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With hardly a day going by last year without the words Falconbridge and Xstrata plc gracing the front pages of business sections across the country, 2006 was without a doubt a banner year for mergers and acquisitions activity in Canada.

Although the purchase of Falconbridge by Switzerland-based Xstrata plc was the biggest Canadian deal last year (at a whopping US$18.2 billion), a host of other deals helped nearly double the value of M&A deals in Canada from US$89 billion to US$173.6 billion. And according to a study recently released by KPMG Corporate Finance, the number of deals increased by a respectable 26 per cent: at year-end, a total of 1,720 Canadian M&A deals closed. And the flood in M&A activity isn’t likely to abate in 2007.

Capital continues to abound and the country’s hot mining and resource sector in conjunction with the activity of private equity firms, which are increasing competition for deals and driving up transaction prices, are expected to drive M&A activity to new heights this year.

A recent survey conducted by Blake, Cassels & Graydon LLP by mergermarket found that M&A activity in 2007 is expected to exceed the record-breaking levels set in both 2005 and 2006. This indicates that M&A interest in Canada is more and more a global phenomenon.

On that note, here’s what some of Canada’s top lawyers are predicting in M&A activity for 2007:

Lawyer: William Jenkins
Firm: Fraser Milner Casgrain LLP
Practice area(s): Securities
Location: Calgary

“M&A activity is likely to continue to be strong in 2007. The change to the taxation of income trusts, combined with commodity price reductions, will result in many of the existing income trusts, particularly in the energy sector, considering their strategic alternatives.  We expect the heavy participation of private equity funds and pension fund investors in the M&A market not only to continue but to accelerate now that income trusts are not able to compete as aggressively on pricing and that the income trust IPO alternative is no longer attractive. 

“We also expect non-resident investment, particularly from the United States, to play a larger role than in recent years given the dislocation in the Canadian capital markets, and in particular we expect to see U.S. master limited partnerships invest in Canadian assets.”

Lawyer: Bernard Pinsky
Firm: Clark Wilson LLP
Practice area(s): Corporate Finance/Securities
Location: Vancouver

“I see the activity in commodities making for a very strong market for junior activity. Many mid-sized companies have several projects, some of which are not core projects. There seems to be a lot of investor appetite for exploration and development projects in the resource sector.

“Add these factors all together and this year I think we will see spin-outs of non-core resource projects by some companies to newly formed or reorganized issuers for the purpose of exploration and development of that resource property. The sellers will take shares in the new venture and net profit royalties on production.

“This takes the risk away from the mid-size resource issuers and leaves them with a big upside potential on the shares if the new company is able to successfully develop the resource. We are seeing a lot of this kind of activity at the moment and I predict there will be a lot more this year.”

Lawyer: Donald R. Collie
Firm: Davis & Company LLP
Practice area(s): Securities/Corporate Finance
Location: Vancouver

“On the mining sector front my guess would be that 2007 will likely be “more of the same”.   2006 was an extremely busy and active year.  Given that we will likely continue to have historically high commodity prices in general, we should see continued buoyant financing and M&A activity.  In particular we act for companies involved in exploration for uranium, gold, copper, zinc and other base & precious metals.  Uranium prices are especially high in historical terms right now.  Because it’s relatively easy in historical terms for these companies to go to market and obtain financing, in turn that will enable them to not only carry on and execute on their exploration and development programs, but also to do more ambitious M&A-type activities such as mineral property acquisitions, takeovers, mergers, spinoffs and the like.” 

“Moving gradually up the corporate food chain, one phenomenon we should expect to see is the logical/expected result of all of this enhanced mineral exploration activity; that is, we should expect that an increasing number of these junior exploration companies will in fact produce exploration results that are “promising/interesting”, or, even some that constitute significant economically viable discoveries.

“This in turn would be expected to lead to the senior companies, e.g., the Xstratas, Newmonts, Goldcorps of the world, to acquire these junior companies (or at least to attempt to), much the way that Barrick acquired Arequipa several years ago during the last big commodity price cycle, etc.

“That’s because these senior companies, also as a result of the commodity price uptick, are trading at higher valuations and are themselves more profitable, giving them an enhanced ability to carry out acquisitions of this sort. 

“And a general rule of thumb in mining is that it’s usually easier to buy someone else’s discovery than to make your own.”

Lawyer: Guy David
Firm: Gowling Lafleur Henderson LLP
Practice area(s): Corporate Finance/Securities & Public M&A
Location: Ottawa

“No one pressed reset on the M&A boom on Jan. 1 so you can expect things to continue pretty much like they were in 2006. Three or four factors, some positive and some negative, are fueling current activity and aren’t likely to change soon. The market’s awash in a sea of cash in the form of large and growing private equity groupings that are looking for earnings and short-term growth. This is the single most important factor fueling the current boom. Low interest rates have a lot to do with this.

“Adding to that, I think we’re going to see pension funds becoming a lot more aggressive in pursuing significant equity investments on their own. We saw that happen in the corporate bond market last year and I think we’re going to see it in the equity markets this year.

“There are a couple of negatives that are also driving activity. Sarbanes-Oxley is still scaring away potential IPO candidates. They come into our office for a briefing on going public, we explain SOX to them, and then don’t hear back until they call saying they’ve got a purchase offer from a Goldman Sachs or a multinational in California.

“In the mid-market, the Conservatives’ decision to close the income trust window is likely to result in private M&A and management buyouts once again becoming the main exit strategy for founders and older generation owners of businesses.

“In terms of where the activity will occur, I think it will be pretty well across the board. However, if I were to pick one or two sectors that I think will be hot in 2007, bio-tech would definitely be one. This sector has taken a long time in maturing but there are a lot of companies out there now that are ready for the next level and I don’t think most of them will opt for an IPO.

“The other area I would be looking at is financial services. There hasn’t been much activity in Canada for a number of years, contrary to everywhere else. I think new legislation currently before Parliament that shifts a lot of the decision-making power on M&A transactions away from the minister of finance and on to regulators is likely to de-politicize the process and result in a lot more M&A activity in the financial sector. Obviously, I’m not talking about bank mergers here, but almost anything else will become easier.”