“It’s better than sex.” That line was attributed to Ted Turner, reacting to the euphoria surrounding the 1990s merger between so-called old media Time Warner and new media AOL.

Of course, the iconic billionaire had far different things to say about the deal a year or so later, when it became clear almost nothing between the companies meshed. And AOL/Time Warner is by no means the worst pairing in history. In fact, the now-legendary dysfunction of that deal doesn’t come close to, for example, the disastrous banking mergers of the past decade.

In stark contrast are the thousands of mergers in the US electric utility industry over the century-plus since Thomas Edison flipped the first switch. In every case and regardless of the challenges, merging companies managed to eventually create a stronger entity. In fact not one union of regulated power utilities has even come apart.

For most industries the success rate lies somewhere in between those extremes. Winning deals have been grounded in economics of scale, allowing the partners to pool expertise, financial strength and asset bases. Losing deals have been all about ego and/or the desire to make a fast buck, and the partners soon come to regret their haste.

Of course shareholders of acquired companies almost always come out ahead, no matter which way things go. That’s because acquirers typically must pay at least some premium to the current market value in order to win their approval for a deal. And prices can get quite steep if the buyer wants them bad enough.

Here in late 2011 few places in the world offer as many attractive targets as Canada. To date the natural resources sector has gotten most of the attention, and with good reason. The combination of new technology coupled with rich reserves and favorable regulation has opened up the country’s oil and gas bounty to development as never before.

Just as in the US, companies are tapping previously inaccessible shale reserves of light oil, natural gas and natural gas liquids. Meanwhile, tar sands development is ramping up, spurred by world oil prices that seem increasingly unlikely to fall below USD100 a barrel again.

Canada is also rich in everything from copper to metallurgical coal and iron ore, the two essential elements for making steel. It’s one of the very few sources of rare-earth metals outside of China, which currently accounts for substantially all global output. It contains substantial quantities of uranium, key to fueling the next generation of nuclear power plants being built around the world. And it’s a primary source of forest products and potash as well.

Canada’s resource bounty has particularly attracted the interest of the Chinese, who are as bereft of these riches and Canada is flush. China’s relentless demand for resources in the wake of the 2008-09 credit crunch/market crash was absolutely critical to Canada’s ability to avoid a serious recession in 2009, despite the worst contraction in the US economy since the Great Depression.

To date Chinese investment in Canada has been mainly passive, that is taking ownership stakes in companies and ventures without taking control. Sovereign wealth fund China Investment Corp’s (CIC) financial support of Penn West Petroleum Ltd’s (TSX: PWT, NYSE: PWE) oil sands projects is one good example, as is its minority ownership position in Teck Resources Ltd (TSX: TCK/B, NYSE: TCK).

Last month, however, the Middle Kingdom became a bit aggressive. China Petroleum & Chemical Corp Ltd, known more colloquially as Sinopec (NYSE: SNP), launched a CD2.2 billion bid to buy intermediate oil and gas producer Daylight Energy Ltd (TSX: DAY, OTC: DAYYF).

As I noted in an Oct. 10 Flash Alert, buying Daylight wasn’t important so much for the target’s 35,000 or so barrels of oil equivalent daily production. Rather, its value lies in the 300,000 acres of land Daylight owns in areas with rich proven oil and gas reserves. Daylight’s inventory at last count is 174 million barrels of oil equivalent. That’s valued conservatively between CAD15 and CAD16 per share and rising, as the company added 46 percent to its reserves in 2010 and despite some hiccups this year is on a torrid pace for additions this year as well.

Sinopec timed its offer well. The offer price of CAD10.08 per Daylight share is approximately 70 percent above the stock’s average price for the 20 days prior to the announcement. It was also more than twice Daylight’s price the day of the deal, as the company’s shares had dropped by more than 50 percent in 2011 due to tumbling natural gas prices and pending debt maturities.

In fact, without a deal, it’s likely Daylight would have had to consider a dividend cut to satisfy increasingly restive lenders, setting off a further price plunge. As a result, it was a very motivated seller, with shareholders getting a modest windfall even as Sinopec acquires its rich reserves for only about 60 cents on the dollar.

Political sensitivities are likely to limit further Chinese direct acquisitions. For example, given regulators’ rejection of BHP Billiton Ltd’s (NYSE: BHP) bid for Potash Corp of Saskatchewan (TSX: POT, NYSE: POT) last year, we’re unlikely to see Sinopec bid outright for a major Canadian oil company.

But would-be sellers’ need for cash and coupled with voracious global appetites for energy and a still-long list of players is likely to continue spurring deals for Canadian oil and gas producers in coming months.

Moreover, natural resources aren’t the only sector attracting takeover interest. On Oct. 25 the Canadian unit of Cardinal Health Inc (NYSE: CAH) announced a CAD165 million, CAD8.15 per share all-cash bid for Futuremed Healthcare Products Corp (TSX: FMD, OTC: FMDHF). The latter has been struggling due to increasingly competitive conditions in the consumable nursing supplies market, with a dividend cut looking increasingly possible. Nonetheless, there was enough value here for major player Cardinal to offer a premium of 31 percent to the pre-announcement closing price.

The current level of activity is, of course, a far cry from the takeover wave of 2006-07. That burst was funded by an unprecedented surplus of private capital hungry to be deployed. And it was fueled by scores of motivated sellers, mainly income trusts that were pondering their future strategy in view of the taxes slated to kick in Jan. 1, 2011, and constraints on their ability to raise new equity capital.

More than three-dozen takeovers of income trusts were announced in the first half of 2007, with targets ranging from oil and gas producers to cold storage operators. Premiums paid to pre-deal prices averaged 20 to 30 percent and ranged as high as 50 percent.

Buyers got first-rate assets that were on sale solely because a change in government policy–income trust taxation–had caught so many by surprise. Sellers, meanwhile, were able at one blow to wipe out stock market losses sustained in the wake of the Halloween 2006 announcement of the trust tax. My August 2007 Feature Article Joining Forces captures the mania at its height, which drove prices of trusts across the board higher, including companies with no intention of selling.

That takeover boom, however, had largely fizzled out by the beginning of 2008, as tightening credit conditions brought the private capital boom to a screeching halt. And by 2010, takeover volume as shown in the table had fallen to barely one-third its peak. Deals were still getting done, but only when the economics were extremely compelling and buyers’ financing completely above reproach.

That’s pretty much the case today, despite the fact that Canadian mergers-and-acquisition (M&A) activity is noticeably picking up once again. Sinopec’s moves, for example, are hardly the actions of a management team hungry for near-term success. Rather, they’re part and parcel of China’s long-term strategy to take financial and physical ownership stakes in natural resources globally, with the goal of offsetting huge and growing exposure to increasingly volatile prices of inputs that are vital to the country’s continued economic growth.

Sinopec’s interest in the Canadian energy patch–including its acquisition of an interest in the Syncrude oil sands partnership–is very much an indication of how much value there is in the country’s resource base. But neither does it indicate any sort of mania, or the start of a bidding war. Rather, every deal we see going forward is going to have to be based on sound economics, as well as motivated sellers and financially powerful buyers.

The good news is that dovetails exactly with what’s always been my strategy for betting on takeovers. Mainly, I never buy or recommend any company as a takeover target that I wouldn’t want to own if there were never an offer.

Good companies, if they are taken over, will ultimately command good value, and they’ll enrich us while we wait for a deal to emerge. Weak companies are as likely to be taken under–at a price well below what they’re worth–and in fact may not survive to see one.

Below I take a sector-by-sector look at strong companies that also have takeover appeal. Note that not all are Canadian Edge Portfolio companies. All, however, are tracked in How They Rate and would make nice alternatives, depending of course on investors’ tolerance for risks.

High-Yielding Energy

High global oil prices and technological advancement are revving up activity in Canada’s oil sands once again. The key to success isn’t reserves in the ground. Rather, it’s having the financial power to construct what amounts to a massive mining and chemicals plant that’s expensive to build as well as operate.

Syncrude, for example, had an average cost of nearly CAD38 per barrel of oil produced. Given the deep pockets of its partners including operator Exxon Mobil (NYSE: XOM), it has few problems meeting that cost, particularly with oil prices again pushing USD100 a barrel. But high costs are indeed an impassible barrier to entry for the myriad companies that have hyped their stocks on the value of their supposed reserves, with no way financially to get it out of the ground.

Consequently, bigger is better when shopping for plays in the tar sands. And there’s no better prospective takeover target than Cenovus Energy (TSX: CVE, NYSE: CVE), the liquids-focused company spun off last year from Encana (TSX: ECA, NYSE: ECA).

Although its former parent has struggled to fund its capital spending plans due to sinking natural gas prices, Cenovus has been able to generally strong oil prices to push ahead with development of potentially vast tar sands projects.

Oil sands output rose 14 percent, and the company reported it’s ahead of schedule for a manifold gain in production by the end of the decade. Third-quarter cash flow rose 56 percent, buoyed by an average cost per barrel of oil equivalent of just CAD12.60.

Cenovus is a buy up to USD40. Note that oil sands’ pricing will leap if either the Northern Gateway pipeline to the Pacific Coast or the Keystone XL pipeline is completed to the US Gulf Coast. Cenovus’ prospective acquirer could well depend on which is finished first. Note that President Obama is now personally reviewing the Keystone XL deal, which could prevent delays from a potential Environmental Protection Agency challenge. There’s no timetable as yet for a decision, however.

Successful permitting of the Kitimat facility for liquefied natural gas exports from British Columbia means that project can now go ahead, potentially opening up heretofore land-locked Canadian natural gas for export to Asia. Completion is some years off even in a best case. But when it does come on stream as now seems likely, it will set a new price level for Alberta gas that’s more in line with global prices–which are much higher than those currently in North America.

That’s set to make North American gas companies considerably more valuable, one reason Sinopec became interested in Daylight. The safest plays are low-cost companies like ARC Resources Ltd (TSX: ARX, OTC: AETUF) and Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF). But the greatest upside lies with more leveraged bets like Advantage Oil & Gas Ltd (TSX: AAV, NYSE: AAV).

Advantage’s fortunes appeared to be at severe risk last month, with natural gas prices plunging and the company in need of rolling over debt. That will remain a risk for the company going forward, at least until gas prices recover. But in the meantime, the company appears to have eased its credit situation by paying off debt, while a bounce back in energy prices is good news for fourth-quarter cash flows.

The stock’s greatest appeal is it currently trades at roughly 50 cents per dollar of reserves, which it continues to expand at a rapid rate along with production. There’s no dividend, nor is there likely to be for the foreseeable future as management devotes virtually all cash flow to development and shoring up the balance sheet. But Advantage Oil & Gas is again a buy up to USD6 for patient speculators.

Faster development of Canadian light oil, natural gas and tar sands is also bullish for energy services companies, a sector that suffered over the summer due to investor worries that slowing economic growth would send energy prices and drilling activity tumbling. As I point out in Portfolio Update, however, third-quarter results at Newalta Corp (TSX: NAL, OTC: NWLTF) and PHX Energy Services Corp (TSX: PHX, OTC: PHXHF) painted a far different picture.

High Yield of the Month Newalta continues to benefit from the fact that greater energy development also means more waste. The company’s three-year contract with Syncrude to clean up tailings promises to be the first of many as activity grows, along with environmental scrutiny. PHX, meanwhile, continues to benefit from the fact that virtually all new drilling is in shale, and therefore requires the use of the state-of-the-art directional drilling rigs in which it specializes.

Both companies are healthy and growing rapidly on their own, but would add nicely to the business mix of several larger players. Buy Newalta up to USD15, PHX Energy Services up to USD14.

Resource Bounty

Much of Canada’s bounty of industrial metals is controlled by global giants such as Rio Tinto Plc (NYSE: RIO). And as regulators’ rejection of the BHP bid for Potash last year shows, getting anything big approved looks less likely, even in a country where resource nationalism is generally not a problem for foreign investors.

One area that may be off the radar screen, however, is rare earths such as lithium, rubidium, cesium, tantalum and beryllium. These materials are absolutely essential now for a wide range of technology applications and virtually all global production is now in China.

One of the exceptions is a handful of properties being developed by Avalon Rare Metals Inc (TSX: AVL, NYSE: AVL) in Ontario and Nunavut near Yellowknife. These projects are still very much in the development stage. And despite a successful initial public offering a couple of years ago, the company is in need of a major partner to provide financing. That’s particularly true with the stock trading at barely one-third the high price set back in April.

The good news is the company now apparently has a potential partner for its lithium minerals project in Warren Township, Ontario. Should that deal happen, production will become a reality and the stock should head a lot higher.

On the other hand, rare earths stocks have proven to be extremely volatile, trading to large extent on hype. That’s always the case with any development mining company and there are plenty ways for even the most promising project to fail and wipe out shareholders. The lack of debt and New York Stock Exchange (NYSE) listing help in this case, but guarantee nothing. Avalon Rare Metals is a buy for speculators only up to USD4.

Power and Pipes

Getting energy to market has created a boom time for pipeline and energy infrastructure companies throughout North America. That’s already produced takeovers of two major US-based pipeline companies, El Paso Corp (NYSE: EP) and Southern Union (NYSE: SUG), and we’re likely to more in Canada as well.

Potential candidates include all the energy infrastructure companies in the Canadian Edge Conservative Holdings, including AltaGas Ltd (TSX: ALA, OTC: ATGFF), Keyera Corp (TSX: KEY, OTC: KEYUF) and Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF). The most likely candidate in my view, however, is Provident Energy Ltd (TSX: PVE, NYSE: PVX). The former combination producer/pipeline company is now virtually a pure play on the explosive growth natural gas liquids (NGLs) production.

NGLs can be used as substitutes for oil in a wide range of industrial processes. Ethane, for example, is quite suitable for plastics and is quite abundant in gas reserves north of the border as it is in gas-rich US areas such as the Eagle Ford Shale. And just as NGLs abundance has pushed the price of making plastics in Texas below Saudi Arabia, so is it creating a boom in Canada as well.

Provident has woven a network of alliances to expand its presence in this market, including with giant Nova Chemicals, and has simultaneously expanded its network of pipelines and storage facilities.

The stock has appreciated of late, marking the rising fortunes of the company and increasingly likelihood of a return to dividend growth. But Provident Energy remains a solid buy either on its own or for a takeover up to USD9.

Cap-and-trade legislation may be dead in the US Congress. But mandates remain in Canada as well in 38 states for utilities to expand production and purchases of green energy. That includes wind and solar. But the biggest source by far of carbon dioxide-free electricity production is hydro power, and few countries have greater potential than Canada.

My favorite takeover bet is Conservative Holding Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF), which has potential hydro projects that are several times its current production capacity. Management has also proven itself time and again as able to get major projects up and running on time and on budget. And despite intensive capital needs has no worries about maturities as it’s still able to borrow cheaply in this environment.

Potential acquirers include Brookfield Renewable Power LP, once it’s formed from the merger of Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF) and parent Brookfield Asset Management’s (TSX: BAM/A, NYSE: BAM) other considerable hydro assets. That company will be the largest pure hydro/wind play in the world and will boast a market cap several times that of Innergex’ current CAD794 million.

Again, trying to guess who will merge with who is always a matter of long-distance mind-reading, something I don’t profess to be good at. But Innergex is perfectly capable of growing gangbusters on its own without a deal as well.

And I’m looking for a return to dividend growth as major new projects come on stream and start delivering cash flow. Buy Innergex Renewable Energy up to USD10 if you haven’t yet.

Eligible Financials

Canada’s banking system is already dominated by a handful of giants. Mergers among them are certainly possible and similar conservative corporate cultures would likely make them successful. But the best takeover bets in the sector are small players who dominate niches coveted by the big boys.

The most obvious of these is CI Financial Corp (TSX: CIX, OTC: CIFAF), a former income trust that converted to a corporation in 2009. Since then the company has boosted the monthly dividend four times, as it’s continued to expand its valuable wealth management franchise.

As my How They Rate table comments show this month (see Financials), Canada’s Big Six banks are now universally attempting to expand their wealth management businesses. The reason is in a slow-growth environment, the most profitable financial businesses are always those catering to the wealthy, and they’re the least prone to credit-related writeoffs as well.

CI has already been targeted by arguably Canada’s most aggressive and successful financial institution, Bank of Nova Scotia (TSX: BNS, NYSE: BNS). And it’s certain to attract more as it continues to add assets with an innovative array of well-managed offerings and financial products. That makes it also attractive as a standalone company. Buy CI Financial up to USD22.

Note that Conservative Holding Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF) is also a perpetual potential target, operating a solid franchise in the web and print documents and related services business. I’m still a buyer of Davis + Henderson, which returned to dividend growth earlier this year, up to USD20.

Finally, Canadian real estate investment trusts (REIT) have plenty of opportunity to expand portfolios without buying each other. In fact, their success has generally pushed up their valuations, making it easier for them to purchase non-REIT properties but more difficult to buy other REITs.

The possible exception is Conservative Holding Artis REIT (TSX: AX-U, OTC: ARESF), which owns a well-managed and diversified portfolio of properties in western Canada and Minnesota. The REIT has successfully diversified its portfolio out of its former concentration in Alberta in recent years and is now starting to see the payoff in rising cash flows.

Ironically, perception that Artis is still chronically dependent on the energy patch has caused investors to continue pricing it at a discount to the rest of the industry. The REIT, for example, currently trades right at its book value and a yield of more than 8 percent.