Frank Turner, Douglas Marshall, Clay Horner
2014 Capital Markets Report
2013 was a year of mixed activity levels in the Canadian capital markets. It was a very good year for the major North American equity trading markets and a record year for Canadian corporate debt issuers. There were also a number of significant Canadian IPOs. On the other hand, there was an overall reduction in the level of Canadian M&A activity and equity offerings. At Osler, we had the good fortune to advise on the two largest M&A transactions of 2013, the two largest equity financings of the year, and several of the most noteworthy IPOs. We also assisted many of our clients with key strategic and, in some cases, transformative transactions. What follows is a review of overall market activity in 2013 and some observations and predictions gleaned from the deals on which we were engaged in the year.
The S&P/TSX Composite Index closed 2013 at 13621.55, more than 9.5% higher than its close a year earlier, while the Dow Jones Industrial Average closed the year up more than 26% over the previous year’s close, setting a new all time high and achieving its biggest one year gain since 1995. However, the TSX-V was down sharply for the year closing 2013 at 931.97, representing an almost 25% decline over the previous year’s close and underscoring the difficult capital market conditions experienced by junior issuers in 2013.
Total equity offering proceeds for TSX and TSX-V listed issuers were approximately $43.6 billion in 2013, representing a 23% decrease compared to 2012. The private placement market was even weaker as many junior and mid-market issuers, especially those in the resource sector, struggled to raise new capital. The Canadian IPO market was somewhat improved in 2013 but could not come close to matching the strength of the U.S. IPO market. Nineteen conventional IPOs (excluding those undertaken by capital pool companies and exchange-traded funds and IPOs involving structured products) were completed in Canada in 2013, which is an increase from the 14 completed in 2012 but less than half the number in 2007. Notable IPOs completed during the year included REIT IPOs sponsored by Loblaw Companies Limited and Canadian Tire Corporation Limited, and the Oryx Petroleum Corporation Limited IPO which was the largest energy IPO of the year. Osler acted for the underwriters on the CT REIT and Oryx IPOs and on several IPOs by technology companies. While overall equity offerings were down, there were several very large offerings by issuers including Barrick Gold Corporation, Valeant Pharmaceuticals International, Inc., Empire Company Limited and BlackBerry Limited. We acted on three of these offerings and increasingly find that effective integration of our capital markets experts across offices, including between our Canadian offices and our New York office, is essential to meeting the very quick timelines required on significant capital markets transactions.
Corporate debt issuances by Canadian companies rose to an all time high in 2013 as equity financing became more difficult for some types of issuers and debt became a more attractive option. Canadian issuers raised $187 billion of new corporate debt through to December 15, 2013, representing an increase of approximately 34% over the same period in 2012. Companies from a variety of industries and across the credit spectrum took advantage of the low interest rates available in 2013 to raise additional capital, and a number of very large M&A transactions were funded in whole or in part through large debt offerings. The high yield portion of the debt market saw the overall value of new issuances decline somewhat compared to 2012, however a broad range of issuers came to the market for the first time in 2013 underscoring the viability of this market as an alternative method of raising new capital.
The M&A markets were off somewhat in 2013 compared to prior periods. Canadian companies were involved in 2,325 announced deals in 2013 valued at $158.2 billion, down 28% from 2012 and representing the lowest level of activity since 2009. However, there were a number of significant M&A deals in the year including Loblaw's $12.4 billion acquisition of Shoppers Drug Mart Corporation and Valeant's $8.7 billion acquisition of Bausch & Lomb Holdings Incorporated. Osler advised a principal party on each of these transactions and observed that while each was negotiated in a short period of time, such negotiations were preceded by extensive prior engagement and preparation that were critical to effective deal making. The availability of significant equity and credit financing were important elements of many of the largest and most strategic M&A transactions undertaken in 2013. In several cases (notably Valeant, Empire and Chemtrade Logistics Income Fund), the announcement of M&A transactions was accompanied by impressive gains in the acquiror’s stock price signaling the market’s approval of strategic deal making. In many years, Canadian energy and mining deals rank among the largest deals, in terms of value, in international comparisons, however in 2013, Canadian retailing and healthcare deals ranked as the 11th and 13th largest worldwide deals.
The energy sector, typically a significant source of transactions, saw a dearth of M&A activity in 2013. Similarly, it was a year of low deal making activity in the Canadian mining industry. SOE investment in the energy sector, which, in 2012 accounted for almost $28 billion of activity, was almost completely absent in 2013 during which there were only two material SOE transactions worth approximately $1.5 billion in aggregate. The oil sands sector reported its lowest level of transactional activity in a decade while M&A activity in the broader energy sector was off by more than 80% compared to 2012. However, the fundamentals for the oil and gas sector appeared to be improving at year end as concerns about the pace of infrastructure development lessened somewhat in light of the approval of the Northern Gateway project and the advancement of Kinder Morgan’s expansion of its TransMountain Pipeline system. Positive movement in public support for infrastructure projects and government’s commitment to shorter timelines for regulatory approvals also contributed to increased optimism. There was also a sense that SOE investment in the oil & gas sector could rebound significantly in 2014 on an improving outlook for the development of a Canadian seaborne export market for domestic energy products and greater comfort with the Canadian regulatory environment for foreign direct investment in the resource sector.
After several years of stellar performance, the REIT market experienced some downward pressure at mid-year as concerns regarding future monetary policy resulted in a significant drop in the trading price of many REIT issuers, which in the case of some of the larger Canadian REITs had recovered somewhat by year end. Bright spots for the sector in 2013 included the successful REIT spin-offs by Loblaw and Canadian Tire. The REIT associated with Loblaw and Sobeys’ sale of properties to Crombie REIT were important deal making elements for both the Loblaw/Shoppers and Sobeys/Safeway retail sector transactions.
Capital markets activity in the financial services sector was similarly subdued in 2013 as several financial institutions digested significant transactions from the prior year. It was a year of record earnings and the announcement or completion of significant changes in leadership at several of the biggest Canadian financial institutions.
Not surprisingly in a lackluster capital market environment in Canada, investors sought other ways in which to maximize the value of their holdings. In this regard, 2013 saw activist investors continue to agitate for change at some of Canada’s largest public companies - with mixed results. Representatives of activist investor Carl Icahn were added to the board of directors of Talisman Energy Inc., and partially in response to activist pressure, Tim Hortons Inc. took advantage of historically low interest rates to return capital to shareholders through share repurchases. However, Jana Partners was ultimately unsuccessful in seeking board representation at Agrium Inc. despite a costly proxy battle. At small to mid-sized businesses, the pace of activist activity continued at high levels, prompting several negotiated resolutions and proxy contests. The significant uptick in shareholder activism engendered both corporate and regulatory responses as boards sought protection against surprise attacks by activists, and securities regulatory authorities sought to implement changes intended to improve transparency and enhance shareholder rights.
Weak capital markets in some sectors and the almost total absence of SOE investment in 2013 resulted in many companies looking at alternative options to fund growth and maximize shareholder value. Many domestic and foreign private equity firms sought to take advantage of this environment in order to build their funds and acquire significant positions in good Canadian companies. By some estimates, 2013 was the best year ever for fund raising by Canadian PE firms with more than $15 billion in new commitments being received. 2013 also saw significantly more PE investment in the Canadian oil and gas sector, and some observers believe that PE investment accounted for almost 25% of the new capital raised by the sector in the year. Venture capital was also another bright spot as there continued to be strong interest in Canadian technology companies culminating in a $165 million investment in HootSuite Media Inc., which represented the largest VC financing in Canadian history. Osler was lead counsel to HootSuite.
Financing and deal levels in the energy and mining sectors were sharply reduced and there were few signature transactions. Further, REIT and real estate sector activity levels were more restrained than in previous years notwithstanding a couple of high-profile REIT IPOs. However, debt financing was readily available and often in large amounts from single source lenders, and the availability of equity financing was an important element of several of the most noteworthy M&A transactions completed in the year.
In response to this dynamic capital market environment, we strove to align our service offering with our clients’ changing needs. We increased our resources in private equity and corporate lending while successfully maintaining our longstanding leadership positions in M&A and Corporate Finance and our sectoral emphasis on Energy and Financial Institutions. We committed additional resources to further enhance our relationships with leading law firms in other countries to facilitate seamless international service to both their clients and our clients in light of increasing globalization. We continued to invest in improved matter management technology to enhance the efficiency of the delivery of our services as well as expanding our commitment to alternative fee arrangements to provide more cost-efficient resource use and appropriate sharing of risk with our clients. These initiatives underscore our commitment to provide our clients with the leading expertise in the areas and jurisdictions that matter most to their businesses and to be Canada’s leading business law firm. Our involvement year over year and again in 2013 in a large number of the year’s largest and most noteworthy transactions coupled with the long term nature of many our client relationships, suggest we are on the right path.
As always, we continue to be grateful to our clients for the trust that you have placed in us. In particular, we were fortunate to help many longstanding clients with strategic and, in some cases, transformative transactions. We are also grateful for the outstanding opportunities provided to us by the underwriting community; we appreciate your confidence in our skills and service levels. We hope that you will find the following articles to be of interest and that our predictions for 2014 are not too far off the mark! Please do not hesitate to contact any of our legal professionals should you wish to discuss any of the articles in our 2014 Capital Markets Report.
We wish you all the best for 2014.
Capital Markets Report Chapters
Osler has consistently been at the top of M&A and Corporate Finance legal advisor league tables published by Thomson Reuters, Bloomberg, Mergermarket and Infomart over the past six years, with the following distinctions for year-end 2013:
- Osler is ranked as the #1 law firm for Canadian deals (by value) and the #3 law firm for Canadian deals (by deal count) by Mergermarket
- Osler is ranked by Bloomberg among the top 5 M&A legal advisors for global announced deals (by value) and as the #2 law firm for Canadian announced deals (by value)
- Osler is ranked by Thomson Reuters as the #2 law firm for Canadian announced deals (by value) and the #3 law firm for Canadian completed deals (by value)
- Osler is ranked as the #1 law firm as Canadian legal counsel to the underwriter on equity and debt offerings in 2013 (value of deals) and the #2 law firm as Canadian legal counsel to the issuer on equity and debt offerings in 2013 (value of deals) by Infomart
- Osler is ranked as the #3 law firm as underwriters’ counsel for Canadian equity offerings in 2013 (value of deals) and the #2 law firm as issuer’s counsel for Canadian equity offerings in 2013 (value of deals) by Bloomberg