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Interest Rate Jitters, Summer Break Slowing Down Deal Activity in Canada | International

Lawyers in Canada say jitters over increased interest rates as well as more mundane factors, such as people taking actual summer holidays, are the reasons why M&A and insolvency activity is sluggish in Canada at the moment—but are likely to pick up in September.

The white-hot pace of M&A activity in 2021 bled over into the first quarter of this year, but activity has dropped off in the second quarter, to what practitioners are saying is a more normal, rather than low, level.

According to Bloomberg data, overall M&A deal volume in Canada was down in the second quarter of 2022 to US$93.8 billion, from $96.2 billion in Q1. 

Activity started to taper off near the end of May, said Shahir Guindi, Montreal-based national co-chair of Osler Hoskin & Harcourt. But, he said, that gave lawyers time to take a breath and wrap up a lot of earlier transactions.

“It feels just by the amount of discussions that clients are pinging us on, that things are about to pick up again, at least on the M&A and private equity side,” Guindi said.

The fear of recession and increased interest rates are affecting valuations on deals—more so than a decline in the actual number of deals, said Joel Jones, a partner in Borden Ladner Gervais’ Calgary office.

“There’s still obviously a great deal of money sitting on the sidelines, just waiting to be deployed,” he said. “I’m hopeful that this is going to offset these macro issues and help maintain our active M&A market … and allow us to finish 2022 relatively strong.”

Eric Moncik, a partner at Blake Cassels & Graydon, said interest rate hikes and all the recession talk mean parties are now being very tactical. He’s seen it in both mining and oil and gas but noted it’s consistent across many industries. What’s most notable, he and others say, is that the deals aren’t “headline grabbing” but are more in the midmarket range.

Guindi said valuations have become much more realistic again and companies that “are not compelled” to exit will hold, while those that do have to divest “have managed their valuation expectations.”

And many of the deals that are happening are outbound, with Canadian companies eyeing targets in the U.S. and beyond.

“Some of that just has to do with a limited market for acquisitions in Canada, so if Canadian companies are going to continue to grow, they have to look internationally,” said Jones.

Fasken Martineau DuMoulin partner Kibben Jackson, who is based in Vancouver, said that while M&A activity has quieted down compared to the highs of 2021, insolvency lawyers, who he said spent much of that time “twiddling our thumbs,” has seen filings picking up over the last few months.

During the pandemic, there was a lot of “forbearance, with extensions and lenders being patient.” But that patience is running out, said Sandra Abitan, managing partner of Osler’s Montreal office.

“There’s no real exit here for certain business other than a formal restructuring and sale process,” she said.

While there has not been an “onslaught of filings,” companies are working through a lot of their cash reserves from government COVID subsidies and other areas, she said, adding that those reserves won’t last forever.

And much like in the M&A arena, most of the insolvency and restructuring work right now is with medium-sized businesses, said Jackson.

Notably, the cannabis industry is providing a fair chunk of both M&A and insolvency work across Canada. Every lawyer contacted by International for this story mentioned it. The glacial pace of the legalization of recreational marijuana at the federal level in the U.S. has had a huge impact on Canadian growers and other suppliers whose growth was predicated on it.

“I’ve heard that we basically can produce the entire world’s demand of cannabis in Canada … there’s an oversupply and so it’s reasonably driving a lot of consolidation in that space,” said Jones.

With M&A work tapering off somewhat and insolvency and restructuring still ramping up, lawyers are taking advantage of the summer this year—taking those vacations they missed either because of the volume of work volumes or travel restrictions.

“People need to recharge and reset and figure out what the fall is going to bring,” said Osler’s Abitan.

Her colleague Guindi agrees that the “extra breathing” room this summer has been a welcome respite, both so lawyers can reconnect with friends and family but also so that firms, which have been in a pitched battle for associates to do all their work, can take the time for more thoughtful and strategic hires.

“We see this as a time to ‘invest’ in the business,” he said.

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