Corporate Canada's love affair with foreign shores has reached unprecedented heights.
Facing a commodities crash and anemic growth at home, Canadian companies and funds have added $83.4 billion of investment assets outside the country in the first nine months of the year, according to data from Statistics Canada. That's more than double year-ago levels and on pace for a record year. The nine-month figures, released Monday, include a record $48.7 billion in foreign mergers and acquisitions.
Easy credit, strong balance sheets, and lack of investing opportunities at home are the main factors driving Canadian money managers and companies on a shopping spree that has included Royal Bank of Canada's $5 billion takeover of Los Angeles-based City National Corp. and Canada Pension Plan's $12 billion acquisition of GE Antares Capital Corp.
“As Canadian companies adjust to the new market conditions in Canada, they will need to get more creative and outward looking for growth opportunities,” said Dany Assaf, co-chairman of the competition and foreign-investment group at law firm Torys LLP. “There is little overall demand growth in Canada so, if you need access to new markets and customers or need to invest large amounts of capital, you're going to have to increasingly look abroad. In that sense, it's just math.”
Financial companies are leading the flow out of Canada, with $34 billion in foreign direct investment abroad in the first nine months of the year. Bank of Montreal, Canada's fourth-largest lender, agreed in September to buy General Electric Co.'s transportation finance business in the U.S. and Canada for an undisclosed amount.
Canada's pension funds are also big players. Canada Pension Plan Investment Board has been the biggest buyer of purchases abroad, scooping up about $67 billion of assets in the year through Monday, according to data compiled by Bloomberg. Ontario Teachers' Pension Plan Board and Caisse de depot et placement du Quebec have also been active this year.
“It's a diversification play,” said Mark Chandler, head of fixed-income research at RBC Capital Markets in Toronto. “If anything, the events over the last year have struck home that the Canadian equity-market play is concentrated, and if you wanted to diversify by industry and certainly geography, you have to go abroad.”
CCL Industries Inc. is one such company pushing abroad. The Willowdale, Ontario-based packaging company pulled off four foreign acquisitions so far this year, including the purchase of U.K.-based Worldmark Ltd., according to Bloomberg data. That deal gave the consumer packaging maker access to plants in China, Mexico and Hungary and sales offices in the U.S. and Taiwan, the company said in a Nov. 6 statement.
“Two thirds of the revenue base is derived in Asia, significantly expanding our presence in this important part of the world,” chief executive Geoffrey Martin said of Worldmark in the statement.
After being the darling of the Group of Seven immediately after the global recession, Canada's economy contracted in the first half of this year as the nation struggles with an oil price shock. It's a weakening outlook that has soured investors on the nation's stocks. The Standard & Poor's/TSX benchmark stock index is down 8 per cent this year, the third-worst performing among 24 developed markets and down about 20 per cent in U.S. dollar terms.
The outflow threatens to be a weight on the Canadian dollar, which has lost about 25 percent against its U.S. counterpart in the past three years, and could be a strain on the country's ability to finance its own investment. Direct investment flows have been largely balanced over the past decade, leaving portfolio inflows to finance Canada's trade deficits.
Since last year though, direct investment outflows have exceeded inflows. Direct investment abroad by Canadians was $17.8 billion more than incoming investment in the first nine months of this year. That's a reversal from last year, when incoming investment exceeded outgoing by $15.6 billion over the same period.
To be sure, foreign investment into Canada is also on the rise, in part because Canadian assets have become cheaper to foreigners. Foreign direct investment in Canada totaled $31.4 billion in the third quarter, the highest investment since the fourth quarter of 2007, Statistics Canada reported. The largest completed foreign takeover of a Canadian company this year was Stericycle Inc.'s $2.3 billion acquisition of document-destruction provider Shred-It International Inc., according to Bloomberg data.
“At some point people will wake up to the discount on Canadian assets we have now and it might look more attractive,” Chandler said.
While Canadian financial companies are the biggest investors abroad, the biggest beneficiary of flows into Canada is manufacturing, which has attracted $14.4 billion in foreign direct investment this year, Statistics Canada data show, in a sign that sector is beginning to revive.