Canada: Farm horizons

The food and agribusiness industry is booming, with farmland investments offering alternatives to work in the stalled commodities sector

Food and agribusiness has long been an important part of Canada’s economy. The industry encompasses several sectors including mining, retail and grain handling. As a res-ult, opportunities abound from an M&A and investment perspective, and they are not limited to the core areas of land and crops.

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“The global demand for agricultural products, fertilisers and biotechnology that fosters advances in agriculture and crop production has created meaningful investment opportunities in Canada,” says Osler M&A co-leader Emmanuel Pressman. “The global and geopolitical context also highlights Canada’s strategic importance in light of its vast farmlands, experience and expertise in agriculture, and its low-risk, stable political and economic climate.”

Retail of the unexpected

In particular, the retail element of the food and agribusiness industry has seen a boom in M&A activity.

In 2012, following deregulation and the dismantling of the Canadian Wheat Board, grain handling business Viterra was taken over by Glencore, the largest commodity trader in the world, in an acquisition worth about C$7bn (£3.9bn). The deal was one of the biggest of the year.

“Glencore’s victory followed an auction among several leading North American companies in the agribusiness sector,” says Pressman. “The acquisition was all the more interesting because of the concurrent and conditional side deals that were cut by Viterra with Agrium for the retail business, and Richardson for the grain handling business.” 

More recently, in November 2013, Canadian food retail giant Sobeys acquired Canada Safeway for C$5.8bn, the biggest deal in Canada’s food and agribusiness sector in the year, according to Thomson
Reuters data. Sobeys acquired 213 stores through the deal, including 67 petrol stations, and 29,000 employees. 

“From an M&A perspective this is a significant strategic synergistic deal,” says Pressman. “In fact, it’s one of several interesting examples in the year of an increased appetite by management and boards – and investor receptivity – in core strategic, synergistic deals.”  

Taking on the US

A key discussion point surrounding these large M&A deals is to what extent they are the cause of consolidation in Canada. Consolidation has been a big issue in the past few years as Canadian businesses attempt to fight off increasing competition from the US.

“While consolidation is one of the drivers of activity in Canada, there are others, many of which are common across the world,” says Torys partner Patrice Walch-Watson. “It’s a strategic area for growth. Increased global population, higher incomes in emerging economies and more focus on food security and safety have led to significant changes in what are increasingly recognised as critical and lucrative global food production and distribution businesses.

“The pace of change in the sector has been increasing because of this, coupled with regulatory change. For example, in 2012 the wheat board monopoly ended, allowing western Canadian farmers to market wheat and barley on their own.” 

Walch-Watson adds that it also helps that Canada’s economy is doing well, compared with much of the world.

Last summer Canada’s largest supermarket chain, Loblaws, bought pharmacy chain Shoppers Drugmart in a C$12.4bn deal. The deal has been talked about as a consolidation in Canada’s retail sector. Undoubtedly, the Sobeys and Loblaws deals were in part strategic moves to merge as a result of competition from US retailers. 

Canadian businesses have been under pressure to merge, to better compete with the US.

“Fierce competition in the retail sector, both domestic and from the US, has been a factor in consolidation activity,” says Pressman.

“Glencore’s acquisition of Viterra is an example of consolidation and that transaction resulted in related sales of some former Viterra grain assets to Richardson, crop input assets to Agrium and dry pasta producer Dakota Growers Pasta to Post Holdings,” adds Walch-Watson. 

Growing investment

Other recent significant areas of development in food and agribusiness include the purchase of assets of Assiniboia Farmland by the Canada Pension Plan Investment Board (CPPIB) in December 2013 in a deal worth some C$128m, expected to complete this month. The deal is symptomatic of increased investment in Canadian farmland, and the value of such land has risen by an average of 12 per cent in the past five years. This has got the attention of investors. Rising value means a good return and low risk – two components of a good investment.

The rise in value is due to low interest rates, good crop yields and high prices. The attraction of farmland means that not only are farmers buying it but investors are too. Hedge funds and pension funds such as CPPIB are entering the market. And foreign investment is also on the radar, as countries where farmland is rare look to benefit.

One of the reasons for the increased demand is the country’s fast-growing population. An increase in population means an increased demand for food. The population is growing faster than anywhere else in the G8 and is set to continue rising over the coming decades. According to Statistics Canada, the population will reach as much as 47.7 million by 2036 and hit 63.8 million by 2061 – almost twice the 33.7 million figure seen in 2009. Immigration is the main reason for the rise.

Last year the population of Canada hit 35 million with a 1.2 per cent annual increase, following a consistent trend over the past five years. The increase in population, although spread across the provinces, has mainly been seen in the western part of the country. 

Farming out the legal work

While an increase in activity in the food and agribusiness sector is in evidence, it is far from a new industry for Canada and its law firms.

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“We’ve been serving the sector for many years,” says Norton Rose Fulbright Canadian agribusiness leader and senior partner Grant Jameson. 

Although not a new sector, it has a strong – and much needed – impact on the country’s legal market, which has not been in the best of shape lately. The stall in the commodities industry has hit hard and areas of work such as traditional M&A have also hardly been thriving. But thanks to the activity in agribusiness, a new wave of opportunities has emerged, with the development of farmland replacing more traditional real estate development and food and agribusiness M&A replacing traditional corporate M&A. 

While consolidation is in part the cause for the rise of M&A activity in agribusiness, there are plenty of other opportunities across the industry keeping firms on their toes. 

“There’s growing recognition by sophisticated investors that the fundamentals are there for successful investment in the longer term in the sector,” concludes Walch-Watson.

Key figures: Canada 

GDP (US$): $1.82trn

Inflation: 0.7%

Population: 35m

Life expectancy at birth: 81

Unemployment: 6.9%

Source: World Bank, Statistics Canada