Canadian dealmakers have become a major presence beyond their borders, conducting a total of 361 outbound deals worth a total of US$117.3 billion during the first three quarters of 2021. This deal value has already more than doubled 2020’s annual value (US$50.8 billion), which fell to the lowest figure since 2012 amid the global COVID pandemic.
Deal volume in Q1-Q3 alone overtook 2020’s entire annual total of 327. The second quarter was particularly impressive, with Canadian dealmakers taking part in a record 139 deals beyond their borders.
Canadian dealmakers are also investing in more sizable deals abroad, having taken part in four megadeals (valued over US$5 billion) so far this year. This compares to just one such deal announced in the whole of 2020. As a result of this renewed confidence in big-ticket deals, outbound deal value could be on track to beat 2016’s record annual total.
Railroad merger tops the deal chart
The transportation sector attracted the highest deal value from Canadian bidders purchasing abroad, with the largest deal of the year—Canadian Pacific Railway’s US$31.1 billion acquisition of US-based Kansas City Southern—taking place within the sector. The merger of the two railroad firms, announced in March, will create the first rail network connecting the US, Mexico, and Canada.
The transaction follows a lengthy bidding war in which Canadian Pacific Railway fought off a rival US$34 billion bid from Canadian National Railway. The deal follows the ratification of the US-Mexico-Canada Agreement (USMCA) last year, which replaced the North American Free Trade Agreement (NAFTA) and has eased trading relations between the three countries. USMCA is expected to boost freight traffic across borders.
Canadian firms seek clean energy abroad
The energy, mining and utilities sector attracted the second-highest year-to-date deal value from Canadian bidders. A total of US$24.3 billion was invested across 49 deals during Q1-Q3 2021.
The global shift to clean energy sources has catalyzed dealmaking in the sector, with the Canadian government’s target of increasing the share of zero-emitting sources to 90 percent by 2030 prompting firms to seek capabilities abroad.
The announcement of Algonquin Power & Utilities Corp’s acquisition of US electric utilities firm Kentucky Power and electricity transmission business Kentucky TransCo, valued at US$2.8 billion, reflects this trend. Through the transaction, Algonquin will leverage Kentucky’s “greening the fleet” capabilities, with the opportunity to replace over 1 GW of rate-based fossil fuel generation with renewable energy.
Another deal highlighting the shift within the global energy sector is Northland Power’s agreement with Helia Renovable’s to acquire a 540 MW wind and solar portfolio in Spain for the sum of US$1.3 billion. The deal, which completed in August, positions the Canadian power producer as a top ten renewable power operator in Spain’s attractive renewables market
PE and pension funds join forces
The volume of private equity deals involving a Canadian bidder overseas reached a record deal volume in Q1-Q3, with 103 deals changing hands. This has already matched 2018’s previous record annual total with three months of dealmaking yet to be recorded. A total deal value of US$36 billion, meanwhile, has already overtaken 2020’s annual figure.
PE houses teaming up with pension funds has become a regular feature of Canadian dealmaking overseas as firms look to bulk up their financing capabilities in order to secure deals. In August, Canada Pension Plan Investment Board (CPP Investments) and BC Partners announced they had jointly agreed to acquire Germany-based technical ceramic materials maker CeramTec for US$4.5 billion from BC European Capital X and co-investors.
Another significant deal which saw a PE house and pension fund join forces was UK energy company SSE’s sale of its 33.3% stake in Scotia Gas Networks Ltd to a consortium consisting of Ontario Teachers' Pension Plan Board and Brookfield Super-Core Infrastructure Partners, valued at US$1.7 billion.
From survival to growth
The resurgence of outbound activity reflects an underlying confidence in Canada’s deal market, as businesses look to capitalize on improving market conditions post-pandemic.
After a challenging 18 months, both strategic and private buyers are now turning their focus from survival to growth by seeking new growth opportunities abroad. As the global economy continues to emerge slowly from the global pandemic, and the global vaccine rollout takes effect, Canadian firms will continue to use acquisitions as a tool to build scale in high-growth markets overseas.
The market is also being helped along by easy access to capital. The rebounding Canada economy and abundant liquidity south of the border are encouraging Canadian borrowers to draw on US high yield bond markets in increasing numbers.
While the US continues to be the target of choice for Canadian firms, European activity can be expected to pick up—particularly in the highly sought-after clean energy market—as the hunt for high-growth assets pushes buyers further afield. Co-investments will become an increasingly popular deal feature, as firms look to ramp up their spending power and compete for deals beyond their borders.