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GLOBAL CHINESE FINANCIAL FORUMSHANGHAI CONFERENCE 2009
Canadian Natural Resources M&A Environment
Trends and Outlook
Brian Imrie
Partner, KPMG Corporate Finance, Canada
2© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
M&A Activity Overview Global M&A has fallen dramatically from the 2007
peak and activity has continued to decline in 2009
M&A activity has rebounded modestly in Canada in 2009
Canadian portion of global total is significant and has risen in recent years
Source: Bloomberg
Global M&A Activity - Annual - $B
$2,013
$2,608
$3,549
$4,050
$2,523
$1,399
2004 2005 2006 2007 2008 YTD 2009
Canadian M&A Activity - Annual - $B
$121
$179
$311
$359
$112$132
2004 2005 2006 2007 2008 YTD 2009
Canadian M&A Activity - % of Global
8.9%
4.4%
9.4%8.8%
6.0%
6.9%
2004 2005 2006 2007 2008 YTD 2009
3© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Importance of Natural Resources in Canada Natural Resources are the leading components of Canadian equity markets and
M&A
Source: Standard and Poor’s (as at November 23, 2009)
Canadian M&A Market 2004-2009
Energy15%
Mining10%
Other75%
Canadian Equity Market (as at Sep 30, 2009)
Utilities, 1.5%Info Tech, 3.2%
Industrials, 5.5%
Telecom Services, 4.3%
Health Care, 0.5%
Financials, 30.6%
Consumer Staples, 2.7%
Consumer Discretionary, 4.2%
Energy, 27.2%
Mining/Materials, 20.4%
4© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Natural Resources M&A 2004 - 2009 Mining M&A activity has declined since 2007 with fewer mega deals
Energy M&A activity has declined less
Source: MergerMarket
Mining M&A
0
10
20
30
40
50
60
70
80
2004 2005 2006 2007 2008 2009
$ B
0
10
20
30
40
50
60
70
80
Units
Value of Deals ($) Number of Deals (Announced)
Energy M&A
0
10
20
30
40
50
60
70
80
2004 2005 2006 2007 2008 2009
$ B
0
10
20
30
40
50
60
70
80
Units
Value of Deals ($) Number of Deals (Announced)
5© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Premiums Paid Analysis The average premium paid in public natural resources takeovers in this period has
been 24.7%
The premium paid in the energy industry has been lower because of the greater number of “mergers of equals” with little or no premium, i.e. “at the market” transactions
Source: MergerMarket
Premiums Paid - Mining
30.6%
0%
10%
20%
30%
40%
50%
60%
2004 2005 2006 2007 2008 2009
Average Premium Paid Average premium paid for all deals
Premiums Paid - Energy
20.5%
0%
10%
20%
30%
40%
50%
60%
2004 2005 2006 2007 2008 2009
Average Premium Paid Average premium paid for all deals
6© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Cross-Border Transactions Cross-border transactions continue to represent a majority of Canadian
M&A by Value
Significantly higher than US Market
Source: MergerMarket
Cross-Border as a % of M&A Transactions
58%
72%80%
61%
53%66%
71%
67%
76%
52%
37%
29%
24%
24%
23%
28%
43% 32%29%
29%
0%10%20%30%40%50%60%70%80%90%
2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD2009
Canada US
7© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Importance of Foreign Acquirors of Natural Resources Companies
Source: MergerMarket
Non-Canadian acquirors play an important role in takeovers of Canadian natural resources companies
Proportion is higher for mining companies, given the more global nature of the assets and the high degree of consolidation activity in Western Canadian conventional oil and gas
Mining & Energy - Foreign Buyers
0%
10%
20%
30%
40%
50%
60%
2004 2005 2006 2007 2008 2009
% N
umbe
r of
Dea
ls
Mining Energy
8© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Consideration Used in Acquisitions Cash is used to acquire natural resource companies in the majority of
transactions
However, acquirors regularly offer equity to target shareholders, or a combination of cash and equity
Source: MergerMarket
Consideration Used - Mining
43% 42%52% 53%
43%57%
43% 42%39% 35%
23%
35%
14% 17%9% 12%
33%
9%
2004 2005 2006 2007 2008 2009
% N
umbe
r of
Dea
ls
Cash Deals Equity Deals Combination Deals
Consideration Used - Energy
65% 58%40%
61% 62%50%
15% 25%
33%
24% 26%
30%
20% 17%27%
15% 12%20%
2004 2005 2006 2007 2008 2009
% N
umbe
r of
Dea
ls
Cash Deals Equity Deals Combination Deals
9© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Notable Deals - Mining Decline in Canadian mining M&A values in 2009 has been driven by a reduced number of mega deals
Decline of commodity prices
Lower equity market values for acquirors
Reduced access to capital
Source: MergerMarket
2006 Barrick Gold/Placer Dome
Xstrata/Falconbridge
Vale/Inco
$10 B
$24 B
$18 B
2007 Rio Tinto/Alcan $44 B
2008 Teck Resources/Fording Canadian Coal Trust $14 B
2009 CIC/Teck (17% stake) $1.7B
10© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Chinese Mining Acquisitions In the last several years, Chinese acquirors have been very active in Canada
Targets have been multiple minerals: nickel, coal, gold, zinc, copper
Exploration, development and production
100% ownership/minority control/portfolio investment
2009 Jilin Jien Nickel Industry/Canadian Royalties
CIC/Teck Resources (17% stake)
$137 MM
$1.7 B
2008 Jinduicheng Molybdenum/Yukon Zinc
China National Gold Corp/Jinshan Gold Mines (42% stake)
Jinchuan Group/Tyler Resources
China Minmetals & Jiangxi Copper/Northern Peru Copper
$120 MM
$200 mm
$175 MM
$410 mm
Source: MergerMarket
11© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Notable Deals – Energy 2009 Energy has been the most active sector in Canadian M&A in 2009
Top 2 transactions and 5 of the top 10
Foreign companies have been active buyers
Ongoing domestic consolidation also
Top Energy Deals
Suncor Energy/Petro-Canada - $20 B
Sinopec/Addax Petroleum - $10 B
Korean National Oil/Harvest Energy Trust - $5 B
Petrobakken Energy/Tristar Oil & Gas - $3 B
Abu Dhabi Investment Authority/Nova Chemicals - $2 B
Source: MergerMarket
12© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Chinese Energy Acquisitions Chinese acquirors have also been active in the mining sector
Greater focus historically on companies with large international reserves
2009 PetroChina/AOSC Oil Sands Project (60%)
Sinopec/Addax Petroleum
CNPC/Verenex Energy
$1.9 B
$10 B
$325 MM(pending)
2008 China Petroleum & Chemical/Tanganyika Oil
$1.8 B
2005 CNPC International/PetroKazakhstan
$3.9 B
Source: MergerMarket
13© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Unsolicited or “Hostile” Bids in Canada Most public company takeovers in Canada are friendly, negotiated transactions
Exclusive negotiations with single buyer or a controlled auction of company
However, Canadian takeover regulations and practices make Canada one of the easiest jurisdictions globally to successfully launch an unsolicited or hostile takeover bid
Regulators in Canada want shareholders to decide on merits of a takeover bid
Majority of Canadian hostile transactions result in a change of control
Different from US “Just Say No” defence
Average ultimate takeover premium for hostile bids is 54%, well above average premium for negotiated deals
First Chinese hostile bid for Canadian company was successful in 2009
Jilin Jien Nickel Industry’s acquisition of Canadian Royalties
14© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Canadian Hostile Transactions since 2005
Number of Deals:
Acquired by Initial Offeror 28
Remained Independent 6
Acquired by Interloper 10
Pending 7
Total 51
Pending7%
Acquired by Interloper
10%
Remained Independent
6%
Acquired by Initial Offeror28%
15© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Foreign Acquisitions in Canada – Investment Canada Act Investment Canada Act applies to every acquisition of control of a Canadian business by a non-
Canadian
Only 1 transaction has been blocked in 25 years, excluding cultural industries
Proposed $1.3 B acquisition of MDA’s space division by US-based Alliant Techsystems
Changes to the ICA in 2009 significantly increased the threshold size under which reviews are not required
Deals will not be reviewed under $600 MM enterprise value Increasing to $800 MM in 2011 and $1 B in 2013
No longer any special review for uranium
However, new power to review transactions based on national security interests creates some uncertainty
Not expected to be used often
16© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
Source: Bloomberg
S&P/TSX Energy Index v Crude Oil
50
70
90
110
130
150
170
190
210
J ul-0
7
Sep-0
7
Nov-07
J an-08
Mar-
08
May
-08
J ul-0
8
Sep-0
8
Nov-08
J an-09
Mar-
09
May
-09
J ul-0
9
Sep-0
9
S&P/TSX Energy Index Crude Oil
S&P/TSX Global Mining Index v IMF World Non Fuel All Commodity
0
20
40
60
80
100
120
140
J ul-0
7
Sep-0
7
Nov-07
J an-08
Mar-
08
May
-08
J ul-0
8
Sep-0
8
Nov-08
J an-09
Mar-
09
May
-09
J ul-0
9
Sep-0
9
S&P TSX global mining index IMF World Non Fuel Commodities Index
S&P/TSX Global Gold Index v Gold
60
80
100
120
140
160
180
200
J ul-0
7
Sep-07
Nov-07
J an-08
Mar-08
May
-08
J ul-0
8
Sep-08
Nov-08
J an-09
Mar-09
May
-09
J ul-0
9
Sep-09
S&P/TSX Global Gold Index Gold
17© 2009 KPMG, a Canadian limited liability partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative.All rights reserved. The KPMG logo and name are trademarks of KPMG International.
Canadian Natural Resources M&A Environment
M&A Outlook – 2010 and Beyond Most markets have improved significantly in 2009
Prospect for global economy has improved
Commodity prices have strengthened
Equity markets have improved and reduction of volatility
Improved CEO and Board confidence
Improved Liquidity
Access to equity capital, particularly for senior and intermediate producers
Improved investment grade credit
Canadian Natural Resources M&A
Mining M&A activity will increase substantially in 2010; energy M&A will remain high
Increased competition for mega deals as seniors return to the game
Junior and intermediates, especially miners with development projects, will actively seek strategic partners and creative solutions
M&A
Minority investments
JV’s/project level investments
Offtakes