Catherine McLean Freelance Writer

Canadian companies are hunting for European buys

July 26, 2012
The Globe and Mail

Late last year, two top Molson Coors Brewing Co. executives went to scope out a potential acquisition target in a fast-growing market: Eastern Europe. While mindful of the debt crisis holding Western Europe hostage, Molson Coors chief executive officer Peter Swinburn and Kandy Anand, president of the company’s international business, nevertheless saw attractive opportunities a bit farther east.

Doing business in Eastern European countries, with their ties to the EU, would be easier than starting from scratch in other markets. As well, economic growth for this region is expected to be more robust than in Western Europe.

What really won them over, though, was the robust position of the brands they would be buying from StarBev LP, which is a top brewer in numerous Eastern European countries including the Czech Republic, Serbia, Croatia, Romania and Hungary. When Swinburn and Anand spoke with retailers in Belgrade, Serbia, they heard them compare StarBev’s Jelen beer to top brands like Coca-Cola.

“If there’s anything we want, we want that strength,” said Anand, referring to the trip that led to Molson Coors’ €2.65 billion C$3.41 billion) purchase of StarBev this spring. That tour changed their view of the deal from “should we do it?” to “we want to do it.”

Molson Coors isn’t the only one looking to make a deal in turbulence-plagued Europe. Going shopping during the continent’s economic crisis may not seem like a wise idea, but that’s not deterring Canadian companies ranging from petroleum storage and technology firms to retailers.

Surprisingly, the acquisition hunt is not about picking up assets at fire-sale prices, with analysts even criticizing some of the deals like StarBev for being pricey. Instead, Europe’s woes are creating compelling long-term investment opportunities at reasonable market valuations, while some firms sell off businesses to clean up their balance sheet or raise capital, experts say.

“The sort of assets being acquired are low-return, low-risk assets,” said Julian Brown, partner and leader of PricewaterhouseCoopers’ corporate finance group in Canada, pointing to purchases like StarBev. Nevertheless, he warns that would-be buyers must carefully consider their targets and be selective. Each sector and country is different. “It’s not something you say, ‘Wow, there’s a big opportunity to buy up a load of companies cheap and there’s no risk attached to it,’” said Brown.

Canadian companies say they aren’t just targeting crisis-ridden Europe: These deals are part of a global expansion strategy in which they scour the world for acquisitions. As their home market is relatively small, Canadian firms are looking abroad for growth. Expansion outside their borders also ensures they can keep pace with their customers who do business worldwide, as is the case with IT services company CGI Group Inc., which announced plans in May to buy Logica PLC in the U.K. for $2.8 billion.

“Two thirds of our largest clients today have a presence in North America and in Europe,” said Lorne Gorber, a spokesman for Montreal-based CGI. “If you don’t follow your clients, you run the risk of losing them.”

The acquisitions make these companies more international. Molson Coors, for example, reckons the percentage of sales coming from outside the U.S., Canada and the U.K. will rise to the “mid teens” from the “low single digits” with StarBev.

The change is even more dramatic at CGI, which generated some 94% of its sales in North America before the Logica purchase. When the deal closes, CGI will generate just 38% of its sales from Canada and the United States.

Buying a European firm doesn’t necessarily mean companies will be focusing solely on the continent, experts say. Just like their Canadian counterparts, European firms have gone global and sell their goods around the world.

“In this day and age, I think it’s very artificial to say because you’re buying a European company you’re buying Europe,” said Terry Dobbin, the Canadian M&A chair at Norton Rose. “You’re buying the world.”

Gorber says the CGI team carefully considered the challenges in Europe. One of the deal’s selling points is the fact that the bulk of Logica’s revenue comes from North European countries like Sweden, Germany and the U.K., which have managed to escape the worst of the economic storm, according to Mr. Gorber. The deal also reduces CGI’s reliance on contracts from governments.

“From a timing perspective, it isn’t often that a company like CGI, a company of $4.3 billion [annual revenue], would have the opportunity to buy a company of $6.3 billion other than in a time like now,” Gorber says.

Inter Pipeline Fund, based in Calgary, believes the downside risks are “limited” from its recent acquisition of four petroleum storage terminals in Denmark for $459 million. While spokesman Tony Mate acknowledges Europe’s economic problems could impact business, he also points out the terminals are on the Danish Straits, the third-biggest channel in the world for the transportation of petroleum as products are shipped between Russia, the Baltic countries and Western Europe.

There’s a lot of optimism, not to mention Canadian dollars, betting on a European recovery. But the situation will likely take years to resolve, and if something drastic occurs—like the breakup of the euro—an acquirer could face a sharp reduction in the value of their investment, Brown warns

“Yes, I think there’s opportunity,” Brown says. “I also think there’s a lot of risk.”