Canada, U.S. M&A action at blistering pace

Canadian merger and acquisition (M&A) activity reached a record high in first half 1997. Meanwhile, U.S. M&A transactions more than doubled compared with previous years this decade.

Records

This represents a 45% increase from the $5.3 billion (Canadian) in M&A activity seen in first half 1996 and triple that of the same period in 1995.

Canada's 1997 January-June total surpassed by $1 billion (Canadian) the previous record of $6.7 billion (Canadian) set in first half 1989.

In the U.S., 193 deals totaled $7.4 billion (U.S.) during the period, according to Randall & Dewey Inc., Houston. This first half total exceeds annual totals for each year this decade.

Canadian deals

Canadian M&A activity has historically tracked the availability of cash to the petroleum industry, according to Sayer Securities, which tallies mergers and acquisitions in the Canadian oil industry.

Following record financing levels in 1996, the total value of financings fell 24% this year to $3.2 billion (Canadian) in the first half.

Noting declines in oil and gas prices in first half 1997 from the same period in 1996, Sayer said, "After very strong oil and gas prices and record financings during 1996, both the total value of financings and price levels have fallen in the first half of 1997, which should eventually have a dampening effect on the demand for acquisitions."

During the first half of this year, the median price paid for Canadian reserves was $6.72 (Canadian)/boe, compared with $5.79/boe for the same period last year.

Corporate acquisitions contributed to this 16% increase, said Sayer. Reserves transactions involved in Canadian company acquisitions were completed at a median price of $7.04 (Canadian)/boe, compared with $6.35/boe for property acquisitions.

"Last year, a burst of new royalty trusts was a factor for increased activity levels and prices," said Sayer, "and these organizations are also having a major impact in 1997."

In first half 1996, royalty trusts made 10 purchases totaling $1.1 billion (Canadian). This year, these organizations took part in 21 transactions totaling $835 million.

"The announcement in August of a potential $595 million (Canadian) purchase by Pengrowth Energy Trust from Imperial Oil Ltd. indicates the continuing strength of royalty trusts," Sayer said (OGJ, Aug. 25, 1997, p. 46).

One cause of increased M&A activity this year is a greater number of large transactions. For the first 6 months, 102 deals had values exceeding $5 million (Canadian), compared with 66 in first half 1996. In fact, four corporate acquisitions account for almost half of this year's Canadian M&A activity.

U.S. activity

Fourteen of these deals were worth more than $100 million apiece.

Of total U.S. A&D activity, deals worth $6.2 billion involved reserves of 1.078 billion boe, yielding an average acquisition cost of $4.76/boe, according to Randall & Dewey. In 1996, average acquisition costs were $4.34/boe.

Randall & Dewey tracks U.S. deals according to the nature and size of companies.

"The independent segment was a large net seller in the first quarter but is now leading the net buying activity by acquiring a net $529 million," said the company. Non-U.S. companies led net buying, with first half activity totaling $510 million.

"Based on other deals in the pipeline," said Randall & Dewey, "we see no abatement of planned activity before yearend."

Takeover attempts

There were six such attempts in the first half of this year. Of the six, only one target company was successfully taken over by the original bidder, four were acquired by so-called white knights ("friendly" third-party bidders), and one went unsold.

Randall & Dewey's first half totals for the U.S. do not include the proposed acquisition of Pennzoil Inc. by Union Pacific Resources Group Inc.

"This takeover attempt demonstrates the forces at work for an aggressive company such as UPR," said the company. "Challenging cash flow and earnings growth targets require continued increases in production volumes, particularly as margins have come under pressure from both increasing costs and softening products prices."

According to Randall & Dewey, similar forces were at work in so-called "friendly" mergers such as Mesa Inc.'s union with Parker & Parsley Co. (OGJ, Aug. 18, 1997, p. 29) and Burlington Resources' merger with Louisiana Land & Exploration Co. (OGJ, July 21, 1997, Newsletter). "In these cases, however, the growth concerns were shared by the transaction partners, allowing deals to be struck at premiums acceptable to both parties," said the company.

So, while Randall & Dewey expects the current wave of mergers to continue, it does not believe market forces will lead to "hostile activity" on a large scale in the U.S.

"In our opinion, it is still too early to view the UPR/Pennzoil battle as the prelude to a widespread war," said the company. "Nonetheless, there will be heightened pressure to identify preferred M&A partners in lieu of unwanted suitors."

Copyright 1997 Oil & Gas Journal. All Rights Reserved.