Skip navigation

News from The Globe and Mail

Deal activity set to flow despite shift to higher interest rates

The era of ultralow borrowing costs may be coming to an end in Canada but observers say the new zeitgeist is unlikely to have much of a dampening affect on the country's lively mergers and acquisitions (M&A) market.

Rock-bottom rates installed during the financial crisis helped fuel a bull run in equities as investors poured into the markets, sending stocks to historic highs. Canadian companies took full advantage, with many using a combination of their shares and cheap credit to pay for blockbuster deals.

Last week, the Bank of Canada changed course. It increased its overnight lending rate by a quarter-percentage-point to 0.75 per cent, its first hike in seven years, and signalled that rates will likely move higher over time. But the torrential pace of deal-making isn't necessarily letting up any time soon, bankers say.

"We're a fair ways off to interest rates being a significant constraint to M&A activity. I would say the opposite, that interest rates are a tailwind for M&A activity," said John Armstrong, the co-head of global M&A at BMO Nesbitt Burns Inc. "The capital markets continue to be receptive to M&A transactions that have a compelling, strategic, operational or financial story behind them."

A more important factor for acquirers is their access to capital. Mr. Armstrong says access remains healthy across most sectors outside of resources, which is more a "challenged and selective" market for funding transactions. He expects the economic outlook, equity valuations, business confidence and geopolitics could have more influence on deal-making in the near term.

"Twenty-five basis points doesn't make a huge difference in the scheme of an M&A transaction," said John Medland, a partner at Blair Franklin Capital Partners, a Toronto-based M&A advisory firm.

"Until you get three or four moves, I don't think it impacts the mathematics."

The rate hike is indicative of a strong Canadian economy, Mr. Medland said. This could bolster confidence, which he said would likely result in more M&A - at least in the short term.

"We remain optimistic that we're going to see Canadian M&A volumes continuing to be strong," said Darin Deschamps, the co-head of Wells Fargo Securities Canada.

In the first half of 2017, 1,362 deals worth $120.5-billion (U.S.) were announced involving a Canadian company, up from 1,245 deals worth $107.1-billion during the same period last year, according to data compiled by Thomson Reuters.

During the first six months of 2017, foreign purchases of Canadian companies hit $16.1-billion, the highest level since 2014. Outbound activity, which is when Canadians acquire foreign assets, fell to $38.4-billion from $55.7billion last year.

Many of the most-active acquirers in Canada, such as the large pension funds and corporations, are looking outside of Canada to fuel growth, have longer investment horizons and use long-term rates in their valuation analysis.

They are unlikely to be put off by a small increase in the overnight lending rate, Mr. Deschamps said.

One area of the M&A market that may be more sensitive to the rate increase is private equity (PE) firms, which typically employ more leverage in deals than corporate buyers. PE firms also usually hold investments for a shorter amount of time.

"I would suspect that a lot of private equity companies are looking at their portfolio companies and looking at any prospective deals and re-evaluating them in the context of a rising rate environment," said Andrew Bunston, a partner in the securities and capital markets group at law firm Borden Ladner Gervais.

He says that lofty valuations, along with higher borrowing costs, could result in "some push-back" on deal-making.

He added that private equity firms in the United States, meanwhile, have already seen a reduction in their potential investment returns when looking at Canadian targets - with the loonie's recent rally against the U.S. dollar. The Canadian dollar has surged 5 per cent in the past month, jumping to 79.09 cents on Friday.

Economists believe the Bank of Canada will be raising rates again soon, with at least one more hike predicted before the end of 2017.

© The Globe and Mail

Search the News
Search using one or more of the following options:
    Symbol  Lookup
Search:
 
 
 
 
 
* Can only be used when searching The Globe and Mail and the newswires. Search Tips 

GlobeinvestorGOLD.com

Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.

Discover a wealth of investment information and and exclusive features.

Free E-Mail Newsletters

  • Morning news headlines
  • Morning business headlines
  • Financial highlights
  • Tech alert
  • Leisure

Sign-up for our free newsletters



Back to top