, with Loblaw Co. Ltd. announcing in mid-July it would buy Shoppers Drug Mart Corp. in a $12.4-billion cash-and-stock deal. On Monday, iconic Canadian retailer Hudson's Bay Co. said it was buying high-end American brand Saks Inc. in a deal valued at $2.9 billion (US).

Analysts are expecting more retail deals, particularly within Canada, as companies come together to fight increased competition from giant U.S. retailers such as Wal-Mart and the recent entrance of Target into the country.

Little M&A activity is expected to come from the mining sector, as companies struggle with huge cutbacks and writedowns amid falling commodity prices as a result of decreased demand in emerging markets such as China.

There was only one mining deal in Mergermarket’s top 5 Canadian list for the first half of 2013. That was Russia’s state uranium firm ARMZ’s offer in January to take Canada’s Uranium One Inc. private by buying the other half of the company in a deal valued at $1.3 billion.

The other two deals in the top 5 included Imperial Oil acquisition in February of a 50-per-cent stake in Celtic Exploration Ltd. for $1.5 billion, and Travelers Co Inc.’s bid in June to buy Dominion of Canada General Insurance Co from E-L Financial Co Ltd for about $1.1 billion.