The Canadian Press

Chinese investment funds and state-owned enterprises will become increasingly important players in Canadian merger and acquisition activity, focusing their sights on larger and larger companies going forward, experts say.

Although M&A activity has edged up throughout 2009 as credit has become easier to get and investor confidence has improved, many Canadian companies are still reluctant to undertake a major deal in an economy that is still struggling.

Because of this, state-owned companies and private investors from developing countries — particularly China, but also India and others — will become increasingly important suitors in the Canadian business world.

“We think the ongoing interest of particularly Chinese (state-owned enterprises) and investment funds… in some of our resource plays is going to continue, and frankly could well accelerate and focus more on larger companies as we go forward,” said Andre Hidi, executive managing director and head of global mergers and acquisitions at BMO Capital Markets.

Hidi, speaking Monday as part of a panel discussion on M&A activity hosted by the Conference Board of Canada, said it’s unlikely a Chinese company would target the very top tier of Canadian resource companies because the bid would probably be thwarted by the government through the Investment Canada Act.

However, he said there are many second-tier companies, particularly in the oil sands sector, that could be targets, including Talisman Energy Inc. (TSX:TLM) and Nexen Inc. (TSX:NXY) which both have operations outside Canada that would increase their appeal to a Chinese company.

Addax Petroleum Corp., which has properties in Africa and Iraq, was recently acquired by Sinopec International Petroleum Exploration and Production Corp., while PetroChina bought Canadian-based PetroKazakhstan, which has assets in central Asia, for more than $4 billion in 2005.

These types of transactions will only increase in number, particularly as Ottawa becomes more comfortable with Chinese investment in Canada, said Dougal Macdonald, president and managing director at Morgan Stanley Canada.

“In the aftermath of the credit crisis, I think the federal government realized that as a country we’d have to be sure that we’re deepening our trading relationship with China, so there seems to be more openness to having government-related enterprises buying assets in Canada,” said Macdonald.

In addition, state-owned companies in countries like China and South Korea are eager to use so-called “moose pasture mines,” or undeveloped projects, as a form of currency, said GMP Securities chairman Eugene McBurney.

“They’ll use them quite aggressively to buy companies and to buy hard assets,” said McBurney, who added that these state-owned enterprises are also interested in securing long-term supply and will be particularly interested in Canadian coal and base metals miners as a result.

The past year has been a rough one for M&A activity in Canada and the world. Transactions were virtually non-existent in the first quarter, but have edged up since then.

In its quarterly report on Canadian M&A activity, released Monday, investment banking firm Crosbie & Co. said that 221 transactions were announced in the third quarter, up 12% from the second quarter. Cross-border activity represented 41% of total announcements. The total value of transactions in the quarter increased 27% from the prior quarter to $30.2 billion, Crosbie said.

Most of the activity was driven by strategic buyers of mid-market companies, but there were also nine major deals worth more than $1 billion announced in the quarter. These included the combination of Petrobank Energy and Resources Ltd.’s Canadian business with TriStar Oil & Gas Ltd. to form PetroBakken Energy Ltd. (TSX:PBN); Capital Power Corp.’s (TSX:CPX) acquisition of power-generating assets from Epcor Utilities Inc.; and China Investment Corp.’s $1.7-billion investment in Teck Resources Ltd. (TSX:TCK.A).

The oil and gas sector accounted for the most transaction volume in the quarter, followed by industrial products.