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The credit crisis has not had as enduring an impact on Canadian M&A as expected

PricewaterhouseCoopers (PwC), in its inaugural roundup of the Canadian M&A market, indicates that the recession’s impact was short-lived when looking at Q1 2010 deal volumes and aggregate values which rose 61% and 70% respectively over Q1 2009.

With 614 closed deals, Q1 volumes outpaced first quarter activity in all but one of the preceding five years. Deals worth a total of $24.3 billion closed in Q1, a 70% increase over Q1 2009, although still below 2006-2008 peak dollar volumes.

According to Kristian Knibutat, national deals leader at PwC, “The Q1 numbers clearly indicate that the Canadian deal market has turned. More importantly, we are witnessing a renewed sense of optimism among dealmakers. With improved access to credit, plausible deal exits and resumption in corporate earnings growth, confidence has finally been restored.”

Knibutat sees a continuation of market strength, as a further 344 deals worth an estimated $16 billion were announced during Q1 2010 and are soon to be closing, up from a Q1 2009 pipeline of only 21 deals worth $4.7 billion. 

PwC has identified six key deal trends based on the latest Q1 figures:

–   Canadian deals remain highly concentrated in two sectors. This is consistent with past history. Energy and materials (largely metals and mining) represent nearly 50% of the Q1 2010 deal volume. This contrasts sharply with the U.S. market which is highly dispersed between sectors, with financials, consumer discretionary, industrials and information technology leading the pack.

–   Strategic buyers are driving the rebound although private funds are active. A combination of limited organic growth opportunities and conservative valuations has created a “perfect storm” for strategic M&A buying. Private funds were involved in 23% of Q1 2010 M&A deals announced and closed, by value. Strategics had the highest proportion of deal activity in five years.

–   There is a mild resurgence in deal-related leveraged lending. After a complete standstill in leveraged lending through late 2008/early 2009, the new issue leveraged loan market, a key driver of the upper end of the deal market, experienced a third consecutive quarter of tepid recovery. North American new issue volume climbed to $42.9 billion in Q1 2010, the most since the third quarter of 2008.

–   The “mega-deal” ((greater than)$500 million) is making a comeback, but, in Canada, the “middle market” still rules. Nine Canadian deals valued at (greater than)$500 million closed during the quarter and further eight were announced. While an impressive rebound, Canada simply does not see the same level of large deal volume as in the U.S. and Europe. An average deal value in Canada is $85 million.

–   Foreign buyer groups continue to be active in Canada, although the nature of deals has changed. Foreign buyers, particularly those in China, the Middle East and India, are increasingly more active on the Canadian M&A front. Canada’s rich resource base is the key reason that Asian buyers are focused on Canadian targets. The Chinese in  particular are looking to secure access to industrial commodities ahead of future demand while seeing an opportunity to diversify away from the U.S. dollar.

–   There is a continued focus on due diligence, deal protections and creative structures. As a result of some market uncertainty and partially reflecting buyers’ stronger negotiating positions, deal terms and conditions continue to be acquirer-friendly. 

PwC deal data includes M&A transactions involving at least one Canadian entity and the source of all of our data is Capital IQ and S&P LCD. The full six-page report including graphs and detailed analysis is available from the contacts below. Go to this url to subscribe to the bi-weekly capital market series: http://www.pwc.com/ca/cmf

About PricewaterhouseCoopers LLP

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For further information: David Rowney, (416) 365-8858, [email protected]; Kiran Chauhan, (416) 947-8983, [email protected]