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periods of economic slowdown, but cracks are starting to appear in the sector. "The strength of the Canadian dollar is an important trend for buyers and producers in the industry. Commodity prices and how that affects the bounty and profit- ability of Canadian food companies is also becoming more of an issue than it has been in the past," she says. Looking back 10 years, says Scott, buy- ers were looking at Canadian companies as leaders of private label manufacturers, but what they're looking at now is Canada as home to innovative manufacturers of premium products. "We've moved up the scale to more of a premium product and also seen a lot of strategic acquirers look- ing to buy companies that are leaders in niche markets." An example is Toronto-based artisan bread maker ACE Bakery, which was bought by Weston Foods (Canada) Inc., in November 2010 for $110 million. "These companies have all traded at a very high premium almost reflecting it will be the last time they will be sold because now they are in a big strategic company and no longer a smaller entre- preneurial company," says Scott. On the flipside, she says, there have been a number of companies over the last few years that were brought to market but not sold and are coming back again to the market. "In my mind these com- panies will be sold again because if they aren't they will be viewed in the market that they are damaged goods and will put lower valuations on the industry." Despite the volatility in the equity markets, corporations are sitting on cash reserves looking to enhance their growth strategies, says Marco Galante, principal with the J.H. Chapman Group LLC, an investment bank in the food industry. Overall, he says M&A activity from 2010 to 2011 for Canada and the United States has increased apprecia- bly since 2008. In 2008 and 2009, the number of transactions in the food sec- tor in the U.S. dropped by 50 per cent. However, from 2009 to 2010 it increased by 36 per cent. In the Canadian market between 2008 and 2009 the market dropped by 36 per cent, yet from 2009 to 2010 and into 2011 the increase of activity has been as high as 25 per cent. "The market is still fairly robust and there is cash at corporate levels and pent-up cash in the private equity area. The combination of that means there are acquirers looking at good opportunities both strategic and non- strategic. But equally, there are fewer sellers coming to market and part of the reason is the sellers are asking if it is the right time to sell today given the envi- ronment," says Galante. While he says there was continued growth of M&A in 2011 in the food sector, one of the constraints is increasing commodity prices and the impact on gross margin and cash flow. On the dollar side, Knibutat agrees a strong Canadian dollar does increase the costs of inputs, which can put downward pressure on profitability. "It really depends on the nature of the underlying business and where they are getting their inputs. The positive side of the Canadian dollar is it gives you more purchasing power and puts you in a fairly attractive position to be an acquirer," says Knubitat, who adds that when the dollar goes above parity there is a strong correlation with deals that get done. "Canadian companies are doing a good job targeting, and when the dollar goes above parity it allows them to close the price gaps between buyer and seller, which allows them to close the deal." The Canadian Pension Plan Investment Board has also been build- ing its interest in the food sector, dem- onstrating that it is seen as a strategic investment area, says Knibutat. The deregulation of the Canadian Wheat Board could also be a catalyst for deals, he adds. The federal government has said it will move forward with a proposed deregulation of grain marketing in Canada. With a targeted implementa- tion date of August 2012, the change would give western Canadian farmers the ability to sell their wheat and barley to whomever they choose. Currently, farmers are required to sell directly to the CWB, which, in turn, sells to the market. Last year, the CWB posted $5.1 billion in sales. At the end of the day, all M&A activ- ity in 2012 will ultimately depend on how buyers and sellers view the overall health of the market. "The fundamen- tals are there to do deals, but the risk is that the global economy is still uncer- tain enough and negative views are still being expressed by the central banks and various governments that it will have a depressive impact on activity for a little while. We need some more clar- ity and stability but the food sector will continue to be one that is interesting and attractive overall," Knibutat says. "It will come, but right now I think it will be far more opportunistic a play for people because of the other macro factors impacting things." IH ... from the wild west all the way to the far east. Plug into Bennett Jones. Your lawyer. Your law firm. Your business advisor. CALGARY | TORONTO | EDMONTON | OT TAWA | BEIJING | DUBAI | ABU DHABI BennettJones-3_IH_Dec_11.indd 1 INHOUSE FEBRUARY 2012 • 11-11-25 10:36 AM 25