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Q.: Which sectors are the most active M&A plays in the Canadian markets versus the US?
Mr. Hidi: The resource sectors in Canada - basic materials (mining) and energy - remain by far the most active sectors by both deal value and number of deals, whereas in the United States, the financial, consumer and energy sectors have been the most active. The Canadian capital markets have always been very receptive to resource companies, and some of these companies are attractive targets for larger foreign acquirers, while others are active acquirers themselves.
Q.: Where are valuations headed in the sectors cited above and how will these effect price/premium negotiations?
Mr. Hidi: Valuations in commodity sectors typically follow commodity price cycles, which, by historical standards, are at very high levels today. Most significant resource sector acquisitions in the current environment require aggressive views on the target's resource base and/or future commodity prices.
Q.: In your opinion, how will the high valuations affect the M&A deals in the resource sector as mentioned above?
Mr. Hidi: Acquirers must be very thoughtful and convincing in their explanation and marketing of their transaction - if it's shareholders don't accept their strategic rationale and/or pricing on a deal (particularly a large one), the bidder may be punished. Additionally, most junior and intermediate resource companies should carefully consider the degree of their vulnerability and strategic alternatives in this robust M&A environment. Defense preparedness is very important for vulnerable targets while others, unless they have extremely bullish views on both their commodity and company, may wish to explore a sale or at least open strategic dialogues with potential partners/buyers.
Q.: In your observations, what is state of acquisition finance?
Mr. Hidi: Financing markets are currently very strong across the board. Investor appetite for risk has increased significantly as compared to 2008-2009, which has resulted in healthy corporate debt and equity market conditions and is facilitating access to capital for strategic M&A.
Q.: What is the state of the high yield market in Canada?
Mr. Hidi: The Canadian high yield market has demonstrated good momentum, with 15 transactions completed over the last six months, almost doubling the number of issuers in the Canadian market over that time frame. Many transactions are being upsized, with all outstanding bonds trading at or inside new issue levels with well distributed buyers lists including U.S. investors. Low-rated and unrated issuers are seen accessing the market with smaller deal sizes being achievable. Issuers have raised in excess of $1.75Bn year to date, which is significantly ahead of the pace we saw in 2010 when issuers raised a total of $3.4 billion. Overall, the tone in the Canadian high yield market is good and it is open to issuers of all credit ratings and industries.
Q.: Any thoughts on private equity activity in Canada especially as there is appetite for the high-yield securities?
Mr. Hidi: Access to C$ high yield financing should facilitate more Canadian buyouts over time but sizable industrial targets are limited in number and availability.
Q.: In your experience, what themes are driving the domestic strategic and private equity M&A deals in Canada?
Mr. Hidi: We've seen a significant pick up in M&A activity so far this year. Renewed economic growth, increased CEO confidence in the economic and business outlook, ready access to strategic capital and reduced market volatility have all played a key role in the recovery of the M&A market in recent quarters. Also, corporate balance sheets are very healthy and financial buyers have large pools of equity capital that have finite lives and are ready to be deployed.
Q.: What are the risk factors that stand to potentially derail a robust recovery in the global M&A activity?
Mr. Hidi: We expect the M&A market to remain strong for the remainder of 2011. However, an M&A slow down could occur next year if investor sentiment turns negative again due to a significant slowdown or reversal in the global economic recovery, unforeseen political or economic shocks and/or major increases in market volatility.
Q.: In the last few years, a number of Canadian resource companies have been active acquirers of assets in Africa and Australia. Do you see this trend becoming more pronounced and how does your team source such deals?
Mr. Hidi: Yes. Canadian mining companies will continue to consider jurisdictions that were historically perceived as remote and/or risky given how few sizable and economic new mineral deposits have been discovered in Canada, versus the significant untapped potential abroad. There have been several recent examples of a growing focus on development in Africa, including our client - Kinross' acquisition of Red Back Mining, the recent hostile takeover bids for Equinox and Lundin, and an increased focus on exploration and development in the region. Australia continues to be one of the world's best mining jurisdictions and is a significant area of focus for North American mining companies, given our common language and the overall in our cultures.

For BMO, our sourcing of international deal flow is primarily driven by our sector expertise and especially focused on mining, energy and food/agriculture.
Q.: What are the deal trends between Canada and South American resource rich countries?
Mr. Hidi: There are a number of Canadian companies with assets in South America that have transacted in the past year. For example, Goldcorp recently acquired our client Andean Resources for over $3 billion. In addition, we are starting to see established South American mining companies looking outside of their traditional operating areas for growth.
Q.: What is the changing character of foreign buyers for Canadian companies?
Mr. Hidi: The Canadian takeover regime remains generally friendly to foreign investors despite the rejection last year of BHP's bid for Potash Corp. Canada is an attractive jurisdiction to many foreign investors, (and not only in the natural resource sectors) because Canadian firms have significant expertise and unique assets for which there is growing demand globally. In fact given the scarcity value of certain Canadian sectors and Canadian companies, buyers have become more aggressive in competing for assets and pursuing larger transactions, in some instances through unsolicited offers.
Q.: In terms of unsolicited bids, how do you advise the target companies to prepare?
Mr. Hidi: In coordination with our client's counsel, we would typically go through a detailed checklist for defense preparedness. This is ideally done long before so the target company are not completely blindsided.

It is also important to know that in Canada, the decision on a hostile bid typically rests with the target's shareholders rather than the Board of Directors, which is intended to encourage unrestricted auctions. Any activity that denies shareholders the ability to make a decision regarding bid may lead regulators to intervene regarding: share and asset lockups / options, asset sales or purchases.
Q.: How will the shifts in the Canada Investment Act affect cross-border M&A deal flow?
Mr. Hidi: The 'net benefits to Canada' test has become a more sensitive topic that has attracted widespread public and media attention due to a few recent transactions involving"marquee" Canadian companies. While I will not predict what changes will ultimately be made to the ICA, I do not think they will have a material effect on the vast majority of cross-border transactions. I do think there are now greater transaction risks associated with acquisitions of marquee Canadian assets.
Q.: Can you clarify the nature of "transaction risks"?
Mr. Hidi: By that I mean the risks of obtaining government and/or regulatory approvals in Canada, particularly Investment Canada approval.
Q.: How would you prepare and advise foreign buyers on this front?
Mr. Hidi: Every transaction is unique, and the approach to Industry Canada should be tailored based on the specific issues involved. It is critical to hire very experienced financial, legal and government relations advisors well in advance of a bid for any marquee Canadian company. They can help navigate the key issues, by helping their client(s) develop effective government, regulatory and communication strategies.
Q.: In a competitive deal environment, how does BMO Capital source deals globally, any sector advantage, size or geographies?
Mr. Hidi: Our key advantages in competitive global situations include our strong focus on building customer relationships (as opposed to just executing transactions) utilizing consistent, integrated client coverage/M&A product teams; our deep sector expertise - particularly in mining, energy and food/agriculture; and BMO's strong track record and reputation.
Q.: On a personal note, what book are you currently reading?
Mr. Hidi: The Opposable Mind by Roger Martin. Roger is the Dean of the Rotman School of Business at the University of Toronto, where I taught an M&A course for a few years before joining BMO. He is a very intelligent and creative thinker who discusses in his book how certain great business leaders when faced with difficult and important problems are able to integrate two diametrically opposed thoughts, thereby deriving a new, innovative solution.

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