In October 2007, the Canadian dollar achieved exchange rate parity with its U.S. counterpart, closing the month with an average exchange rate of 1:0.975 versus the U.S. dollar, according to the Royal Bank of Canada.
This convergence was over 30 years in the making. It marked a spectacular run for the Canadian dollar, which has appreciated 62% since its low in January 2002.
Parity in this instance was driven by rising commodity prices (the Canadian dollar is highly correlated with oil and precious minerals prices), a flagging U.S. dollar and a strong demand for Canadian properties in the mergers and acquisitions market. More than $140 billion of consideration was paid to selling Canadian corporations in 2008, a 210% increase from 2007, according to CapitalIQ. The inflow of funds was mainly targeted at asset-rich mining companies in Central and Eastern Canada.
In January 2011, the Canadian dollar closed the month with an average exchange rate of 1:0.994 versus the U.S. dollar, again breaching parity. While commodity prices have rallied substantially over the past 12 months and the U.S. dollar has again depreciated against other major industrialized currencies, a number of subtle differences should be noted.
Most significantly, the 2007 parity was achieved at the end of a long economic boom, while the recent equivalency appears to be at the base of a global economic recovery. Further, recent mergers and acquisitions involving Canadian companies are well off the 2008 mark, with $97 billion in closed transactions over the prior 12-month period ending March 1, 2011. Notably, Canadian companies have been more active in acquiring U.S. and foreign assets with net mergers and acquisitions outflows exceeding inflows by nearly $10 billion over the past 12 months. Many analysts consequently conclude that this time, parity is structural and likely to last.
Given this reality, we believe now is the time for B.C.-based businesses to get more aggressive in considering U.S. acquisitions. Effectively, everything is on sale in the U.S. on a relative basis for Canadian buyers. While true for all Canadian companies, this is an especially attractive environment for those who do limited or no business in the U.S. to expand into the much larger U.S. market and capture growth early in a U.S. economic upswing.
Additionally, the Canadian banking system remains much stronger than its U.S. counterpart.
While many U.S. banks continue to struggle with flagging real estate values, the collateral that underlies much of its loans, Canadian banks are thriving. Royal Bank of Canada and Bank of Montreal posted record revenue, interest and net income for the 12 months ended January 31, 2011.
Given the more limited ability of U.S. companies with less than $10 million of EBITDA (earnings before interest taxes and depreciation and amortization) and the near impossibility of U.S. companies with less than $5 million EBITDA to garner material leverage, this class of assets is an ideal target for well-financed Canadian buyers to be more competitive than U.S.-based acquirers.
Early signs are that active Canadian buyer corporations are following this script in the Pacific Northwest. Notably, Seattle based Emeritus Corp., an operator of assisted living facilities, sold its Milford Assisted Living, LLC to the Ontario Teachers Pension Plan.
Premium Brands Holding Corp., a publicly traded company that engages in the manufacture and distribution of food products in Canada and the United States, acquired SK Food Group, a Seattle-based manufacturer and wholesaler of food products.
Finally, Research in Motion recently acquired Seattle-based online service provider Gist, Inc.
For Canadian companies interested in pursuing U.S. acquisitions, there are a few important steps they should take.
First, ensure that debt financing is in place before approaching U.S. targets.
Second, focus on smaller U.S. companies that can currently be acquired at substantial discounts.
Finally, be proactive and strategic in reaching out to potential U.S. targets. Taking a wait-and-see approach is likely to result in missed opportunities.
While we expect the Canadian dollar to remain at parity with the U.S. dollar for some time, a recovery in the U.S. bank lending market will enable U.S.-based strategic and private equity buyers to bid aggressively for domestic acquisitions.
However, until that time arrives, Canadian companies will have a distinct advantage, and one they would be best served to capitalize on.?
Christian Schiller is a managing director at Cascadia Capital, a Seattle-based boutique investment bank serving companies in diverse industries, including information technology, sustainability and middle market. Bryan Jaffe is a senior vice-president at Cascadia.
