Canada’s legal market continues to consolidate as the stalling global commodities supercycle slows work
When the world financial system collapsed in 2007, Canada recovered faster than any other G7 country from the ensuing global recession. While part of this was down to the pre-crisis conservative regulation of its banks, Canada’s abundance of natural resources also made it attractive to investors from global and emerging markets. This, in turn, made post-crisis Canada a good market for lawyers – a fact not lost on the international firms vying to get into the country.
However, with the commodity supercycle appearing to be over and with the BRICS countries, as well as many other emerging economies, experiencing a sharp slowdown, a pronounced ‘lumpiness’ has struck the Canadian market over the past six months.
In a hole
Nowhere has the impact of the commodities slowdown been felt more sharply than in the mining sector.
“It is a troubling economy,” says Jay Kellerman, managing partner of Stikeman Elliott’s Toronto office. “Some industries such as mining have been incredibly beaten up and that has implications not only for the industry but also for service providers like lawyers. Firms overweighted in mining, for example, are struggling.”
But it is not just the commodities slowdown that is hurting the sector, observes Kellerman.
“It’s the Canadian capital markets as well,” he says. “There has been a perfect storm – commodities prices are down and capital markets sentiment has turned against junior exploration companies as there have been some spectacular failures of such companies to perform and bring in assets,” he says.
The hiatus in the mining sector is also affecting Canada’s entrepreneurial spirit.
“Part of the impact of the slowdown is that these plans are put on hold,” adds Scott Jolliffe, chair and chief executive officer of Gowlings. “There’s less excitement, let alone enthusiasm, about risky, expensive projects.”
The energy market, another mainstay of the Canadian economy, has also seen significant changes in recent years. Sales of oil and gas, Canada’s biggest exports, are tied to the US and the lobbying by Canadian politicians of the Obama administration in the lead-up to a decision on whether to allow Keystone XL, a US$7bn (£4.5bn) cross-border pipeline project to link Alberta’s oil sands to refineries on the US Gulf Coast, is testament to this dependency.
At the same time as environmental concerns in the US could scupper Keystone XL, plans to build pipelines to the West Coast to carry exports to Asia, or east to supply consumers in Ontario and Quebec, are far from fruition. Meanwhile, energy exporters face falling prices on the back of the boom in US shale gas and oil, and the US move towards energy self-sufficiency.
Such fundamental changes are creating significant regulatory and infrastructure work for lawyers, says Brock Gibson, chair of Blake Cassels & Graydon, who also highlights the substantial increase in liquefied natural gas (LNG) projects in Canada, in particular on the western coast.
“These are mega multibillion-dollar projects involving First Nations, environmental, energy regulatory and energy commercial issues, and substantial investments – not dissimilar in size and scale to some of the oil sands projects,” reports Gibson.
With Canada holding oil reserves second only to Saudi Arabia, the impact of foreign investment has been a hot political issue, particularly in connection with the C$15.1bn (£9.5bn) acquisition last year of Calgary-based oil and gas company Nexen by CNOOC, a Chinese state-owned enterprise (SOE), and the C$5.2bn acquisition of Progress Energy by Petronas, a Malaysian SOE.
In December 2012 the Canadian government approved both transactions but at the same time released revised guidelines for investments by foreign SOEs that are subject to net benefit review in Canada. Among other things, the guidelines are directed at ensuring the acquirer has an appropriate governance and reporting structure, and will operate on a commercial basis.
The new guidelines also make it clear that future acquisitions by SOEs of control of companies operating in the Canadian oil sands will be approved only in exceptional circumstances.
This remains the biggest issue raised by investors, but Kellerman says the message is clear.
“There is continued investment in the oil sands as the area needs capital and returns are still to be made,” he says. “While there are not going to be any 100 per cent deals, the rest of the country and the rest of the oil patch continues to be open for business.”
“This can’t be completely laissez faire,” adds Gibson. “These are our natural resources and governments around the world set principles to get the type of capital they want. Achieving that balance creates lots of legal work.”
While traditional corporate M&A work has been slow, with the occasional exception such as the C$12.4bn acquisition last month of the 1,200-store pharmacy chain Shoppers Drugmart by the country’s largest supermarket chain Loblaw, there has been growth in consolidating M&A in the financial services sector, with Canadian banks on the acquiring side.
Last October Royal Bank of Canada paid C$4.1bn for Ally Financial’s Canadian assets. The following month, Scotiabank completed its C$3.13bn acquisition of ING Direct Canada.
As a new dimension of M&A, “proxy battles remain big,” says John Coleman, managing partner of Norton Rose Fulbright in Canada.
“Private equity fund and hedge fund shareholders are trying to get more value, driving the business in a direction they think will be better for the company – it’s an offshoot of M&A in terms of leadership and the management of companies.”
While proxy battles have been popular in the mining sector and in both junior and major gas and oil companies, the past year has also seen battles over blue-chips such as Canadian Pacific Railway, agribusiness Agrium and telecom company Telus.
The securities and regulatory aspects of this work, Coleman says, chimes with the global focus on regulations and investigations.
“There are huge competition issues, regulatory and securities issues, corruption and anti-bribery issues – all of which are important for companies around the world trying to manage those risks.”
Managing around C$640bn between them, Canada’s four largest public pension fund groups have continued to invest in long-term revenue streams.
“In the past five years in particular,” says Gibson, “there has been increased weighting towards direct investments, so instead of using a stockbroker to go and buy shares in companies they are using investment bankers or lawyers to go and buy hard assets such as office towers and airports – that creates more legal work.”
Another hot sector is real estate investment trusts (Reits) which have dominated the IPO market over the past year as unit holders use the steady income they generate as shelter against overall market volatility amid the uneven global economic recovery.
According to a recent study by PricewaterhouseCoopers, of the 13 new issues in the second quarter of this year, four were Reits, while early activity in Q3 also suggests that demand for these issues remains strong. Choice Properties Real Estate Investment Trust, the Reit arm of Loblaw, closed its C$400m IPO last month – the largest IPO so far this year.
An increase in workflow from IP is seen by Jolliffe as signalling a rebound in the economy.
“With the ups and down in the manufacturing and commodities sectors, IP assets are more important than ever – there continues to be good investment in biotech, hi-tech and telecommunications, and even in the resource sector in processes to improve extraction efficiencies and environmental controls,” he reports.
In a market that has shown post-crisis strength, international firms are keen to gain entry. The two highest-profile moves saw SNR Denton join forces with Fraser Milner Casgrain and European firm Salans, while Norton Rose previously merged with Canada’s Ogilvy Renault and Macleod Dixon.
“Good on them,” says Kellerman. “They took the view that to differentiate themselves from other Canadian law firms they needed to try a different strategy. Norton Rose are certainly punching above the weight that they were under their previous name. They’ve got traction, have developed good brand awareness and are getting files they wouldn’t otherwise have got.”
Since the Dentons merger, according to global chief executive Elliott Portnoy, there have been “well over” 100 matters referred from Canada and “many dozens” of matters referred into the country.
“This is an early trend but it gives a sense of the appetite of partners and clients,” asserts Portnoy. “[The merger] has already been a success and our competitors know it. They are scrambling to find such an opportunity.”
“It isn’t a one-size-fits-all proposition,” adds Chris Pinnington, Dentons’ Canada CEO. “While there’s flat to decreasing demand for legal services in the domestic Canadian legal market, there is increasing demand for legal services both by Canadian companies spreading their reach globally as well as international interest in the Canadian market. The dynamics in the Canadian economy and legal marketplace suggest there will be more of this kind of combination.”
But there has been a collective pause, with the “intrigue and excitement” of six to 12 months ago about Canadian firms becoming global firms having “died down”, remarks Jolliffe.
“I don’t think this has reduced interest in the move towards global law firms but there is now a wait-and-see approach that has delayed the impact of that trend in Canada,” he says. “The past six months have been a period of reflection and more detailed contemplation of the pros and cons on the part of our firm and others in Canada – but we’re just taking a breath.”
Key figures: Canada
GDP (2012): $1.82trn
Annual inflation (June 2013): 1.2%
Life expectancy at birth: 81
Unemployment (June 2013): 7.1%
Source: World Bank, Statistics Canada