Big deals on backburner as Canada’s recovery lags

Corporate America is more confident about an economic recovery than its peers in Canada, and more willing to pursue deals as a result, a new survey suggests.

About 41 per cent of U.S. firms say they’re ready to buy or merge with another company, compared to 33 per cent of Canadians, says the latest Canadian Capital Confidence Barometer from consulting firm Ernst & Young (EY).

While confidence is growing among Canadian executives - with 98 per cent saying they expect the Canadian economy to remain stable or improve, up from 79 per cent a year ago - deals are still hard to come by.

“Canadian executives expect to remain cautious over the next 12 months — and now, U.S. confidence and expectations of M&A activity have surpassed Canada for the first time in two years,” says the report.

A year ago, 44 per cent of Canadian companies surveyed said they expected to pursue M&A in the coming year, versus 23 per cent U.S. firms. In the fall of 2011, 45 per cent of Canadian companies were on the M&A path, compared to 36 per cent of American ones, says the EY report.

The report comes as the U.S. economy is poised for growth after several sluggish years since the recession, and the Dow Jones Industrial Average continues to hit fresh highs, including above 16,000 for the first time on Thursday.

Meantime, Canada’s Toronto Stock Exchange is still off its high just above 15,000 points reached in 2008, just before the global financial crisis hit. Recently, new Bank of Canada governor Stephen Poloz described Canada’s economy as “healing,” forecasting growth of 2.3 per cent in 2014, up from 1.6 per cent this year. That’s a more pessimistic outlook from this summer, when the bank said the Canadian economy would grow by 1.8 per cent this year and 2.7 per cent in 2014.

It appears Canadian executives are taking heed.

The EY report says Canadian companies “either seem to be waiting for more favourable economic conditions, for the right deal or, in some cases, for someone else to make the first move.”

Targeted M&A volume for the first nine months of the year totaled $73.8 billion, down 32 per cent from the same 2012 period and the lowest first nine-month level since 2011, according to Dealogic.

The retail sector was most active, with volume reaching $19.5 billion for the first nine months of 2013, nearly 12 times higher than the same period last year and the highest first nine-month level on record.

Loblaw’s $12.4-billion offer this summer to buy Shoppers Drug Mart is the Canadian retail sector deal on record, according to Dealogic. Sobeys Inc. also made an offer to buy Safeway's Canadian assets for $5.8 billion.

Consolidation is the retail sector is ramping up as companies try to cope with increased competition, including from U.S. discount retailers such as Target and Wal-Mart, which are expanding across Canada.

In the U.S. deal activity rose 39 per cent in the first nine months of the year to $865.1 billion, the highest first nine-month total since 2008, Dealogic says. Telecom was the hottest sector, driven by Verizon's $130-biliion purchase of a 45-per-cent stake in Verizon Wireless.

While Canadian deal volume is down versus the U.S., the EY survey shows Canadian executives expect larger sizes of deal that do happen.

For instance, 19 per cent of Canadian executives expect deals more than $1 billion.

"Just six months ago, no respondents expected any deals of that magnitude,” said Tony Ianni, an EY partner.

Among survey respondents, 81 per cent expect credit availability to stabilize or improve and 65 per cent say growth is their primary focus.