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Canadian Utilities Buy American

By Chad Fraser on October 19, 2016

When the Canadian dollar bottomed out against the greenback last January, it seemed like a given that Canadian companies would pull in their horns on the M&A front.

After all, with $1 Canadian fetching just US$0.69 at the time, a cross-border shopping spree would have seemed to have little appeal.

Meantime, U.S. companies were getting $1.45 in loonies for every U.S. dollar, causing some Canadians to worry that U.S. buyers would snatch away big chunks of Corporate Canada at fire-sale prices.

Fast-forward to today, and the loonie has inched up to around US$0.76, which is still below the historical average. And indeed there is an M&A boom going on in Canada: According to Bloomberg, north-of-the-border deal-making hit a record $113 billion in the third quarter.

But here’s the twist: It’s outbound—not inbound—M&A that’s fueling the party. Of the $113 billion in total deals, $77 billion worth (or about 68%) was Canadian companies buying up their international counterparts, not vice versa.

Electric utilities and pipeline operators, including members of our Canadian Edge Dividend Champions Portfolio, have led the way in 2016, and the conditions look ripe for that trend to continue—low loonie or no.

4 Big Utility Buyouts

Almost on cue, Newfoundland-based electric utility Fortis Inc. (TSX: FTS, NYSE: FTS) kicked off the buying spree on Feb. 9, just three weeks after the loonie tanked, announcing a US$11.3 billion cash-and-stock bid for Michigan-based ITC Holdings Corp., owner of 15,700 miles of power lines. That deal closed last week.

Also on Feb. 9, Algonquin Power & Utilities Corp. (TSX: AQN, OTC: AQUNF) announced plans to buy Missouri-based Empire District Electric Co. (NYSE: EDE) in a $2.4 billion all-cash deal that’s expected to close in the first quarter of 2017.

Next up was TransCanada Corp. (TSX: TRP, NYSE: TRP), which announced its $13 billion all-cash deal for Houston-based Columbia Pipeline Group. That deal closed July 1—Canada Day, to add a bit of irony.

They weren’t done.

On Sept. 6, Enbridge Inc. (TSX: ENB, NYSE: ENB) announced an all-stock bid for pipeline giant Spectra Energy Corp. (NYSE: SE) valued at around US$28 billion. The companies aim to close the deal in the first quarter of 2017.

Regulatory Wrangles Drive Pipeline Buys

The trend doesn’t look like it will end anytime soon, for three reasons.

One is the stiff-arm the pipeline operators are getting from regulators on both sides of the border when it comes to building new projects.

Consider TransCanada, which took a C$2.9 billion writedown on its Keystone XL pipeline after the Obama administration turned it down.

On top of that, the company’s Energy East pipeline is tied up in a National Energy Board approval process that’s in suspended animation: Protestors shut down the proceedings in Montreal last month, then the original panel members stepped down. That’s put everything on hold until the federal government appoints replacements.

In light of all that, it’s not hard to see why Canadian pipeline companies would rather buy than build their way to growth these days.

On the electrical side, meanwhile, transmission-grid operators along the lines of ITC are mostly government owned in Canada, and the country’s small population and vast landmass make the acquisition pool a lot shallower than it is in the U.S.

Soaring TSX Provides an Assist

You may have noticed that two of the four deals above were all or partly in stock, illustrating another aspect of the buying binge: the stellar performance of the Toronto Stock Exchange vs. its American cousins this year.

In absolute terms, the S&P/TSX Composite Index has gained 14.1% year to date as of this writing, compared to just a 4.9% rise for the S&P 500 and a 4.5% rise for the Dow.

Canadian utilities have been among the biggest gainers, and several now trade at premiums to their U.S. counterparts, making it more appealing for them to pay for their south-of-the-border buys in shares, rather than cash.

And here’s something else to keep in mind: Even though the lower Canadian dollar makes these deals pricier for Canadian firms, they should get an earnings boost in the longer term when they convert the cash flows from their new U.S. subsidiaries into loonies.

Ultimately, of course, it will be the strength of those cash flows that governs the success or failure of these deals. We’ll keep a close eye on that and the rest of the cross-border shopping spree in Investing Daily’s Canadian Edge.

To see our latest recommendations on Canada’s best dividend stocks, please check out our Dividend Champions Portfolio.


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