China eyes Canadian companies for takeover prospects

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Feb 23, 2011 Jan 21, 2011
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The Toronto Sun
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China eyes Canadian companies for takeover prospects

Last Updated: January 21, 2011 2:21pm

Chinese companies were behind more takeover deals in Canada than ever before last year and there's evidence state-backed investors are on the hunt for more resource-rich companies headquartered here.

The China Investment Corporation (CIC) opened its first foreign representative office in Toronto on Thursday. The goal is to strengthen ties with business, regulators and government agencies, said Felix Chee, the office's chief representative officer.

"It is symbolically and substantively significant because it speaks of CIC taking Canada very seriously and wanting to have a permanent presence here," said David Emerson, former federal trade and foreign affairs minister and advisor to the CIC.

Overall, mergers and acquisitions in Canada hit five-year high in 2010, far outpacing the global average, according to a new PricewaterhouseCoopers report.

Canada saw a total of 3,001 deals worth $155 billion last year, with annual volumes rising 30%.

Annual dollar volumes posted a 65% gain. In comparison, Canada's international counterparts saw dollar volumes increase on average just 25%.

Not surprisingly, the energy, materials and financial sectors represented 61% of Canadian activity.

Canada saw a record number of Chinese acquisitions.

The dollar value of Asian buying in Canada crossed the $5-billion threshold in 2010, marking a 392% increase over the 2007 peak.

China's state-owned energy firm Sinopec picked up a 9% interest in oilsands giant ConocoPhillips for $4.65 billion. It was the largest Chinese investment ever made in Canada and the second largest in North America.

"In our view, the transaction was a beacon to the market of just how high the Chinese are willing to go to secure commodity supply ahead of price strengthening and expected demand surges," the report said.

Even with a handful of blockbuster Chinese deals, more Canadians acquired foreign entities in 2010 than vice versa (77% versus 23%), PwC said.

"The hollowing-out debate was one of the most heated business issues of the year. While we recognize that certain assets in Canada are highly strategic, on the whole our experience suggests M&A has contributed to the growth - not the demise - of corporate Canada," said Kristian Knibutat, PricewaterhouseCoopers' national deals leader.

Foreign investment is a two-way street.

The Canada Pension Plan Investment Board and Onex took top honours for the biggest global private equity acquisition of the year with their $4.4-billion purchase of U.K. manufacturing giant Tomkins.

PricewaterhouseCoopers suspects Canadian companies will continue look past North America to emerging markets for better deals.

Last year, Canadians made major "buys" in nearly every continent with deals in the fourth quarter alone stretching to the Middle East, Asia and Africa.

"These transformational deals are beacons for what will become the norm for Canadian deal making going forward," Knibutat said.

Joint ventures and minority purchases will also become more popular, it said. These deals allow companies to test drive sectors while minimizing financial and political risk, PricewaterhouseCoopers said.

"Organic growth prospects within North America remain limited, so for many well capitalized corporates and funds, M&A may be the best and only tool for growth," Knibutat said.

A "perfect storm" of companies flush with cash, improved access to financing and lacklustre organic growth prospects means the M&A outlook is even brighter for Canada in 2011.

Global public companies have an estimated $3 trillion in cash reserves. Private equity firms hold another $500 billion.

Competitive tensions stemming from strong takeover demands are likely to entice sellers back in the market and that should create a more balanced number of buyers and sellers, PricewaterhouseCoopers said.

All this means Canada will likely continue to outpace the globe when it comes to M&A activity, buoyed by a well-capitalized financial system, strong dollar and leadership in hot deal sectors.

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