Algoma Joins Ranks Of Foreign-owned Firms Boyd Erman
Published by MAC on 2007-04-16Source: Toronto Globe
Algoma joins ranks of foreign-owned firms BOYD ERMAN
Toronto Globe and Mail
16th April 2007
First the operators of nickel mine and luxury hotels vanished from Canada's business landscape, now it is the steel industry's turn to go, and the quickening pace of head office disappearances is raising concerns that the country is approaching a point of no return.
With Algoma Steel Inc. agreeing yesterday to be bought by India's Essar Global Ltd. for $1.85-billion, Canada will soon be down to only two steel makers. And one of those, Ipsco Ltd., is also in talks to be sold.
Last week, a court approved the purchase by Bill Gates and a Saudi Arabian Prince of Four Seasons Hotels Inc., which will soon follow Fairmont Hotels & Resorts Inc. into the sunset. Nickel miners Inco Ltd. and Falconbridge Ltd. have already been subsumed into foreign parents, and even smaller producer LionOre International Mining Ltd. has now agreed to be bought.
For years, such takeovers of Canadian companies were offset or even outweighed by Canadian firms making purchases abroad.
But with so many large Canadian companies gone, the risk now is that a "spiral effect" takes hold because "each company that is acquired is no longer a company that can acquire for us," said Kenneth Smith, the Toronto managing partner for Secor Consulting.
"The trend [of hollowing out] will accelerate because of the spiral effect, then you have to look at how does it change our cities," said Mr. Smith, who has studied the phenomenon. "These office towers are full of two kinds of folks, generally. People who work at company HQs and people who work at the law firms, accounting firms and investment banks who support those HQs."
Canada's steel industry began to attract bids years ago. Maverick Tube Corp. of the U.S. snapped up Calgary's Prudential Steel Ltd. in 2000, and in 2002, Toronto's Co-Steel Inc. merged with a Brazilian company.
But in the past 18 months, another surge of global mergers doomed the last of Canada's steel makers. Producers in India, Russia, Brazil, Europe and the United States moved faster and more aggressively than those such as Canada's Dofasco Inc., which went on much as they had for decades -- as small players with few growth ambitions.
Dofasco, the pride of Canada's steel sector, was sold to European giant Arcelor SA. Then Arcelor was bought by India's Mittal Steel to form the largest producer in the world.
"I think the Mittal-Arcelor transaction changed everything," said one investment banker who specializes in the steel industry. "When that happened, you could just see the dominos start to fall."
Rival players were left scrambling to keep pace, and in the process have been devouring competitors in both Canada and the United States. Even Stelco Inc., weighed down with problems, is viewed as a takeover candidate.
The banker said that while Canada has produced some innovative companies in the steel industry, none have had the necessary size to hatch their own acquisition plans and become world leaders.
"Putting patriotism aside, I look at the business fundamentals," the banker said. "Even a Dofasco, which is a marquee player, was not able to play globally."
The story is similar in the nickel industry, where a long-time rivalry between Falconbridge and Inco kept them from combining while the rest of the mining industry went on a consolidation binge. By the time the pair finally tried to merge, it was too late and bigger rivals from abroad were willing to pay more.
"If you look at this story repeating itself -- nickel, steel, perhaps telecom -- and then add up the imbalance if the deals announced so far are done, we'll be $100-billion behind in terms of Canadian companies versus our acquisitions overseas," Mr. Smith said. "If you play that out across industries, that's when it, to me, becomes concerning."
There are still industries where Canadian companies have the heft to fight it out globally, he said.
Uranium, where Cameco Corp. is the world's largest miner, is one.
Telecommunications is another, if BCE Inc. and Telus Corp. were to merge as part of the end-game of the current fight over control of BCE, Mr. Smith said. Canada's banks and insurance companies, too, could compete globally if they were allowed to get big at home first, he said.
Should policy makers decide that Canada is too vulnerable to foreign takeovers, one prescription that those in the business of making deals have suggested is to make it easier for companies to say no to buyers. Currently, Canada is one of the most buyer-friendly jurisdictions on earth, securities lawyers say.
Canada's government may also need to consider enabling more companies to merge at home, even if it means a lessening of local competition, to create global behemoths based here, Mr. Smith said.
[With a report from Sinclair Stewart]